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Friday, 02 January 2015 12:47
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Raising minimum wages will only hurt employment

The government is reportedly examining the possibility of nearly doubling minimum wages—the labour ministry, The Indian Express reported earlier this week, is planning a meeting to get the states on board. At a time when the government is working on a variety of labour reforms, the logic goes, the move will help convince workers the government is on their side. Apart from the fact that the move will be opposed by industry, the plan is wrong at many levels. For one, it is not going to be easy to enforce higher wages in a country where over 90% of the work force is in the informal sector—enforcing higher wage levels will then require an army of inspectors. In countries where such laws work better, the proportion of organised sector workers is higher; most important, such countries do not have anywhere near the excess worker levels that India has—in a labour-surplus country, there will always be workers willing to accept jobs at less than the minimum wage.

Apart from the issue of enforcing such contracts, the dynamics of employment is equally critical. If wages are increased without any commensurate increase in productivity, the first thing to suffer is employment itself. While there are apocryphal stories of how farm mechanisation rose when MGNREGA drove up farm wages, it remains true that the auto industry, for instance, has chosen to mechanise more in the face of rising unionism and rising wages. Economists, in fact, call this the middle-income trap. When salaries start rising as economies hit middle-income levels, if this is not matched with sharp increases in productivity, economies become uncompetitive and lose their export edge.

This is the reason why, for instance, India lost a considerable part of its edge in the BPO business, and industry found it cheaper to relocate this business to countries like the Philippines. Rather than trying to curry favour with workers by raising wages, the government would do better to help industry grow to create more jobs—it is only when there are more jobs than workers that salary levels can rise meaningfully—and to work on developing India’s education sector so that, with education, workers can get more productive and command higher salaries.



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