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SSRN Id1838088 PDF
SSRN Id1838088 PDF
1
The authors would like to thank all the participants at the Workshop on Inequality and
Poverty, Château de Penthes (Geneva, 7-8 May 2009). Our sincere thanks to Duncan
Campbell, Frank Hoffer, David Kucera, Sangheon Lee, Martin Oelz, Catherine Saget and
Manuela Tomei for their insightful comments on an earlier draft of the paper. The
responsibility for opinions expressed in this article rests solely with the authors, and does not
necessarily represent the view of the International Labour Office.
The authors are Labour Economist (TRAVAIL) and Development Economist (IILS) at the
International Labour Office, Geneva and can be reached at belser@ilo.org and
amara@ilo.org.
2
India is not alone in having multiple minimum wage rates. For example, in Argentina, there are
dozens of minimum wages set for agricultural workers, while one minimum wage is set for all other
economic activities (Kristensen and Cunningham, 2006). In Mexico, wages are set separately for three
regions and 88 occupations (Gindling and Terrell, 2004). In Costa Rica, there were over 500 wages set
by industry and occupational categories; from 1988 to 1999, the structure of minimum wages was
simplified and gradually reduced to 19 minimum wages based on skills (El-Hamidi and Terrell, 2004).
See also Marinakis and Velasco who discuss the multiple minimum wages in the Latin American
context (2006).
Who would benefit from a compulsory national minimum wage and what
would be the impact on poverty and inequality? What could be the potential
impacts on employment if the minimum wage is made compulsory? These are
the main questions that we explore in the present paper. We consider two
different policy options: making the national minimum wage floor compulsory
across the country or, as an alternative, extending the coverage of existing state-
level minimum wages to all workers. The latter option is perhaps more attractive
in a large country such as India, where the costs of living as well as economic
conditions differ widely across states. At the outset, we would also clarify that
we are not proposing to have a single national minimum wage floor or only
state-level minimum wages. Our proposition is that there should be a national
minimum wage floor or state-level minimum wages, and that no worker should
be paid below the minimum wage that has been set. Other occupational wages
could exist, which should be set above this basic minimum wage. We make a
modest attempt to provide some benchmark figures on the possible effects of
making the national minimum wage floor compulsory or extending the state
level minimum wages to all workers.
3
GoI (2007) provides a detailed account and discussions on the measures taken to make minimum
wages compulsory for all occupations in India.
4
See for example the reviews in Neumark and Wascher 2008 on the U.S., Vaughan-Whitehead, 2010
on Europe and Cunningham, 2007 for Latin America
3
data exists (ILO, 2008a and 2008b). Debates are also ongoing at the ILO about
the need to extend minimum wages to domestic workers, which are excluded
from coverage in most countries.
n n
1
Gini
2n 2
i 1 j 1
wi w j (2)
5
Wage-earners include both those who are covered and entitled under a specific schedule of
employment and those who are not covered under any schedule of employment.
4
income accrues individually, but expenses and poverty are measured at the
household level. The use of per capita expenditure as the dependent variable
therefore infers a precision which cannot be taken as granted. In such cases, it
can be safer to analyze the probability of expenditure falling within a specified
interval. For these reasons, we focus on probit models and explore whether
extending minimum wages reduces the probability of the household to be poor.
We estimate the equation of the form:
6
The survey provides daily wages for casual workers and monthly incomes for salaried workers.
5
lines for the analysis, and we construct dummy variables for both these
indicators.
The variables included in the probit models are age, age squared, dummy
for female, dummy for those living in urban areas; caste groups with dummies
for scheduled caste, scheduled tribe, other backward caste and forward caste
(hindu). The Employment-Unemployment Survey allows us to classify
individuals into different categories depending on their levels of education 7 and
their status in employment. Regarding the latter, the data allows for three major
categories: self-employed, salaried and casual labour. The self-employed
comprise of own-account workers, employers and unpaid family workers, while
salaried and casual workers are two separate categories of wage-earners. Salaried
workers include regular salaried and wage employees, while casual workers
often work on a daily basis. The survey also provides information on number of
workers in the enterprise and we have used this information to construct the firm
size variable. We distinguish between tiny firms (less than six workers), small
firms (six to nine workers), medium firms (ten to 20 workers) and large firms
(more than 20 workers).
Finally, we use two minimum wage indicators: one is the minimum wage
set at the national level (national minimum wage floor); and the other is the
minimum wage set at the state level. Though there are a number of minimum
wages for different occupational categories differing across regions, we use the
average minimum wages at the state level and national minimum wage floor
with no variation across economic activities or occupations. For 2004-05, the
national minimum wage floor was set at Rs. 66 per day, while the state-level
minimum wages that we have used are provided in Appendix I. The only
selection criterion is age, and we have included all persons aged 15-64 years in
the sample.
Results
Who and how many workers could potentially benefit from extending
mandatory minimum wages? By definition, minimum wages can only apply to
7
We created dummies for six education categories: illiterate; literate, primary; middle; secondary and
higher secondary; and above secondary education (reference group).
8
The seven occupation groups for which we created dummies are administration, clerical, sales,
service workers, farmer, production workers and professionals (reference group).
9
The six industry groups for which we created dummies are agriculture, manufacturing, construction,
low-skilled services (comprise trade, hotels and restaurants, transport, and personal services), high
skilled services (comprise banking and insurance, communication and storage, real estate, business
services and public administration) and mining, electricity, gas and water (reference group);
6
wage-earners, i.e. people in paid employment. So we first provide some
information on the total number of wage-earners in India. In Table 1, we see that
there are about 408 million persons employed in India, out of which 232 million
(56.8 per cent) are self-employed. This leaves a total of 175 million wage-earners
(43.2 per cent), out of which 58 million (14.3 per cent) are salaried workers and
117 million (28.9 per cent) are casual workers. Amongst all wage-earners, a
majority of two-thirds are male and another majority of two-thirds live in rural
areas. Those wage-earners in rural areas are mainly casual workers, while a
majority of salaried workers are found in urban areas.
Source: Computed from the raw data provided by the National Sample Survey Organisation, Employment-Unemployment Survey,
2004-05.
Not all wage-earners are paid the minimum wage. Overall, no less than 73
million workers, equivalent to 42 per cent of all wage-earners, receive wages
which are below the national minimum wage floor of Rs. 66 per day in 2004-05.
This includes more than half of all casual workers (58.6 million earners) and
another one-fourth of all salaried workers (or 14.5 million workers).
Unsurprisingly, female workers and those residing in rural areas are more likely
to earn below minimum wages (see Table 2). As already pointed out, the national
minimum wage floor is only indicative. Therefore we also look at the state-level
minimum wages. We find a similar result: 76 million workers are paid less than
the minimum wages, including 27.2 per cent of salaried workers and 52.3 per
cent of casual workers. These high proportions may result from a variety of
reasons, but presumably include a large number of workers in “schedules” that
are not-covered by the minimum wage legislation.
7
Urban 38.0 50.7 40.8
Total 52.7 46.3 50.6
State-level minimum wages
Salaried workers
Rural 22.2 42.2 25.7
Urban 24.9 40.6 28.2
Total 23.8 41.2 27.2
Casual workers
Rural 55.2 47.4 52.7
Urban 49.7 54.9 50.8
Total 53.7 48.7 52.3
Note: The national minimum wage is Rs. 66 per day for 2004 and the state-level minimum wages are provided in Appendix II.
Source: Computed from the raw data provided by the National Sample Survey Organisation, Employment-Unemployment Survey,
2004-05.
Who is paid below the minimum wage, i.e. who would benefit from
enforcing mandatory minimum wages? Table 3 gives the marginal effects from
the probit model for both national and state-level minimum wages for salaried
and casual labour. The results for national and state-level minimum wages are in
most cases in the same direction, and the only difference is in the size of the
effects. As expected, illiterate and those with no more than middle-level
education are more likely to earn below the minimum wage among both salaried
and casual labour. Everything else held constant, there is a marginally higher
probability for Scheduled Tribes (ST) and Other Backward Castes (Other BC) to
earn below minimum wage compared to Upper castes. But there is a higher
probability for Scheduled Castes (SC) salaried workers to earn minimum wages,
which may be because many work in formal enterprises at the lower cadre (Class
IV employees), which is to a large extent due to the reservation policy to support
such groups. This becomes evident in the case of casual workers where, in the
absence of such a policy, there is a higher probability for such workers to earn
below minimum wages. Being a women and living in rural areas also increases
the chances of receiving less than the minimum. Strikingly, for women this is
mostly due to differences among salaried workers, where being a woman
increases the probability of not receiving the minimum wage by 17 per cent.
Looking at industry groups, we see that for salaried workers the probability
of receiving below minimum wages is much higher in agriculture than in any
other sector, while casual workers seem to be particularly at risk in the
construction sector. In terms of occupation, service workers are most frequently
underpaid, whether they are salaried or casual worker. Production workers have
a higher probability of receiving minimum wages as they are often unionized.
Firm size matters too. Salaried workers working in tiny enterprises as compared
to large enterprises have a higher probability to earn below minimum wages.
8
Table 3: Probit estimates of workers receiving below minimum wages, ages 15-64 years, India,
2004-05
Sex (male)
Female 0.1674*** (0.006) 0.1571*** (0.006) -0.0645*** (0.006) -0.1138*** (0.006)
Living in urban areas -0.0262*** (0.004) -0.0111** (0.005) -0.0159*** (0.006) 0.0162*** (0.006)
Notes: Text in parentheses is reference category. Figures in parentheses are standard errors. *** denotes significance at the 1 per
cent level; ** denotes significance at the 5 per cent level; * denotes significance at the 10 per cent level.
Model 1: National minimum wage floor; Model 2: State-level minimum wages
9
(b) Effects on wage inequality
When we impute the prevailing minimum wage for all workers who earn
below minimum wage, we find that in agriculture and in the low-productive
service sector the wage inequality would decline by more than 15 percentage
points. This is followed by the manufacturing sector, where wage inequality
would decline by 10 percentage points (Table 5). The decline in wage inequality
in mining, electricity, gas and water, and high-productive service sector is
comparatively low or minimal, implying that the extent of minimum wage
coverage in these sectors is quite high. The results are very similar when we
impute the state-level minimum wages for all workers earning below the
minimum wage.
Industry groups Actual wage Adjusting for national Adjusting for state-
minimum wage floor level minimum wage
Agriculture 0.307 0.097 0.170
Mining, electricity ,gas and water 0.437 0.415 0.405
Manufacturing 0.456 0.366 0.350
Construction 0.297 0.219 0.229
Low-productive service sector 0.410 0.248 0.267
High-productive service sector 0.395 0.375 0.363
Source: Computed from the raw data provided by the National Sample Survey Organisation, Employment-Unemployment Survey,
2004-05.
Full coverage of minimum wages would not only reduce inequalities across
and within sectors, but would also reduce the gender wage gap. We estimated
two earnings functions with the log of actual daily wage earnings, and adjusted
10
national minimum wage daily earnings for the year 2004-05 and the exponential
of the sex coefficient provides an estimate of women’s adjusted relative wage.
The analysis was done for salaried and casual workers separately. Both the
earnings functions are controlled for age, experience, schooling, occupation,
industry, caste, size of the firm, region and state dummies. The results reveal
that, if all workers receive at least minimum wages then, among salaried
workers, the gender wage gap would narrow from 0.84 to 0.90, i.e. by 6
percentage points. Among casual workers, the wage gap would narrow from 0.74
to 0.92, by 18 percentage points. Thus, we find that if minimum wages were to
expand to all workers, then the impact would be enormous for female casual
workers.
Has the minimum wage the ability to help workers who live in poor
households? In the literature, it is often argued that minimum wages benefit
workers in the formal economy who usually live in non-poor families. However
in India, as in other developing countries, a relatively high proportion of poor,
low-skilled people in both rural and urban areas are wage-earners. Our analysis
of Indian data for 2004-05 shows that about 30 per cent of salaried workers and
40 per cent of casual workers who earn below minimum wages belong to poor
families (and that among the wage-earners belonging to poor families, about 50
per cent earn below the minimum wage). If these poor workers were to receive at
least the minimum wage, it would presumably help them and their families move
out of poverty.
These figures, when compared to developed countries, might be similar, but one needs to be
10
cautious while making such comparisons. This is because these poverty effects are only for the wage-
earners who comprise 45 per cent of the workforce and the remaining are self-employed. In advanced
countries, wage-earners would comprise more than 80 per cent of the workforce.
11
Table 6: Probit estimates of workers in households below the poverty line, ages 15-64 years in India, 2004-
05
Sex (male)
-
Female -0.0139*** (0.003) -0.0023** (0.003) -0.0063 (0.006) 0.0247*** (0.006)
Not receiving minimum wages 0.0948*** (0.004) 0.0647*** (0.004) 0.0807*** (0.005) 0.0286*** (0.005)
Living in urban areas 0.0999*** (0.003) 0.1027*** (0.003) 0.3608*** (0.006) 0.3503*** (0.006)
Notes: Text in parentheses is reference category. Figures in parentheses are standard errors. *** denotes significance at
the 1 per cent level; ** denotes significance at the 5 per cent level; * denotes significance at the 10 per cent level.
Model 1: National minimum wage floor; Model 2: State-level minimum wages
12
(d) Employment effects
11
See http://www.epi.org/publications/entry/minwagestmt2006/.
13
by assuming no adverse employment effects. We see that in the presence of
adverse employment effects, the ability of the minimum wage to compress the
wage distribution is reduced. But, in spite of these adverse effects, it is to be
noted that the new level of inequality after implementation of the minimum wage
is still at least 5 percentage points lower than the existing Gini coefficient for
wage inequality of 0.499.
(e) Enforcement
14
make it happen” (Murgai and Ravallion, 2005, p. 2). In practice, compliance is
always less than perfect in both developed and developing countries. In
developed countries, the proportion of workers paid less than the national
minimum wages ranges from about 1.3 per cent of all wage-earners in the U.K.
to 2.6 percent of all hourly paid workers in the U.S. (Bureau of Labor Statistics,
2009 and Metcalf, 2008). Non-compliance in developing countries, as measured
by the proportion of wage-earners who are paid below the minimum wage, is
comparatively higher. In Brazil, for example, Lemos (2005) estimated that in
2000 the proportion of workers earning below the minimum wage was 13.7 per
cent in the private sector and 4.6 per cent in the public sector. Even at this level
of less-than-perfect compliance, however, a majority of workers in India would
be able to benefit from expanded minimum wages.
Conclusion
In India, the Minimum Wage Act of 1948 is perceived as being of great
importance, particularly to the unorganized casual workers which – as our paper
calculates account for two-thirds of all wage-earners and a total number of
about 117 million workers. In this paper we show that if minimum wages are
extended to all workers and, if fully implemented, it would have a significant
impact on inequality and poverty in India. Indeed, our simulations show that
minimum wages can play an important part in reducing inequality and poverty
12
In this context, it is interesting to note that a recent evaluation study on the implementation of the
Minimum Wages Act, 1948, in the stone-breaking and stone-crushing industry in Karnataka in 2007-08
found that, among employers, only 30 per cent reported awareness of the Minimum Wage Act and 27
per cent were aware of the prescribed/statutory minimum wages paid to the workers. Among workers,
only 8.4 per cent stated awareness of the Minimum Wage Act and 18.5 per cent were aware of any
inspection authority (GoI, 2009b).
15
even in the presence of some adverse employment effects. This finding is
supported by others in the literature. For example, Lustig and McLeod (1997)
using cross-country data on developing countries find that a higher minimum
wage does lower poverty, even though it reduces employment.13 In India, the
large potential impact can be easily explained by our finding that an extension of
either system of minimum wages could potentially improve the wages and the
lives of about 73 to 76 million low-paid workers.
At the same time, the paper leaves many questions unresolved and open for
future investigation. One important question that requires further consideration
concerns the possibility of some employment substitution between men and
women. We have seen earlier that the minimum wage would increase the wages
of women more than of men and, hence, reduce the gender wage gap. This may
lead to two possible outcomes. On the one hand, there could be a significant
decline in women’s employment, especially where men can replace women
workers. This is surely a cause for worry, especially where the female worker is
the main earner of the household. 14 The second situation is where men are
unlikely to replace women workers due to gender segregation of work, like
transplanting in agriculture or assembly work in the manufacturing sector.
Finally, our simulations also ignore the possible benefits of lower inequality
on overall aggregate demand in India. In principle, according to Keynesian
arguments, partial-equilibrium analysis of minimum wages is unsatisfactory. The
13
See also Saget (2001).
14
In households where women have entered the labour market as an additional worker to meet the
subsistence needs of the household (that is, poverty-induced), their exit from the labour market could in
theory be compensated as long as the male earners are able to get both minimum wages and minimum
days of work required for the households.
15 See Lemos, 2004, for an international survey of the literature; Dube, Naidu and Reich, 2007, for a
case study.
16
minimum wage is a redistributive tool which transfers resources from high-
income groups to low-income groups. Because the relatively poor have a higher
propensity to spend their money than the relatively rich (see, for example,
Stiglitz, 2009), this fall in inequality can be expected to increase aggregate
demand and employment. In other words, even if minimum wages force some
companies to undertake layoffs in the short-term, they can be expected to
ultimately lead to higher private consumption and create new jobs elsewhere in
the economy. We have not tried to simulate these second-round effects.
In spite of these limitations, our paper provides some of the first benchmark
figures on the potential benefits of minimum wages. Our simulations highlight
the fact that by providing an effective backstop for wages, a minimum wage can
compress inequality and, in particular, reduce the distance between the low paid
and those in the middle of the wage distribution. An important effect of an
extended minimum wage would be a sharp reduction in the gender pay gap. We
find that if all workers would receive at least minimum wages, average wages of
women compared to men would increase from 84 per cent to 90 per cent for
salaried workers and from 74 per cent to 92 per cent for casual workers. This
effect does not arise because women are over-represented among workers with
sub-minimum wage. From our dataset, we calculate that women represent about
one-third of all wage-earners and also about one-third of the sub-minimum wage
population. Rather, our strong results stem from the fact that, even among sub-
minimum wage workers, women are paid lower wages than their male
counterparts. Lifting all wages to the mandatory minimum would eliminate
inequality among the lowest paid.
17
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18
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Appendix I: State-level minimum wages
21