It’s Time To Dump The Neo-classical Bogey On Base Wages

Context: Analyzing the scope of base wage policy at a time when at least half a dozen states are in a rush to pass a law that reserves 75% of all jobs for locals.

Issues with the policy of job reservation for locals

• Deemed unconstitutional
• Unlikely to increase employment
• Negative connotation when compared to subsidizing skill-building and training, infrastructure up-gradation etc.

Background to the Minimum Wage: It is argued that rather than the stick approach of a job quota, a carrot approach of giving fiscal incentives for creating jobs for locals has a better chance of success. 

Minimum Wage Policy in India

• Code on Wages Act, 2019: Combined labour laws on payment of wages, remuneration and bonuses.
• State subject: Labour is a state subject, and hence minimum wage varies from state to state.
• Remuneration: National minimum around Rs.176 per day for unskilled labour; barely above World Bank poverty norm of $2 per day - Translates to income of Rs.4,400 per month.

Arguments against raising base wage- Neo classical bogey

• Leads to rationing and shortages of labour: It has the same impact as any other price ceiling. A wage floor will neither create employment nor reduce poverty.
• Won’t help workers: Will lead to more automation and skew the mix away from labour to capital – as articulated by Milton Freidman as a reaction to minimum wage legislation of 1938 in the US.

Arguments for raising the base wage

• Changes in the minimum wage did not affect employment: as suggested by some empirical studies.
• For E.g. The stylized fact is that if you pay a McDonald’s worker 10% more, the price of a burger goes up by maybe 25 cents. That does not affect sales volumes at all.
• Benefits to employers: Higher pay for low-skilled workers reduces churn and decreases the overall cost of training and retention of workers for their employers.
• Scope and Applicability: Phenomenon of moderately higher wages being passed on to consumers works in non-tradable service sectors, or indeed for a variety of jobs like janitors, cleaners, courier etc.
• Social benefit: Welfare of minimum wage labourers paid by large diffused mass of consumers.

Conclusion: Minimum Wage has to be large enough to make a material difference to workers but small enough to keep demand inelastic.