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Minimum Wage Policies and Their Effects in Developing Countries: A Comparative Perspective

Abstract

India was one of the first developing countries to introduce the Minimum Wages Act in 1948 and it is still considered to be an important piece of labour legislation. However, the Act is only applicable to a small proportion of workers. This has resulted in intense academic and policy debate over the past decades about having a meaningful wage policy and a binding national minimum wage, which is applicable to all workers. This is especially important as the growth rates have been quite high over the past decade in India but income inequality has remained quite high. A number of developing economies like Brazil, China have been able to seize the opportunity of high growth rates and implemented a meaningful and enforceable minimum wage system. This paper makes an attempt to look at minimum wage policies and institutions in developing economies and the role they have played in providing a decent wage floor and securing a minimum living standard for low paid workers and their families. The paper also explores the policy lessons that can be learnt for improving the minimum setting mechanism and enforcement within the Indian context.

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Fig. 1

Source: This figure has been reproduced from Fig. 4, Rani e t al. (2013)

Notes

  1. 1.

    A number of committees were set up to address the national minimum wage and wage policy: the Bhoothalingam Committee (1978); Regional Advisory Committees (1987), the National Commission on Rural Labour (1991); the Second National Commission on Labour (2002); and the Working Group of the Central Advisory Board (2003) (GOI 2015; Belser and Rani 2010).

  2. 2.

    These are the Minimum Wage Act, 1948; the Payment of Wages Act, 1936; the Payment of Bonus Act, 1965; and the Equal Remuneration Act, 1976.

  3. 3.

    Some 90.4 million people live in poverty.

  4. 4.

    The tripartite Committee on Fair Wages (1948) provides recommendations on the concepts of “living wage”, “minimum wage” and of “fair wages”. The concept of “living wage” provides for bare physical subsistence, maintenance of health and decency, and some insurance for misfortunes. The “minimum wage” provides not only for the bare sustenance of life, but also for some measure of education, medical requirements and amenities. Finally, the “fair wage” has two limits, the lower limit is the “minimum wage” and the upper limit is based on the capacity of the industry to pay, which depends on the level of productivity, prevailing wage rates and the place of the industry in the economy. These concepts very clearly embody the social objectives of and aspirations for a “decent standard of life” (Anant and Sundaram 1998).

  5. 5.

    Workmen vs. Raptakos Brett & Co. Ltd. 1992 1 LLJ 340, AIR 1992 SC 504, expressed the view that “children’s education, medical requirement, minimum recreation, including festivals, ceremonies, provision for old age and marriage should further constitute 25 per cent” and should be used as a guide for fixing the minimum wage.

  6. 6.

    The Department of Labour, Government of Andhra Pradesh set up a committee in 2010, which recommended that the existing scheduled employmentscould be rationalized and simplified into four categories: manufacturing industries or factories; shops and establishments; beedi and cigar establishments; and agriculture-related employments. These could be further classified into technical categories, based on different levels of skills: unskilled, semi-skilled, skilled and highly skilled. Non-technical categories could be classified into managerial, supervisor, clerical, and sub-staff. Finally, the minimum wages could be set for three zones: municipal corporations, all municipalities, and rest of the places (Reddy 2016).

  7. 7.

    The extent of compliance is often measured as the proportion of wage earners who earn more than the minimum wage., which is the simplest method. There are other methods, such as incidence of violation of minimum wage laws detected during workplace inspections, or complaints filed by workers to enforcement bodies and courts, which are not generally used owing to difficulties in the collection and interpretation of data (Rani et al. 2013).

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Acknowledgements

This is the condensed version of the Prof. T S Papola Memorial Lecture presented at the Conference of the Indian Society of Labour Economics, Guwahati, 22-26 November, 2016. The author has benefitted greatly from discussions and collaboration over recent years with Patrick Belser, Inclusive Labour Markets, Labour Relations and Working Conditions Branch, and Martin Oelz, Gender Equality and Diversity Branch, ILO, and wishes to thank them both. The author would also like to thank Marianne Furrer for reading the manuscript and providing valuable comments. The author alone is responsible for any errors or omissions. The views expressed in the article are those of the author and not of the organisation that she represents.

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Rani, U. Minimum Wage Policies and Their Effects in Developing Countries: A Comparative Perspective. Ind. J. Labour Econ. 60, 33–55 (2017). https://doi.org/10.1007/s41027-017-0077-0

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Keywords

  • Minimum wages
  • Income inequality
  • Informal employment
  • Labour market
  • Trade unions
  • Collective bargaining

JEL Classification

  • J31
  • J46
  • J51
  • J52
  • J53
  • J58