Minimum Wage Conundrum

Context: The Union Ministry of Labour and Employment last week constituted an expert group to give technical inputs and recommendations on fixing a national minimum wage. Govt will need to strike the right balance.

According to the Code on Wages, 2019, the Central government is expected to fix a floor wage after taking into account the minimum living standards of workers. It can also fix a floor for the states so that the latter don’t pay below the one set by the Centre.

Recommendations of Anoop Satpathy Committee: The committee submitted its report on “determining the methodology for fixation of the national minimum wage” in 2019 recommended

• Fixing the need-based national minimum wage at Rs 375 per day or Rs 9,750 per month as of July 2018.
• It suggested that this minimum wage was not subject to skill or occupation.
• The committee also recommended introducing an additional house rent allowance for urban workers.
• Besides a national minimum wage, the committee recommended different minimum wages for different regions to account for local factors.

Features of the expert group:

• Chaired by Ajit Mishra of the Institute of Economic Growth,
• Has been constituted for a period of three years. This effectively means that the government is unlikely to fix the floor as mandated by the new wage code in the near term.

Challenges in determining a minimum wage

• Earlier recommendations were ignored: The government had constituted another expert committee under Anoop Satpathy in January 2017.
  • The report didn’t seem to have made much headway as the government raised the minimum wage only marginally in 2019. However, some of the trade unions demanded higher wages.
• Striking the right balance:
  • If the floor wage is set too high, it will deter employers from hiring more workers and force them to opt for more capital-intensive techniques of production.
  • However, if it is set too low, sustenance would become difficult for workers.
  • In principle, the minimum wage should not be high because it should leave space for market forces to determine wages above a minimum threshold.

Way Forward:

• Simplify laws: India has not been able to take advantage of its large pool of labour to push labour-intensive manufacturing and exports due to the presence of a maze of labour laws.
  • It will be important that rules are kept simple so that they encourage firms to hire more workers and increase scale.
  • This would also lead to greater formalisation in the labour market, which should help ensure that the rights of workers are protected.