Wasted labour

Raising minimum wage is no compensation for deeper reforms

The Union government’s decision to raise the minimum wage from Rs 246 a day to Rs 350 a day for unskilled employees may look good at first glance, but it is already evident that this seemingly substantial 43 per cent increase has not achieved the immediate objective of persuading the Left- and the Congress-affiliated trade unions to call off an all-India strike on September 2. This is no surprise since the increase meets only about half the unions’ demand for a minimum wage — Rs 692 a day. Of greater concern is the fact that this increase does little by way of raising the bar on labour market reforms.

For one, the limited benefits of this increase will impact a relatively small universe of unskilled workers – a little over 1.9 million workers in the central sector. It leaves out of its purview the vast numbers employed in states, which have widely varying minimum wage structures – often below the national standard (bar states such as Delhi, Haryana, Gujarat and Maharashtra) – and outside the purview of any robust monitoring system. How many states are likely to follow the Centre’s lead is an open question. Unlike the Pay Commission awards, which are invariably replicated by the states, minimum wage increases do not encourage emulation perhaps because they impact the less vocal (or the less articulate) sections of the electorate.

There is also a question whether even this increase can be called a living wage. It works out to roughly Rs 9,100 a month, against the Pay Commission’s recommendation of Rs 18,000, though in line with India’s annual per capita income of Rs 93,293. But with food inflation at 8.5 per cent – and food constitutes almost half a low-income family’s consumption basket – it is hard to see the new minimum wage providing significant relief to those at the bottom of the employment pyramid.

The habitual resort to entitlement spending to assuage political opposition also does not address the great divide in India’s labour market between the vast informal and minuscule formal sectors. As the Economic Survey 2015-16 pointed out, informal sector jobs, which account for over 90 per cent of the labour force, were much worse than formal sector ones on most measures. Wages in the formal sector were 20 times higher than those in informal sector — and this despite the fact that the informal sector grew somewhat faster. These differentials are the result of what the Survey calls “regulatory cholesterol” — the tough retrenchment laws that discourage firms from hiring full-time employees on full benefits. To be sure, the Centre’s role here is limited since labour is a state subject under the Constitution and few states have moved to ease their laws. It is possible that Finance Minister Arun Jaitley had to consider the Centre’s spending constraints in approving this modest increase. But with the middle class ready to enjoy a bonanza thanks to the Pay Commission payout, this is a poor signal to send out to the more vulnerable sections of India’s labour force.