The following article is based on my own interpretation of the said events. Any material borrowed from published and unpublished sources has been appropriately referenced. I will bear the sole responsibility for anything that is found to have been copied or misappropriated or misrepresented in the following post.
Sumeet Kumar Sharma , MBA 2015-17, Vinod Gupta School of Management, IIT Kharagpur
Across the world the issue of maintaining a minimum wage sets off a heated political debate. The opinions are divided about the same, some welfare economists support minimum wages for their redistribution effects, while others debate that minimum wages drive down demand for labour by companies. And—especially relevant to India—minimum wages coupled with rigid labour laws send firms scurrying outside the regular formal job market.
The government decision to provide a minimum wage of Rs. 10,000 per month to contract labourers has drawn opposition from many economists. led to many raised eyebrows. However, it is mentioned by the government that it’s a universal wage rather than minimum wages. Minimum wage widens the wedge between the two wage rates, by taking care of permanent employees and contract workers, whereas universal wages involves paying an optimal amount to every employed person. This year’s Economic Survey estimates that wages are on an average 20 times higher in the formal sector than the informal sector in India. The new minimum wage for contract labour, an integral part of the informal sector, seeks to fix the considerable gap in the wages of formal and informal sector.
Only 16.6% of the informal sector gets covered under the existing Contract Labour (Regulation and Abolition) Act, which deals with the wage norms of contract labourers among other things. The rest of the labour force trapped in the informal sector languishes with little or no financial security. The study also adds that 30% and 32% of the workers in the private and public sectors, respectively, are hired through contractors.
The new executive order could a considerable influence in shifting the labour curve in favour of the workers. There are valid apprehensions that the move would restrict workers to the informal sector rather than helping them move into the formal sector. And that is where labour reforms come in. While ensuring contract workers’ financial security is important, it is equally necessary to tenaciously pursue labour reforms that can facilitate a faster transition to the formal sector. Eventually the need for a minimum wage must itself be done away with.
The Narendra Modi government’s move to merge the country’s many labour laws into five comprehensive bills is a step in the right direction to simplify the Indian labour market. It needs to simultaneously step up its game in job creation and creatively integrate the Make in India and Skill India campaigns in the action plan. A reformed labour market is also a prerequisite for the success of Make in India and improving the ease of doing business, and not a substitute to job creation.
It is only the symptoms of struggling labour market that gets treated by minimum wages. The need of hour is a permanent cure that can only be achieved by developing a more flexible labour market.