India has been a pioneer in legislating for worker welfare and providing for minimum wages. However, the outcomes have been far from ideal. As one explores the causes for the shortcoming, it also becomes clear that academic opinion is wide split on the impact of such legislations.

India was one of the first developing countries to introduce minimum wage regulations.[i] Through the Minimum Wages Act, 1948, minimum wage rates were set by both Central and State governments for employees working in selected ‘scheduled’ employment, for different categories of workers according to skill levels, location, and occupations. Minimum wage in India is regulated by the Minimum Wages Act of 1948 which was later replaced by The Code on Wages, 2019. The regulations for the new act are yet to be notified and we will focus on the Minimum Wages Act for this piece. The act provides for an appropriate authority to define minimum wage for each industry. Non-payment or underpayment of the minimum wage are considered as culpable crime, as provided for in Section 22 of the Act, and the punishment for a convict can be up to 5 years imprisonment with a fine of Rs 10,000.

Supreme court of India observes that, “the Act which was enacted, in 1948 has its roots in the recommendation adopted by the International Labour Conference in 1928. The object of the Act… seems to us to be, clearly directed against exploitation of the ignorant, less organised and less privileged members of the society by the capitalist class… appears to be in supersession of the old principle of absolute freedom of contract and the doctrine of laissez faire and in recognition of the new principles of social welfare and common good.”[ii]

Despite being a pioneer in legislating for this cause, there is overwhelming evidence around pervasive low wages, high wage inequality, working poverty and high gender pay gap in India compared to international standards.[iii] The failure of the initiative can be attributed to a number of factors, one of them being, the wide scope of provisions under this act. This led to a scenario where minimum wages varies across different industries in the same State and across States for the same industry. According to the International Labour Organization, there exist 1171 different minimum wage rates in India.[iv] The complexity of the provisions makes it difficult to be implemented as well as monitored.

Apart from the institutional capacity to implement minimum wage legislations, policy makers also have to understand the varied impacts of such legislations highlighted by empirical data.

Studies have reiterated the importance of minimum wage legislations in reducing inequality and improving overall employment. A detailed study undertaken by Patrick Belser and Uma Rani in the context of India, under the assumption of full implementation, found that the extension of legal coverage of minimum wage can reduce wage inequality by 10 percentage points; reduce poverty among low-paid workers by 8%–9%; and compress the gender wage gap by 6 percentage points among regular and 18 percentage points among casual workers.[v] Empirical evidence from other emerging economies, such as Brazil and China, also suggests that a minimum wage policy may contribute to a reduction in income inequality by raising the earnings of low-paid wage workers[vi]. A study in turkey estimated that a 1 percent surge in the minimum wage increased wages by an extra 0.22 – 0.35 percent. Wage increase was observed not only for the formal but also for the informal employees pointing out to the presence of a “lighthouse” effect.[vii] The cascading impact of wage rise on informal sector is observed in countries with significant presence of formal sector. In India, however, a significant portion of population remains outside the ambit of this regulation. A recent report of Periodic Labour Force Survey (July 18 – June 19) mentions that only 13.1% of households in urban area and 42.8% of households in rural area have regular wage or salary as their primary source of income.

Minimum wage regulations in counties with high share of informal sector leads to shifting of jobs from the formal sector to the informal sector. This is reiterated by a 2012 paper that studied the impact of labour market regulations on employment in low-income countries. The paper concludes that 10% increase in the minimum wage would reduce formal employment by 0.8% and increase employment in the informal sectors.[viii] Though there is a shift in employment structure, minimum wage legislation seems to have a positive overall impact on employment level. Using labour force data from 1996 to 2004 in Indonesia, Comola and De Mello showed that an increase in the ratio of the provincial minimum wage to the average wage is associated with a net increase in employment, where the decrease in formal sector employment is compensated for by the expansion of the informal sector.[ix]

While the divide between formal and informal sector seems to be minimal, studies indicate a stronger impact on unskilled labours. A study by Asian Development Bank confirms the negative effects of minimum wages on the employment or hiring of unskilled workers. In general, the study found that doubling the minimum wage will reduce hiring of unskilled workers by 2%.[x]

In light of these findings, a policy decision regarding universal minimum wage has to be evaluated not just in the light of institutional capacity but also the impact on various sections of employees and overall employment structure of the country.

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[i] Ministry of Finance, Economic Survey 2018-19, ed. Government of India, First edition (New Delhi, India: Oxford University Press, 2019), https://www.indiabudget.gov.in/budget2019-20/economicsurvey/.

[ii] “Y. A. Mamarde And Ors vs Authority Under The Minimum Wages … on 12 April, 1972,” accessed June 7, 2023, https://indiankanoon.org/doc/1447519/.

[iii] “India Wage Report: Wage Policies for Decent Work and Inclusive Growth,” Report (International Labour Organization, August 20, 2018), http://www.ilo.org/newdelhi/whatwedo/publications/WCMS_638305/lang–en/index.htm.

[iv] Rani and Belser, “The Effectiveness of Minimum Wages in Developing Countries.”

[v] Uma Rani and Patrick Belser, “The Effectiveness of Minimum Wages in Developing Countries: The Case of India,” International Journal of Labour Research, Social justice and growth: The role of the minimum wage, 4, no. 1 (2012): 4566.

[vi] Niklas Engbom and Christian Moser, “Earnings Inequality and the Minimum Wage: Evidence from Brazil,” SSRN Scholarly Paper (Rochester, NY, July 27, 2022), https://doi.org/10.2139/ssrn.3181965; Carl Lin and Myeong-Su Yun, “The Effects of the Minimum Wage on Earnings Inequality: Evidence from China,” Research in Labor Economics 44 (2016): 179–212.

[vii] Hatice Burcu Gurcihan Yunculer and Caglar Yunculer, “Minimum Wage Effects on Labor Market Outcomes in Turkey,” Central Bank of the Republic of Türkiye, Working Papers, 2016, https://ideas.repec.org//p/tcb/wpaper/1614.html.

[viii] Shanthi Nataraj et al., “What Is the Impact of Labour Market Regulation on Employment in LICs? How Does It Vary by Gender?,” SSRN Scholarly Paper (Rochester, NY, July 9, 2012), https://doi.org/10.2139/ssrn.2127434.

[ix] Margherita Comola and Luiz De Mello, “How Does Decentralized Minimum Wage Setting Affect Employment and Informality? The Case of Indonesia,” Review of Income and Wealth 57, no. s1 (2011): S79–99, https://doi.org/10.1111/j.1475-4991.2011.00451.x.

[x] Guntur Sugiyarto, Do Minimum Wages Reduce Employment and Training? (Asian Development Bank, 2008), https://www.adb.org/publications/do-minimum-wages-reduce-employment-and-training.