One size doesnt fit all

Updated: Jan 18 2014, 00:56am hrs
The Centre proposes to amend the Minimum Wages Act of 1948 to allow for minimum wage setting at the national level. On the surface, this amendment seems employee-friendly but as a concept, it is unjust, irrational and myopic.

A single national minimum wage is toxic in a country where states are at various levels of development in terms of infrastructure, urbanisation, industrialisation, education, employment, and much else.

The move for a uniform floor wage has been driven by demands of the trade unionsa vocal and organised minority that accounts for just 6% of the labour forcewhich have always positioned their self-interest as national interest.

The proposal must not be pursued as it will hurt the countrys youthIndias demographic dividend means that 10 lakh students will enter the labour force every month for the next 20 yearsand the backbone of its employment baseorganisations with less than 50 employees, which account for 99% of employment.

The minimum wages that states set are based on various factors like the cost of living, geography, skill levels, etc. For example, the monthly minimum wage rates vary from R11,969 in Delhi for the skilled to R3,900 in Odisha for the unskilled. Let us assume that Delhis current minimum wage of R297 a day becomes the new national minimum wage, which means that an employer in Odisha will have to pay R7,722 to hire an unskilled hand. Will Odisha, which has close to 5% unemployment rate at the existing wage of R3,900, be able to generate more jobs for its youth with a higher minimum wage

The new proposal offers nothing but greater powers to the Centre, and expand its power over minimum wages from the current 45 industries to the 1,679 industries set by state governments. It will obviously take away the power of chief ministers to decide on how the labour markets function within their boundaries. It takes away the impetus to attract investments, and hence create jobs for many states.

The move will have a huge negative impact on jobs for young and low- skilled workers. It will take away the citizens right to wages based on skills and the cost of living in various geographies. It is bizarre to mandate that Tripura should have the minimum wage of Delhi given the huge differences in rentals, transportation costs, and standards of living. A one-size-fits-all approach can be a fatal error that would damage the very interest of those the Centre is seeking to protect.

The erroneous move will amplify the flaw in Indias labour market where 94% of employment is informal. It will push more jobs to the unorganised sector and leave more people without the protection of any labour laws. OECD suggests that India is one of the most regulated labour markets in the world yet the least protective when it comes to labour.

Higher wages will also push up inflation, which will prove counterproductive for the interest of the very segment the Centre claiming to safeguard. A higher proportion of informal employment leads to a lower penetration of skill development and hence lower productivity.

Wage levels in China have increased continually over the last two decades as the economy has developed and the private sector has created new job opportunities. In India the 250 million people working in the farms representing half the workforce contributes a meagre 15% to its GDP. A national minimum wage is only going to sabotage the farm to non-farm transition that has been Chinas genius over the last three decades.

A recent article in The Economist suggest that France with one of the highest wage floors, at more than 60% of the median for adults and a far bigger fraction of the typical wage for the young, has shockingly high rates of unemployment at 26% for those in the 15-24 age-group. Germanys proposal of increasing its wage floor to 62% of median wage is expected to lead to job loss, especially in the relatively lesser productive parts of that country. Similarly, Britains campaign for increasing the minimum wage by 20% is expected to hit youth unemployment.

Overall in theory and practice there seems to be three key lessons around changing or setting minimum wages:

(i) It should not be politically driven or motivated;

(ii) Wages have to set at such levels by which less productive people, such as young and long-term unemployed, can get employed; and

(iii) Playing around wage should not distract government attention from efforts to address fundamental causes of low wagessuch as lack of education and skills.

Higher wages come as a consequence of a thriving economy and high productivity. The average size of an Indian employer is three employees and 80% of Indias textile production comes from employers with less than 15 employees (80% of Chinas comes from employers with more than 200 employees). The small and medium enterprises (SMEs), the backbone of India's employment creation, will be hurt more from this new legislation than big employers.

A national minimum wage will discourage competition amongst states and individuals and encourage mediocrity. The infrastructure of opportunity our youth needs involves the difficult reform of our 3Es; education, employment and employability. Of course, we need to raise wages but that must come from productivity increases. Legislating a national minimum wage is like trying to treat obesity by mandating small sizes.

Rituparna Chakraborty

The author is co-founder and senior vice-president, TeamLease Services

Most complicated system in world

There exist 1,171 different minimum wage rates in India

While India was one of the first developing countries to adopt minimum wages, its system also remains to this day one of the most complicated in the world. Its 1948 legislation determines that the appropriate government should fix minimum wage rates payable to employees in a number of listed sectors (or scheduled employments).

This, in practice, means that the central government sets minimum wages in all companies operating under a railway administration or in relation to a mine, oilfield, or major port or any corporation established by the central government, and that all other rates are essentially set by state governments, who have appointed tripartite Advisory Boards that include representatives of government, employers and workers. The proportion of workers covered by the minimum wage depends on the number of scheduled employments and is decided at the state level.

The original Minimum Wage Act of 1948 obliged states to protect workers from 13 scheduled employments that were identified as the sectors uncovered by collective bargaining and therefore most vulnerable to unduly low wages and exploitation. But the Act also empowered state governments to expand this list, so that today there exist more than 300 different sectors that are covered in one or more of the Indian states. While some states such as Tamil Nadu and Orissa have massively expanded coverage, others such as Mizoram and Manipur have left it almost unchanged.

India is, therefore, a country with multiple minimum wage rates, which vary across states as well as across jobs within a state. According to Indias Labour Bureau (2009), the central government sets 48 minimum wage rates for different job categories, while various state governments determine minimum wage rates for 1,123 job categories among the sectors scheduled in the Act. In other words, there exist 1,171 different minimum wage rates in India.

Still, the Minimum Wages Act of 1948 is of great importance, particularly to the unorganised casual workers who account for two-thirds of all wage earners and a total number of 133 million workers, a majority of whom are males.

Our research has shown that about 33% of the wage workers that is, 61.6 million wage workers were paid less than the national minimum wage floor. Our analysis for certain sectors domestic work, construction, agricultural workers and hospital, nursing homes and private clinicsbrings out that the effectiveness of the minimum wage coverage is mixed. In none of the states is there full compliance, and noncompliance seems to be particularly high in the states of Andhra Pradesh, Karnataka, Gujarat and Maharashtra, all of which are highly developed and industrialised states. So enforcement seems to be a major issue even for sectors which are covered under the schedules of employment.

To ensure a high rate of minimum wage compliance throughout the country there is a need for a coherent enforcement strategy based on provision of information, effective labour inspections and sanctions in case of violations. Also, as long as the national minimum wage floor remains indicative and non-binding on all states, it will remain difficult to enforce for those who are not covered by state-level legislation.

Uma Rani & Patrick Belser

The authors are from International Labour Office, Geneva

(Excerpts from article in the International Journal of Labour Research, 2012)