Decoding The Wage Code Bill

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Will the Government of India be able to enforce the provisions of the Code of Wages Bill and guarantee a minimum wage?

On the final day of the Monsoon session of the Lok Sabha, India’s Minister of State for Labour and Employment, Bandaru Dattatreya, introduced the Code on Wages Bill, 2017. Unifying four separate wage laws, the stated aim of the bill is to provide a universal minimum wage for all sectors of the Indian labour force.

In his opening speech, the minister stated that 40 crore (400 million) workers from the unorganized sector would be able to avail the new minimum wage; stressing repeatedly and to applause, that worker’s rights would not be infringed.

The Code on Wages Bill will amalgamate the Payment of Wages Act of 1936, the Minimum Wages Act of 1948, the Payment of Bonus Act of 1965 and the Equal Remuneration Act of 1976. But since it was introduced on the final day of the Monsoon session, it will only be discussed and passed/withdrawn in the Winter Session commencing.

Its provisions include:

  • A universal minimum wage set by the Centre, with states given the freedom to set a higher wage if they choose.
  • Expanding the scope of the Payment of Bonus Act, 1938, to all workers regardless of wages and type of industry/establishment worked for
  • Allowing employers to pay their workers by cheque or bank transfer, instead of the pre-demonetisation system of cash-only (depending on the employer’s preference)
  • State governments must set up one or more authorities along with an appellate authority to hear and decide claims arising from non-payment of the required wages
  • All employers must maintain a register of the number of workers employed, the wages paid to them and other details as prescribed by the Government
  • Facilitators, and not Inspectors, will be provided to inquire, investigate and aid companies with compliance.

Analysis

Until the Bill is approved by Parliament in the Winter session, the age-old debate of whether a minimum wage is good or bad for the economy will persist. India has had minimum wage programs in place for a while – but their impact has been limited with the informal economy taking up a significant portion of the economy (between 75 percent of GDP and 92 percent of the workforce; figures taken from the Berkley Centre and the National Commission for Enterprises in the Unorganised Sector.

The Bill has few points on how it hopes to enforce and monitor the execution of its provisions. It proposes to replace the current system of Inspectors with one of ‘Facilitators’ who will “supply information and advise the employers and workers concerning the most effective means of complying with the provisions of the proposed legislation”. This inspection is to take place through a ‘transparent, web-based inspection scheme”.

Its impact can be manyfold. It arrives during a period where job creation is at its lowest in eight years. The fear that a minimum wage would increase unemployment is touted as a potential consequence of the proposed Bill.

Historically, classical economic theory implied that rigid wage rates (ie, an enforced minimum wage) can trigger greater unemployment – as demand for jobs outpaces supply. The logic is that companies unable to pay many workers the higher wages will start laying-off their employees. In practice, the evidence has not been so clear. A lot depends on whether ‘real wages’, (i.e., wages that reflect what you can buy with them rather than just their numerical value) have risen to match inflation.

Studies of the same effect can often have contrasting results. A Berkeley study of the city of Seattle, which increased the minimum wage to $10-11 in 2015, found no effect on unemployment – and a higher wage hike across the board. Another study, by the University of Washington, found that working hours were cut for low-wage employees – making them earn less overall than they did before the hike in minimum wage.

Changes to minimum wage play out differently in different countries; particularly in India’s case. State-wise variances in unemployment rates and median incomes mean that setting the same floor across the country could lead to undesirable effects. The North-East states of Assam, Tripura and Nagaland report some of the highest unemployment in the country.

The fear is that an enforced minimum wage would only push more workers into the informal sector. Studies such as Murgai and Ravallion (2005) cited in Belser and Rani (2012) suggest that unless the government can assure employment at minimum wage, vast pools of unskilled workers will take up lower-paying jobs in the informal sector.

Enforcing minimum wage laws within the informal economy will be the real challenge. A 2014 study published in the Global Journal of Human Social Science analysed the effectiveness of the Minimum Wages Act, 1948. One of the biggest challenges was non-compliance – out of 7,698,033 establishments covered under the Act, fewer than three percent submitted annual returns.

Raising the minimum wage is no longer a clear-cut case of stifling employment. An increasing number of economists, including seven Nobel prize winners, advocate and support raising the minimum wage. The expected benefits are decreasing wage-inequality, forcing wages to match real household expenditures and incorporating more workers into the higher-paying formal sector.

In India, this experiment will be tempered by a host of other factors; unaccountability of the informal economy is one, a weak job market is another and the burden of added bureaucracy is the third. India’s industries, which largely enjoy cheap labour, react sharply to news of wage hikes. In the case of the garment sector, plans to double the minimum wage from Rs.9000 to Rs.18,000 were met with a drop in export orders – even before the wage was hiked.

There is already a National Floor Level Minimum Wage, though it is non-statutory. In July, 2015this was raised to Rs. 160 a day. In contrast, states like Kerala set much higher minimum wages, with a proposal to raise the ceiling to Rs. 600 a day ($9.36). Unemployment in Kerala is high, at 7.4 percent, but the higher wages have attracted more than 2.4 million migrant workers from India’s poorest states – who earn several times what they would make in their home states.

The unique set of scenarios that make up the Indian economy needs to be taken into consideration in determining the scale, applicability, and limit of India’s national minimum wage. The debate on whether it is good or bad for the economy is far from over – and the outcome, far from being fully understood.

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