04 March, 2012

The futility of Minimum Wages

In virtually every country in the world, the government fixes minimum wages that must be paid to workers. In India it is a state subject and each state fixes minimum wages. Seems a very sensible move. After all the poor unskilled worker has no bargaining power [unlike coders :) ] and the power equation between employer and employee is heavily tilted in favour of the employer. A decent civilised society must ensure that workers are not exploited with wages that condemn them to subhuman existence. Seems a straightforward case, right ? It turns out to be not so right, after all.

The biggest problem with the Minimum Wage is that in reality it has become the ceiling and not the floor. Whole industries have abandoned having any remuneration policies at all and simply have adopted the Minimum Wage as their policy. In fact the largest number of legally employed people in the country are probably on Minimum Wage. Construction labour, Security guards, cleaners, and virtually every form of unskilled labour is on Minimum Wage. With all good intentions, governments have ended up fixing the Maximum Wage rather than the Minimum Wage.

The consequence of this is that if the level is higher than what the market can bear, there is every attempt to evade the law. It also ensures curtailment of employment - employers restrict hiring if its too expensive. If the wage level is fixed too low, then the employee can't make both ends meet and job hops all the time in the vain attempt to earn a bit more. Attrition levels in states with low minimum wages touch 50% per month. Getting the level right is the key - but then you can bet that the last agency that can get it right is the government.

Ramamritham has a field day with Minimum Wage law. The state of Tamil Nadu has 65 different categories where it has fixed Minimum Wages. In his infinite wisdom, Ramamritham has fixed that a worker working in the footwear making industry must be paid Rs 121.91 per day while the worker employed in coconut peeling industry must be paid Rs 121.24 per day. There are annual revisions. Very productive employment for hundreds of Ramamrithams (alas at much higher than Minimum Wages).

Let supply and demand fix wage levels. Only legislate that employee benefits such as PF and ESI must be provided. Leave the job market to fix sensible remuneration levels. I am willing to bet that the wage levels would actually rise in many states in India.

I am reminded of a quotation attributed to a famous business leader. You should be a capitalist in the mind and a socialist at heart. The sure road to disaster is if that equation is reversed.

13 comments:

gils said...

minimum wagesa maximum salarya neria edathula tharathu problem thaan..aana before it came into being..antha min. amt kooda kedaikaatha makkal ekkachakka per irunthaangalla. At the best, if at all there is a second and subsequent ones, min. wages is a first step, towards whatever its intention!!

Sandhya Sriram said...

I agree with GILs. The very fact that Minimum wages has become maximum wages is because of the very same reason and i am sure there will be rampant exploitation if the Act didnt exist.

But equally so that the forces of demand and supply naturally operate in the market. can you get me an electrician who will come home and fix a light as per minimum wages act. maybe, we will get a factory unloader @ minimum wages. isnt it market forces of demand and supply operating in the Industry.

the other perspective is that the time and money that Ramarathinam spends time fixing and reviewing 65 categories of jobs and implementing the legislature can possibly be gainfully invested in planning and developing infrastructure for upskilling. how many of the workmen who earn minimum wages go through any formal skill enhancement training. by giving the right set of skill reenforcement, we can by default create the right eco system for the demand and supply forces to operate.

sorry - i think it sounded like a political speech. maybe biassed by too much of election reading on the paper :-)

Ramesh said...

@Gilsu - The employers who don't want to follow Minimum Wages will not follow it whether there is a law or not. The best example of this law breakers is every housewife - she violates every law of the land when employing a maid. In reality, market determines wages - law oor not.

@Sandhya - See my arguement to Gils. The problem with the law is that it has anchored the ceiling - that's why you can't get an electrician. Pay him the market wage and he'll land at the house exactly on time !! In reality many firms that employ electricians pay them the minimum wage - hence the moonlighting, unreliability, job hopping, etc etc.

Oh yes - depriving Ramamrithams of their work will immensely enrich everybodyelse.

Asha said...

This argument works vice versa in my area or my housing society. The employees dictate terms and talk of labour laws. The power equation here is tilted in favor of the employee. Be it the dhobi, car driver, car cleaner, maid or cook they unite and fix their wages before the residents association take a call. Many housewives especially who have to balance a career and home have no choice but bow down. A case of huge demand and less supply.

J said...

You are sounding like a Republican now! Also, a problem with minimum wages is that we assume closed economies. The minimum wages could then deprive the high-cost economy worker the chance to compete. But then that would predict that wages could fall when you lift the minimum wages but that may be better than losing your job altogether.

Ramesh said...

@Asha - I understand the sentiment, but actually my sympathies are entirely with household help - especially maids. Their terms of employment are awful - no security of employment, can get fired instantly, no PF, no ESI, in most cases no weekly off, no leave, no nothing. Lets say they unionise as you say and are paid Rs 1500 for an hour's job - and they can get say 5 jobs in a day average. Thats Rs 7500 per month with no benefits. Ajust for leave, bonus, etc which they stand no chance and that's below the minimum wage level in most states. No wonder they behave unreliably and do a shabby job and absent themselves on a whim. The need is to professionalise this service - then we will get reliable service but need to pay more.

Ramesh said...

@J - OMG - If I sound like a Republican (especially the mad fringe that seems to have taken over the GOP), I need to commit harakiri. My post was entirely for India - I've seen here how minimum wages is affecting the labour market at the unskilled end and hence this post. Its an unbelievable paradox in India that we have millions of unemployed people and yet these days its impossible to fill vacancies for unskilled jobs in towns and cities and even if you fill, attrition rates are 50% per month. Minimum Wages is only part of the problem, but I beleve an important part.

TMM said...

On a different note. Do we get to see a blog from you this weekend on that gentleman cricketer who epitomised what cricket stands for- class and charecter on and off the field.

Ramesh said...

Yep; of course.

Vishal said...

Ramesh - another perspective is that there are enough people (end users) willing to pay more than the minimum wages but it is the intermediary who wants their piece with all the possible loopholes in the law. and hence, the issue turns more severe...

Ramesh said...

@Vishal - You have a point there. Distortions have happened in the market for labour because of minimum wages and intermediaries have exacerbated it.

sriram khe said...

Hey, write something where I can seriously disagree with you :)

65 categories for minimum wages? In one state? are you kidding me? How awful!

Ramesh said...

@sriram - Oh not to worry - there will be many areas where we disagree :)