#15: Navigating India’s minimum wage maze
States may have traded compliance for complexity
It is widely believed that minimum wage laws are required to protect workers from exploitation. To this end, India was one of the first developing countries to implement a minimum wage law in 1948. In contrast, South Korea enacted its minimum wage law in 1986. Despite being an early adopter, India’s minimum wage is characterised by low compliance. One estimate shows that non-compliance may be up to 90% in some sectors (Mansoor & O’Neill, 2021).
India’s minimum wage structure is one of the most complicated in the world (Belser & Rani, 2011; Kumar, 2021). Each Indian state sets its minimum wage, which may vary based on the region, industry, jobs within the industry, and skill level.
This article analyses minimum wages in eight states at different levels of economic development. The analysis throws up three stylised facts:
States set minimum wages proportional to their economic prosperity, with poorer states setting lower minimum wages than prosperous states.
States may not be rewarding upskilling through minimum wages. Skilled workers do not earn much more in minimum wages than unskilled workers.
In some states, minimum wages differ across industries. Entry-level unskilled workers earn different minimum wages in the garment industry than in the plastics industry.
Development and minimum wage
India’s federal structure means each state sets minimum wages (S. 4 of the Minimum Wages Act, 1948) for its territory. Given the large variation in average incomes and living costs between states, this makes intuitive sense. Living costs in Mumbai are generally higher than in Patna. A single minimum wage would not encourage wage competition between states, and it would always be rewarding to be situated in a more developed state.
Indian states seem cognizant of this fact and set minimum wages in line with their GSDP per capita. This trend is observed across 12 industries in the eight states studied. The figure below compares annual minimum wages to GSDP per capita.
Haryana is the exception to the rule of states setting their minimum wage in line with their development. Haryana is the richest of the eight states studied. Therefore, in line with the trend, wages should be the highest in Haryana. However, Haryana keeps its wages lower (across industries) than the trend line. Haryana is roughly five times richer than Bihar, but the minimum wage in Haryana is only 3.81% higher than that in Bihar. In comparison, Maharashtra is four times more prosperous than Bihar, but the minimum wages in Maharashtra are 38.70% higher than in Bihar.
Low premium for skill
States set minimum wages in line with their economic situation. However, states fall into two groups when it comes to rewarding skill acquisition. Some states have a larger gap between the minimum wages for skilled and unskilled workers. The table below shows the premium paid to skilled workers (compared to unskilled workers) in the four industries.
As the above table shows, low-income states tend to mandate a larger wage premium than their richer counterparts when workers move upwards in skill level. Skilled workers get a greater reward in low-income states when compared with high-income states in terms of the percentage increase in annual minimum wages. For instance, the minimum wages for skilled workers are approximately 24% higher than for unskilled workers in low-income states. In contrast, the minimum wages for skilled workers are approximately 10% higher than unskilled workers in high-income states.
This is counterintuitive. States take the effort of differentiating minimum wages based on skill, but they don't attach a premium after all that effort. It may have been easier for states to just reduce the categories of jobs rather than create multiple categories with minimal difference in minimum wage. Moreover, given that economically developed states also tend to have a greater presence of industries, the differentiation should be more pronounced.
Different minimum wages across industries
It is intuitive to think that skilled workers earn more than unskilled workers. But, it is difficult to justify the differences in minimum wages for unskilled workers based on the industry they are employed in. Some states set different minimum wages depending on the industry, even for the same skill level, while others don’t. In our analysis, the four poorer states and Haryana have set a single minimum wage for jobs that do not require skill for all industries. However, Tamil Nadu, Maharashtra, and Gujarat vary minimum wages depending on the industry, even if the job is entry-level and does not require any skill. This comparison is based on the lowest minimum wage set in each industry (generally classified as mazdoors, other workers and sweepers). The figure below shows the variation in the lowest level of minimum wages, across industries, within the same state.
The relative wage differences are also different across states. In Tamil Nadu, the garment industry has the lowest wages, whereas in Maharashtra, it is the plastic industry. On the other hand, the highest wages have been set in the plastic industry in Tamil Nadu. In contrast, in Maharashtra, the garment industry has set the highest minimum wages. Gujarat sets a standard minimum wage for unskilled workers across industries except for the garments industry. It is difficult to identify the economic reasoning behind the practice of differential treatment of unskilled workers based on the industry they are employed in. Workers would naturally prefer to work in industries that offer the highest wages. Due to inter-industry variation, the market for unskilled workers may get distorted if unskilled labour can move from one industry to another with relative ease.
Consequences
Academic literature has debated the impact of minimum wages on employment generation. Some argue that minimum wages hurt employment, while others point out that no such effect exists. Most of the literature concentrates on the existence or increase of a minimum wage. India’s minimum wage laws introduce multiple conditions that combine with the country’s federal system to create a complicated wage structure. This raises several empirical questions about the impact of the present system, including the effects of the wage structure on demand for entry-level jobs across industries, the location of industries, and the employment opportunities in states.
Complicated and burdensome labour laws have been identified as a challenge to India’s manufacturing sector. Some states have recognised this problem and have liberalised laws such as the Factories Act, Contract Labour Act, and the Industrial Disputes Act. However, the Minimum Wages Act has not attracted as much attention. Does India’s minimum wage system serve the role of protecting workers' interests? Or, like other labour laws, is this law a hindrance to their prosperity? A complicated system characterised by low compliance is an important cue for reform.
References
Belser, P. and Rani, U. “Extending the Coverage of Minimum Wages in India: Simulations from Household Data.” Economic and Political Weekly, 46(22) (2011): 47-55
Kumar, S. “Redesigning a minimum wage system in India for inclusive growth.” International Journal of Advanced Scientific Research and Engineering Trends, 5(12) (2021)
Mansoor, K. and O’Neill, D. “Minimum wage compliance and household welfare: An analysis of over 1500 minimum wages in India.” World Development, 147 (2021)
Minimum Wages Act. https://clc.gov.in/clc/sites/default/files/MinimumWagesact.pdf (1948)
Bhuvana Anand, Suyog Dandekar and Shubho Roy are researchers at Prosperiti.
What's even the point of having different minimum wages by skill level and industry? Assuming that minimum wages are justified(I don't think they are), their purpose is to provide a safety net, a living wage. How does it make sense to argue that two persons living in the same state require differing safety nets based on their skill levels and the industry they work in?