India's high minimum wages cause large informal workforce: Report

A report says India's minimum wage structure may be pushing workers into informality, with 64% earning below the legal floor and labour-intensive sectors lagging peers

India’s minimum wage structure may be excluding a majority of workers from formal employment, with 64 per cent of workers earning below the legal wage floor, said a report by the Foundation for Economic Development on Thursday.

 

The report, titled Minimum Wages Hurt the Most Vulnerable Workers, showed that minimum wages in India are set significantly above prevailing earnings, with the statutory floor at 1.7 times the median earnings of casual workers and about 77 per cent of per capita GDP, compared to roughly 50 per cent in major export competitor economies.

 

“The share of Indian workers with no contract, no PF, no legal protection is higher than Vietnam, Thailand, Bangladesh, or Mexico, with 88 per cent of the workforce being informal,” the report said.

   

It also highlighted that labour-intensive sectors such as apparel, leather, and footwear have grown at 7–9 per cent annually, compared to 13–14 per cent growth in capital-intensive sectors over the past decade. India’s share of global low-skill exports remains below its labour endowment, resulting in an estimated $60 billion annual shortfall, it added.

 

The analysis is based on minimum wage data from the 14 most populous states, using the average of state-level notified wages as a proxy for India’s wage floor, alongside earnings data from the Periodic Labour Force Survey (PLFS) 2023–24, excluding Bihar due to data inconsistencies.

 

Across these states, 40 per cent to 79 per cent of workers earn below the minimum wage, indicating that the statutory floor sits above the earnings of a large share of the workforce, the report said.

 

It noted that India’s minimum wage stood at 169 per cent of the median earnings of casual workers, compared to 26–59 per cent in advanced economies such as the United States, Japan, Canada, and the United Kingdom. India’s minimum wage was 90 per cent of median earnings for regular workers and 113 per cent for the self-employed, indicating a wider gap for vulnerable segments, it added.

 

It further found that India’s minimum wage was 77 per cent of monthly per capita GDP, compared to about 50 per cent in export competitors such as Vietnam, Bangladesh, and China, placing it roughly 54 per cent above the competitor benchmark. It noted that aligning with these levels would imply a lower wage floor in India.

 

The report said 47 per cent of workers earn less than three-fourths of the minimum wage, implying that even a 30 per cent increase in wages would still not meet legal thresholds. It also showed that minimum wages are 1.3 to 2.2 times higher than MGNREGA wages across major states.

 

State-level comparisons showed that regions where minimum wages are high relative to per capita income tend to have lower formal employment and smaller manufacturing workforces, noting that higher relative wage floors correlate with a smaller manufacturing workforce.

 

“The relationship is weaker than for informality — manufacturing share is driven by many factors beyond the wage floor — but the sign is consistent with the mechanism, and Uttar Pradesh, Jharkhand, and Madhya Pradesh again cluster in the low-employment tail,” said the report.

 

Minimum wages vary widely across states and regions depending on the cost of living and industrial conditions. For instance, daily wages can range from around ₹462 in Odisha to over ₹650 in states such as Maharashtra and Kerala.

 

Recently, both Uttar Pradesh and Haryana revised wages following worker protests, with Uttar Pradesh raising minimum wages by around 20–21 per cent, with unskilled wages rising to about ₹12,356–13,690 per month depending on the district, while Haryana approved a 35 per cent hike, taking unskilled wages to about ₹15,220 per month from around ₹11,275.

 

Noting that the Code on Wages, 2019 empowers the Centre to set a national floor wage, while minimum wages continue to be notified by states, the report cautioned that a uniform national floor could have varying effects across states due to differences in productivity and wage levels.

 

The Centre is in the process of determining a statutory national floor wage under the Code on Wages, 2019, with officials indicating that the benchmark will be revised to reflect inflation and regional disparities. At present, the national floor-level minimum wage stands at about ₹176 per day, which acts as a baseline below which states are not expected to set wages, though it has remained unchanged since 2017.

 

The report recommended allowing workers and employers to freely negotiate wages within a formal framework, while retaining legal protections. It also proposed replacing further minimum wage hikes with government-funded wage subsidies, under which the state would provide a fixed per-worker support to boost incomes without reducing labour demand. 

Jobs squeeze

• Minimum wage set at around 77% of per-capita GDP, while global peers have it at 50%
• Higher wage floors linked to lower formal employment and smaller manufacturing workforce
• Labour-intensive sectors lag capital-intensive growth; India faces $60 bn shortfall in low-skill exports