The futility of Minimum Wages

In virtually every country in the world, the government fixes minimum wages that must be paid to workers. In India it is a state subject and each state fixes minimum wages. Seems a very sensible move. After all the poor unskilled worker has no bargaining power [unlike coders :) ] and the power equation between employer and employee is heavily tilted in favour of the employer. A decent civilised society must ensure that workers are not exploited with wages that condemn them to subhuman existence. Seems a straightforward case, right ? It turns out to be not so right, after all.

The biggest problem with the Minimum Wage is that in reality it has become the ceiling and not the floor. Whole industries have abandoned having any remuneration policies at all and simply have adopted the Minimum Wage as their policy. In fact the largest number of legally employed people in the country are probably on Minimum Wage. Construction labour, Security guards, cleaners, and virtually every form of unskilled labour is on Minimum Wage. With all good intentions, governments have ended up fixing the Maximum Wage rather than the Minimum Wage.

The consequence of this is that if the level is higher than what the market can bear, there is every attempt to evade the law. It also ensures curtailment of employment - employers restrict hiring if its too expensive. If the wage level is fixed too low, then the employee can't make both ends meet and job hops all the time in the vain attempt to earn a bit more. Attrition levels in states with low minimum wages touch 50% per month. Getting the level right is the key - but then you can bet that the last agency that can get it right is the government.

Ramamritham has a field day with Minimum Wage law. The state of Tamil Nadu has 65 different categories where it has fixed Minimum Wages. In his infinite wisdom, Ramamritham has fixed that a worker working in the footwear making industry must be paid Rs 121.91 per day while the worker employed in coconut peeling industry must be paid Rs 121.24 per day. There are annual revisions. Very productive employment for hundreds of Ramamrithams (alas at much higher than Minimum Wages).

Let supply and demand fix wage levels. Only legislate that employee benefits such as PF and ESI must be provided. Leave the job market to fix sensible remuneration levels. I am willing to bet that the wage levels would actually rise in many states in India.

I am reminded of a quotation attributed to a famous business leader. You should be a capitalist in the mind and a socialist at heart. The sure road to disaster is if that equation is reversed.