It’s time to put the neo-classical bogie on base wages

At least half of the states in India are in a hurry to pass legislation allocating 75% of all jobs to locals. Such legislation is considered unconstitutional and is unlikely to increase employment for locals compared to other strategies such as skill development and training, or opening affordable accommodation or rental housing or improving or effectively creating travel infrastructure. Job market. More than the stick policy of the job quota, the carrot policy that gives financial incentives to create jobs for locals has a better chance of success. Therefore, there is a middle ground between the imposition of an optional quota, which is an illegal non-financial expense and incentives that require public funding.

What if we changed the speech from job reservations to minimum wage law? Doesn’t this have a greater and more decisive impact on the well-being of workers, especially in a less skilled team and on their working conditions? The need to create large-scale sustainable employment is a national priority, and not just for individual states. India recently passed its Wages Act 2019 combining the four old labor laws on wage payment, wages and bonuses. Labor is a state matter, so the minimum wage also varies from state to state, but the new law provides for a national minimum, which is approx. At present it is Rs 176 per day. It is for unskilled labor. This is more than the World Bank poverty standard of $ 2 per day. India’s current minimum wage translates into income 4,400 per month, which cannot lift a family of four out of poverty. Of course, there are many other anti-poverty schemes that offer kind and cash benefits. The actual minimum wage and salary varies not only by state, but also by industry, occupation, skill level and job position (whether or not it is in a backward area).

But back to the talk theory. The knee-jerk reaction to the market-friendly school’s minimum wages is that it leads to rations and shortages. This is similar to other price limits. The wage floor does not create employment or reduce poverty. This is a neo-classical position, most intensely expressed by Milton Friedman and George Stigler in the 1940s. Their reaction was to pass the first minimum wage law in 1938, US President F.D. Roosevelt introduced it as part of a new treaty in response to the Great Depression of the 1930s. One wonders how much traction and longevity that argument has against the minimum-wage law. Minimum wages do not help workers, lead to greater automation and distort the mix from labor to capital. Despite federal law, the United States has not changed the national minimum wage for more than a decade during President Ronald Reagan’s two terms. It remains a theory built on an elegant theoretical model, but has never been rigorously tested against empirical data. Consequently, the current US minimum wage set in 2009 is 25 7.25 lower than in the 1970s, adjusted for inflation.

This theory began to shift with more subtle patterns of looking at the flaws in labor markets. But it was decisively changed by empirical paper. This is a 1994 seminar paper written by leading economists David Card and Alan Krueger. They showed that the on-ground data did not confirm the theoretical predictions of Friedman and others. Using inter-state data, they were able to show that changes in the minimum wage did not affect employment. Their study has been replicated and extended to many other labor markets. The finding is the same: minimum wages have no effect on employment. This hypothesis has also been tested in the context of other countries such as the UK. The stylistic fact is that if you pay 10% more to a McDonald’s worker, the price of the burger will increase by 25 cents. It does not affect sales volumes at all. The additional cost of paying a higher minimum wage is paid to the customer. True, the Big Mac is 60 cents more expensive in Denmark than in New York. But the Danish minimum wage is twice as high as in America. Higher wages for less skilled workers also reduce the overall cost of training and retention of workers for their employers. Such a phenomenon as giving moderately high wages to customers works in non-commercial service sectors, or actually works for a variety of jobs (security guards, cleaners, courier or security services).

The empirically proven fact is that minimum wages are mostly paid to unskilled workers working in non-traded sectors. Raising that minimum can help consumers overcome the cost by increasing prices. Instead of funding it through the financial pot, their welfare is paid for by large sums of money by consumers. It is a social tug-of-war whose balance must move towards low-wage workers. Apart from the productive sector (commodities that can be traded), there is no concern that higher wages will lead to the disappearance of jobs in other low-wage countries. In addition, even in manufacturing sectors such as footwear and textiles, jobs are lost to automation anyway. Those jobs are going back to high-wage countries.

How much the minimum wage should be raised is a matter of experience. It should be large enough to make a physical difference to the workers, but enough to keep demand volatile. The traditional UK government has raised it to two-thirds of the median wage, and the US liberal government may follow suit. Is India ready to do the same?

Ajit Ranade is the Chief Economist at the Aditya Birla Group.

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