Explainer: How to make minimum wages work as a social safeguard

Why minimum wages are needed?

Minimum wages are rooted in the idea of a welfare state, where the government bears the responsibility of protecting workers from exploitation. In a typical labour market, employers often hold a structural advantage and are naturally inclined to minimise production costs, including wages.

In the absence of a regulatory intervention, this dynamic can lead to a race to the bottom, with wages being pushed below subsistence levels. Minimum wage laws are therefore not merely economic instruments but social safeguards—ensuring that workers are able to sustain a life of dignity, security, and self-respect.

Defining wages

One of the longstanding challenges in India’s labour framework has been the multiplicity and inconsistency in the definition of “wages” across different laws. This lack of uniformity created ambiguity for workers and allowed employers considerable flexibility to structure compensation in ways that could reduce statutory liabilities.

Such inconsistencies not only led to disputes but also opened avenues for avoidance of contributions and distortions in the wage structure. The Code on Wages has addressed this issue by introducing a clear and uniform definition. A key feature is the stipulation that wages must constitute at least 50% of the total remuneration paid to an employee.

This brings greater transparency, reduces scope for manipulation, and ensures that statutory benefits linked to wages are not unduly diluted.

How to calculate minimum wages

The guiding principle is that a worker’s earnings should be sufficient to meet essential needs—food, clothing, housing, and healthcare. The methodology is based on scientific norms, particularly in relation to nutrition. Minimum calorific needs are used as a baseline, from which the cost of a basic diet comprising cereals, proteins, fats, and vegetables—is derived.

To this, estimates for clothing, shelter, and healthcare are added. While these costs vary across regions due to differences in the cost of living, the framework allows for a rational and evidence-based determination of wages, with appropriate regional adjustments.

Concept of national minimum wage

The introduction of a national floor wage under the Code on Wages is a major policy shift. Historically, minimum wages across states and sectors displayed wide disparities, with some falling well below subsistence levels. By empowering the Centre  to set a floor wage, the framework establishes a non-negotiable baseline.

At the same time, states retain the flexibility to fix higher wages based on their specific economic conditions. This approach balances uniformity with federal flexibility, ensuring that all workers are guaranteed a minimum standard of living, while allowing states to remain responsive to local realities.

Role of states in fixing thresholds

Though labor is in the concurrent list, the primary responsibility for fixing and enforcing minimum wages lies with state governments. This includes periodic revision of wages to account for inflation and evolving economic conditions. Equally critical is enforcement.

States must therefore invest in robust monitoring mechanisms and simplify procedures to make adherence both practical and transparent. Well-designed systems—combining digital tools, clear standard operating procedures, and accountability frameworks—can significantly enhance both compliance and worker confidence.

NCR & the debate on wage disparities

The national capital region (NCR) presents a unique policy challenge. While it functions as an integrated economic and labour market, it is governed by multiple states, each with different minimum wages. This results in disparities for workers performing similar jobs under comparable living conditions.

Such inconsistencies can create perceptions of inequity and trigger labour unrest. A coordinated approach among NCR states, based on dialogue and consensus, could help move towards a more harmonised wage structure. Given the region’s economic integration, a degree of uniformity would be both rational and desirable.

Wages and productivity

The linkage between wages and productivity is often underestimated. While paying minimum wages may appear cost-efficient in the short term, it is not necessarily conducive to sustained productivity or organisational stability. Workers are more likely to be engaged and productive when they see growth opportunities—via skill development, training, and fair wage progression.

A static wage structure anchored at the minimum level can erode morale, reduce loyalty, and increase attrition.
Minimum wage should therefore be viewed as a floor, not a benchmark for long-term compensation. Progressive employers recognise that investing in human capital—through better wages and skill enhancement—yields dividends in productivity, efficiency, and enterprise competitiveness.

Disclaimer: The views expressed are the author’s own and do not reflect the official policy or position of Financial Express.