The current national minimum wage of Rs 176 per day must be revised upward, writes Ajit Ranade

President Joe Biden’s administration was able to push through a major corona-relief fiscal package this month. It is worth $1.9 trillion and includes another round of $1,400 in stimulus cheques for every American, $350 billion to states and local governments as grants, and $160 billion for coronavirus testing, tracing and vaccines. But it failed to get the voting support needed to raise the nationwide minimum wage to $15 an hour. The Democrats have a comfortable majority in the Congress (the Lower House), but it is a knife-edge situation in the Senate (the Upper House). And within the party itself, there are voices opposing what they consider a steep increase in the minimum wage, which is currently $7.25 per hour.

This minimum wage number was set back in 2009. However, individual states in the federal system are free to add to that and have done so. For instance, in New York, Washington, etc., the minimum wage is far higher. For the rest who follow the 2009 number, in inflation-adjusted terms, the minimum wage is even below what prevailed in the 1970s. Surely that needs a correction? But the Republicans, and a significant number from the Democrats feel that this increase would put an undue burden on employers, at a time when the economy is coming out of a deep recession. As a compromise, don’t be surprised if an $11 per hour wage is voted successfully. But that is yet to happen. It may also subsequently get indexed to the inflation rate.

Significant development

That this is happening in capitalist America is a very significant development. Even in the United Kingdom, which has had a conservative, pro-business, pro-employers’ government for more than 10 years, the minimum wage has been raised to £8.7 pounds for all adults above the age of 25. This may go up further. This wage is roughly two-thirds of the median wage earned by all workers in the UK.

In America too, if the $15-dollar minimum wage is imposed, it would be close to two-thirds of the national median. As such, the total income (i.e. earnings from wages, salaries and other sources) for a median American household has stagnated for nearly four decades. This has happened despite the growth in national income and a roaring stock market. Which means that substantial gains of income and wealth were going to the top tier in society, and for the vast majority incomes were stagnating.

This has lessons for India. Wages have to grow, if incomes and standards of living have to improve. Will a higher minimum wage help? Will that crimp employers and lead to lower employment, or will it help workers?

While per capita incomes rose by nearly seven per cent per year from 2003 to 2012 in India, subsequently, this growth has slowed down. This was also a period when rural wages were rising. India’s labour market has 90 per cent of its workforce in the informal or unregistered sector. Which means that they work either without a written contract, or without any health and retirement benefits. Even in sectors where there is a significant registered (‘permanent’) employment, the ratio of permanent to contract workers is very skewed, which is also reflected in their respective benefits and pay.

De facto caste system

Sometimes, this creates a de facto caste system, where for the same work, a contract worker is paid much less than a permanent worker. Such conditions can create stress and unrest, sometimes leading to intemperate outcomes, like the violence a few years ago in an auto plant in Manesar. Due to the large number of informal and seasonal workers, the data on wages and earnings is notoriously bad. Anecdotal and survey data indicate that wages have stagnated in recent years. Of course, during the pandemic, there have been large-scale job losses too.

When surplus labour moves out of agriculture, it is coming from disguised unemployment, so productivity is nearly zero. Hence, even a small wage is a decent improvement on zero. This process of absorbing surplus labour from zero wage, can continue for a long time, until agriculture no longer has any surplus labour. Indeed, this was the strategy of sustaining high growth and high exports at low and constant wages, in China. The low-wage workers were taking away higher wage jobs from advanced countries.

The low wages in China meant that much of the benefit of high GDP growth was going to capitalists, in this case mostly state-owned enterprises. That profit was continuously re-ploughed, leading to high GDP growth rate. To some extent, it can work in India, only if industrial employment increases continuously, like it did in China. But unlike China, India’s services sector is nearly 60 per cent of the GDP (national income). It employs only 25 per cent of the workforce. Besides India’s consumption expenditure as a share of the GDP is much larger than in China.

Jobs won't vanish

It is not as if raising the minimum wage in India will make the jobs vanish out of the country. This is because these low-paying jobs are mostly in the services sector, which is a non-tradable sector. Besides if the increase in the minimum wage is not very large, it does not even affect the demand for those services. Think of the wages paid to farm labour or security guards, or courier services workers. Even the gig economy workers, such as hail tax drivers feel the squeeze. An increase in their wages surely will not affect the demand for those services, nor will it lead to a decrease in employment.

This has been amply documented by researchers in America, who show that contrary to populist caricaturing, the increase in minimum wages in most sectors just means that consumers pay more. When a McDonald worker gets a fifty per cent higher minimum wage, the burger price goes up by 25 cents. This is a social tug of war. This is a way of transferring incomes from consumers to workers, without causing a burden to the exchequer.

It is similar to increasing the minimum support price to farmers, so that urban consumers pay a bit higher for food and the farmer earns a bit more. This removes the urban bias of the food policy. Similarly, an increase in minimum wage will remove the pro-employer bias of the wage policy. The current national minimum wage of Rs 176 per day certainly needs to be revised upward.

The writer is an economist and Senior Fellow, Takshashila Institution.

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