Negative impacts of Minimum wage laws on workers

Source: The post negative impacts of Minimum wage laws on workers has been created, based on the article “Minimum wage: It’s likely to hurt the very workers it aims to help” published in “Live Mint” on 30th May 2024.

UPSC Syllabus Topic: GS Paper 3 – Indian Economy – Growth and Employment

Context: The article argues that minimum wage laws can harm the very workers they aim to protect by reducing employment opportunities for less skilled individuals. It suggests that allowing market forces to dictate wages and increasing competition for workers is a more effective way to support them.

For detailed information on Issues with the minimum wage in India read this article here

How does Minimum Wage impact employment?

1. Negative Employment Effects: According to a 2006 study and a subsequent review in 2022, there’s a consistent pattern of negative employment effects associated with increase of minimum wage. These studies particularly highlight stronger dis-employment effects for less skilled groups.
2. Findings from Randomized Control Trials (RCTs): An RCT examining the impact of minimum wages found that while wages of already hired workers increased, there were notable reductions in hiring and hours worked. The trials also noted that firms shifted towards hiring more productive workers, adversely affecting the less productive ones.

For example, if the minimum wage of domestic help and security guards increases significantly (e.g., ₹1 lakh per month). It would lead most households, except the super-rich, to reduce or eliminate these positions, impacting employment adversely in these sectors.

How have labor laws affected employment in countries like China and India?

1. China’s Employment Shift: Over 30 years, China transitioned 35% of its workforce from agriculture to manufacturing and services, significantly boosting economic growth and development.
2. India’s Slower Progress: In contrast, India moved only 13% of its workforce into similar sectors in the same timeframe. This slower shift is partially attributed to restrictive labor laws, including mandates for minimum wages that exceed market wages.
3. Comparison with Bangladesh: In contrast to India, in Bangladesh, more women have moved from agriculture to factory jobs, helping secure their economic independence. This is implied to be due to the more flexible labor policy in Bangladesh.

What should be done?

1. Encourage Market-Determined Wages: Allow wages to be set by market forces rather than government mandates to increase employment opportunities, especially for less skilled workers.
2. Increase Competition for Labor: Create more competition among employers for workers’ time and effort, which can drive up wages naturally and improve job availability.
3. Focus on Worker Choice: Prioritize policies that maximize worker choice and mobility, which have been effective in countries that have transitioned from low to higher income levels.
4. Reduce Regulatory Burdens: Lighten labor laws that restrict employment growth, such as those that set minimum wages above the market rate, to stimulate job creation in manufacturing and other key sectors.

Question for practice:

Examine the potential impact of minimum wage laws on employment, considering evidence from studies, randomized control trials, and comparisons between countries like China, India, and Bangladesh.