Minimum Wage System

MAY 20

Mains   > Economic Development   >   Indian Economy and issues   >   Employment

WHY IN NEWS:

  • The Delhi government has hiked minimum monthly wages of unskilled and skilled labourers by Rs 450-Rs 550 in view of high rate of inflation.

 

DEFINITION OF MINIMUM WAGES:

  • According to International Labour Organisation minimum wages is “the minimum amount of remuneration that an employer is required to pay wage earners for the work performed during a given period, which cannot be reduced by collective agreement or an individual contract”.

 

MINIMUM WAGE MECHANISM IN INDIA:

  • Constitutional provisions:
    • Fundamental rights:
      • The right to minimum wages has been recognised as a fundamental right by the Supreme Court of India, which has held non-payment of minimum wages to be a violation of Article 23 and therefore declared it to be “forced labour.”
    • Directive Principles of State Policy:
      • Article 43 of DPSP states that the State should secure a living wage to all workers by a suitable legislation or economic organisation
  • Statutory provisions:
    • In India, labour is included in the concurrent list which implies that both the central government and state governments can make laws regarding this subject.
    • India was one of the first developing countries to introduce minimum wages with the enactment of the Minimum Wages Act way back in 1948.
    • Code on Wages was introduced in 2019 to regulate wage and bonus payments in all employments
    • The Code replaces the following four laws:
      • Payment of Wages Act, 1936, Minimum Wages Act, 1948, Payment of Bonus Act, 1965 and Equal Remuneration Act, 1976
    • Fixing a floor wage:
      • According to the Code, the central government will fix a floor wage, taking into account living standards of workers.
      •  
      • Further, it may set different floor wages for different geographical areas
      • Before fixing the floor wage, the central government may obtain the advice of the Central Advisory Board and may consult with state governments.  
      • The minimum wages decided by the central or state governments must be higher than the floor wage. In case the existing minimum wages fixed by the central or state governments are higher than the floor wage, they cannot reduce the minimum wages.
    • Fixing the minimum wage:
      • The Code prohibits employers from paying wages less than the minimum wages.
      • Minimum wages will be notified by the central or state governments.
      • This will be based on time, or number of pieces produced.
      • The minimum wages will be revised and reviewed by the central or state governments at an interval of not more than five years.
      • While fixing minimum wages, the central or state governments may take into account factors such as: (i) skill of workers, and (ii) difficulty of work.

NEED:

  • Checking poverty:
    • Minimum wages are accepted globally to be a vital means for combating poverty
  • Reduction in wage inequality:
    • International experience suggests that greater compliance with minimum wages has led to reduction in wage inequality
  • Positive impact of employment levels:
    • As per Menon and Rogers (2017) report there is a positive effect of minimum wages on employment levels for both men and women.
    • They find that a 10 per cent rise in minimum wages raised the employment level by 6.34 percentage points in rural areas
  • To ensure ‘minimum living standards’ for workers:
    • A minimum wage will ensure that the net calorific needs for a working class family, their annual clothing requirements, house rent expenses and expenses on children’s education, medical needs etc met
  • Ensuring the vibrancy of any economy:
    • Aftermath of the 2008 global financial crisis and the erosion of purchasing power worldwide, the International Labour Conference’s Global Jobs Pact of 2009 identified “the regular adjustment of wages, in consultation with the social partners” as a means of increasing demand and contributing to economic stability.
  • Helps to revive economic growth:
    • An effective minimum wage policy that targets the vulnerable bottom rung of wage earners can help in improving general wage levels and driving up aggregate demand >> hence helps in consumption-led economic growth.
  • Bridge gender gaps:
    • A robust minimum wage policy will ensure that women are not discriminated against men in payment of wages
  • Increased bargaining power for vulnerable workers:
    • Minimum wage acts as a benchmark that pulls up wages in the low-paid and informal sector by enhancing the bargaining power of vulnerable workers.
  • Historical experience:
    • Minimum wages for labour rendered has been a feature of society since ancient times.
    • For instance, the famous Indian treatise from 2nd Century BCE, Arthashastra, ordained “the lowest wages for state employees was 60 panas per year for unskilled workers

ISSUES

  • Lack of coverage:
    • According to the International Labour Organisation’s India wage report one in every three wage workers in India is not protected by the minimum wage act.
  • Issues with earlier system:
    • Minimum wage system, under the Minimum Wages Act, 1948, has different minimum wages defined for different job categories across States.
    • 1,915 minimum wages are defined for various scheduled job categories across various states.
  • Lack of uniform criteria for fixing the minimum wage rate:
    • Different minimum wages for the same occupation across different states, along with a wide range between the lowest and highest minimum wages, trigger migration of industries towards low wage regions.
    • This can also cause distress migration of labour to better paying states.
  • Gender bias:
    • Analysis of minimum wage data also shows a systemic gender bias.
    • For example: male-dominated job of security guards pays better than being a domestic worker, most of whom are women.
  • Minimum wage can disrupt the economic system:
    • Considering the demand and supply where the economy is at equilibrium, minimum wage functions similarly to a price floor.
    • Imposing a higher wage level than the equilibrium would disrupt the price mechanism, which means that the market will not be able to clear, seeing workers not being able to find work

WAY FORWARD

  • Simplification and rationalization:
    • International experience has shown that relatively simple systems of minimum wages are more effective and usually complex systems are least effective
    • Rationalisation of minimum wages under the Code on Wages is a step in the right direction
  • Setting National Floor Level Minimum Wage:
    • Economic Survey 2018 suggests that the Central Government should notify a national floor minimum wage that can vary across five geographical regions.
    • Thereafter, states can fix minimum wages, which shall not be less than the 'floor wage'.
  • Periodic review:
    • The minimum salary needs to be adjusted regularly to keep pace with inflation
    • Develop a mechanism to adjust minimum wages regularly and more frequently.
  • Coverage:
    • The minimum wage regime should be extended to all employments or workers in all sectors and should cover both the organized as well as the unorganized sector.
  • Criteria for setting minimum wage:
    • Minimum wages should be fixed on either of the two factors - Skill category (unskilled, semi-skilled, skilled and highly skilled) and Geographical region, or else both.
    • This key change would substantially reduce the number of minimum wages in the country
  • Set up a national level dashboard:
    • A national level dashboard can be created at the centre with access to state governments whereby states can regularly update notifications regarding minimum wages
    • This portal must be made available at Common Service Centres (CSCs), rural haats etc., with the required mass media coverage so that the workers are well-informed>> their bargaining skills and decision-making power are strengthened.
  • Grievance redressal:
    • There should be an easy to remember toll-free number to register grievance on non-payment of the statutory minimum wages
    • This should provide low-paid workers a forum to voice their grievance.
  • Focus on ‘Need Based Minimum Wage’
    • The government should focus on ‘Need Based Minimum Wage’ covering nutrition, healthcare, education, housing and provisions of old-age.
  • Right based approach:
    • Guaranteed minimum wage should be treated as a fundamental constitutional right for every citizen of India.
  • Set up a National Commission for Labours:
    • The National Commission for Labours should be formed to streamline the issues and challenges of labour market and fixing discrepancies in national level minimum wage computation.
  • Proper design and implementation:
    • For the minimum wage system to play a meaningful role in aligning protection with the promotion of sustainable growth, it must be properly designed, its goals clarified, and its enforcement made effective

 

BEST PRACTICE:

  • UK’s comprehensive approach:
    • United Kingdom abolished its system of industry-wide trade boards in the 1980s and replaced it with a simple national minimum wage
  • ‘Impimpi Alive’ of South Africa:
    • It enables workers to send anonymous SMS messages to the Department of Labour, after which an inspector is dispatched to the employer’s place of business within 48 hours.

PRACTICE QUESTION:

Q. Examine the need for fixing minimum wages in India and suggests the way forward for rationalizing and streamlining the policy for minimum wages?

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