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Hike wages, kill jobs PDF Print E-mail
Thursday, 13 July 2017 03:53
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Shobhana edit

Without productivity hike, raising wages a bad idea

 

Even as India is looking to overhaul its labour laws, the Brazil Senate on Tuesday approved some major changes to that country’s labour code. Amidst some serious opposition, the Brazilian government tweaked the law to allow agreements negotiated between employers and workers, on a range of issues, to override current labour law. The changes will also make it easier to hire temporary workers, even for extended periods of time. While India’s Parliament is also expected to debate amendments to labour laws next week, one of the laws expected to be discussed is making minimum wages mandatory. The Labour Code on Wages, 2015, says no employer shall be allowed to pay to any employee wages less than the minimum wages notified by the state government. Given India’s labour laws are already very restrictive, imposing one more condition will only make it more difficult for companies—especially smaller ones—to function efficiently.

At a time when job creation is very slow, and increasing automation in the manufacturing sector is threatening to shrink the number of jobs, enforcing a minimum wage will be counter-productive. Already India is losing out in the export market to countries such as Vietnam, Bangladesh and China. While wage costs are not the only reason for the loss of market share—poor infrastructure is also a culprit—an increase in the wage bill will make Indian exporters even more uncompetitive. So, while India’s labour costs are around half China’s, poor labour productivity means China’s cost of production is half India’s. With poor labour laws resulting in India having a lot more small firms than China, this ensures India can never get the same economies of scale.

The Economic Survey makes this point when it notes that India still has the potential comparative advantage in terms of cheaper and more abundant labour. However, these are nullified by other factors that make Indian companies less competitive. The minimum wages in India vary widely across states; in Andhra Pradesh semi-skilled workers earn $81 per month whereas in Maharashtra they make $118 per month. This is similar to the wages of $80-120 per month in Bangladesh but lower than the $120-$150 per month in Indonesia. State governments will be expected to review or revise the minimum rates of wages every five years if the wages include a component of variable dearness allowance—linked to the CPI Index. Else, these need to be re-looked every two years. Unfortunately, there is no room for freezing wages or trimming them in the event the company goes through a bad phase or any recognition of the fact that businesses typically go through cycles. While the government is looking to protect the interests of workers, enforcing minimum wages will end up hurting the job market.

 

 

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