ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Does Minimum Wage Affect Informal Jobs across States in India?

The presence of a large informal sector as the mainstay of semi-skilled and unskilled workers raises questions on how the adoption of minimum wage in the formal sector could affect job opportunities. Using NSSO data on unorganised employment in non-directory manufacturing enterprises across 19 major states in India between 1989 and 2011 supported by time series data for minimum wage, net state domestic product, school enrolment, etc, it is found that the minimum wage has a positive impact on NDME jobs.

The authors thank the RBI Endowment at the Centre for Studies in Social Sciences, Calcutta for research support. The usual disclaimer applies.

Minimum wages have been commonly understood as a policy tool to address concerns over determination of “living wages” in all countries and for correcting wage inequa­lity. According to the Inter­national Labour Organization (ILO 2020), the majority of those receiving minimum wages or below are located in the lower tail of the income distribution. The adoption of minimum wage provides a floor to the market-
deter­mined wages with the intent to protecting the low wage-earners globally. The demographic groups that are most vulnerable to wage shocks and much in need of enforceable minimum wage contracts include individuals with no high-school level education, inexperienced cohorts, transitional workers, and women. Jobs created in the unorganised sector in the developing countries are expected to benefit considerably from the implementation of the minimum wage as a shield from unpredictable shocks as witnessed during COVID-19, for example. Further, in terms of the occupation types, especially by the nature of contracts, ILO (2020: 132) further notes that most sub-minimum and minimum wage earners around the globe are likely to have tem­porary contracts and that they work longer hours (47 hours per week, which also varies considerably across continents) than average. Indeed, an estimated 46% of those paid at or below the minimum wage worldwide are employed on temporary contracts and approximately 14% of them work part-time. Conversely, workers earning more than the minimum wages are 28% on temporary contracts, 9% on part-time contracts, and on average register shorter working hours.

Owing to non-negligible unemployment problems in developing countries within the formal and regulated sector, a larger section of the labour force in India remain without contracts and outside the purview of legal mandates on wages and working conditions (Marjit and Kar 2011). In turn, employers and policymakers often argue that minimum wages will affect both formal and informal sectors negatively. However, even theoretically, unless the implementation of minimum wage ushers in a stronger income effect, while the reservation wage (for example, public transfers) rises at the same time, it is well known that the rise in wages does not lower labour supply or the labour force participation among low-skilled individuals. On the demand side, unemployment increases or decreases with the minimum wage according to whether the wage elasticity of demand for labour is greater or less than one in absolute value. What happens as an outcome of both effects is an empirical question as shall be (descriptively and graphically) pursued in the remainder of this article.

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Updated On : 20th Feb, 2023
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