Adopting a living wage approach

Source-This post on Adopting a living wage approach has been created based on the article “It’s time to raise minimum wages or adopt a living wage approach” published in “Live Mint” on 14 May 2024.

UPSC Syllabus-GS Paper-3– Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development and Employment.

News– The Indian government has chosen to substitute the minimum wage with a living wage, determined through scientific methods, by the year 2025, with guidance from the International Labour Organization (ILO). As per ILO, living wage considers expenses on food, transport, housing, education, healthcare, etc., for a decent standard of living.

What is the current situation regarding minimum wage in India compared to other countries?

India’s National Floor Level Minimum Wage (NFLMW) of ₹176 ($2.1) per day, last updated in 2017, is one of the lowest in the Asia-Pacific region. It’s lower than countries like China, Vietnam, and even Bangladesh. Brazil’s minimum wage is closer to that of developed economies like Australia, the UK, and the US.

What are the issues with the current minimum wage in India?

1) Addressing Disparity- While the government regularly updates dearness allowance (DA) for central government employees to compensate for inflation, the minimum wage remains unchanged. This leads to a disparity between the minimum wage and the cost of living.

2) Discrepancies in Minimum Wages across States– Indian states have their own minimum wage mechanisms, usually higher than the national floor.For ex- the minimum wage for a security guard ranges from ₹521-580 per day in Karnataka to ₹176 in Nagaland.

3) Insufficient Minimum Wages Across States -The current monthly minimum wages ranging from ₹7,000 to ₹20,000 across states are not adequate for a family to maintain a decent standard of living, especially with inflation.

Read more- Employment status in India

What is the Importance of Adopting Minimum Wage or Living Wage?

1) Social Importance-Increasing the minimum wage or transitioning to a living wage could alleviate poverty, reduce inequality, and improve living standards.

2) Economic Importance-Increased incomes will boost spending and stimulate the Indian economy. This may also enhance the demand for affordable housing and home ownership over time.

What are the concerns raised about minimum wage hikes?

1) Concerns vs. Mixed International Evidence -Opponents of minimum wage hikes fear negative impacts on hiring, especially by smaller enterprises. However, studies from other countries show mixed results, indicating uncertainty about the impact in India.

2) Implementing a Fair Living Wage -Introducing a mandatory fair living wage requires strict enforcement of wage regulations. Ensuring compliance across different employment statuses, genders, and skill levels would be challenging.

What should be the way forward?

1) Governmental Support-Government support, such as tax waivers, could ease the economic strain on smaller businesses during the initial phase of strict enforcement.

2) Reforms in Social Security Contributions– Enhancing minimum wages should not be accompanied by increased salary deductions for social security benefits like provident fund and ESIC (Employees’ State Insurance Corporation).
Instead, the government must abolish ESIC contributions by employees and reduce the employer’s ESIC contribution from 3.2% to 1.5%.

3) Adjusting Provident Fund Contributions Based on Income -For the Employees’ Provident Fund Organization, employees earning monthly wages below ₹15,000 should have their contribution reduced from 12% to 8%. However, for those earning more, the contribution should remain at 12%.

4) Regular Inflation Adjustments-Once established scientifically, the minimum or living wage should be adjusted for inflation every two years.

Strict implementation could help more individuals transition to formal employment while raising living standards and supporting economic growth.

Question for the practice

What are the issues with the current minimum wage in India? What steps can be taken to address this issue?