Overhaul minimum wage system

The new Code on Wages Bill must address the key problem of inconsistent minimum wage determination by the States.

By Author T Muralidharan    |   Published: 29th Aug 2017   12:05 am Updated: 29th Aug 2017   1:03 am

The controversy over the Code on Wages Bill has taken the debate away from the core issue –  the current minimum wages regime is not working and we need to desperately correct it through a centrally-driven minimum wages regime. We explain some of the key concerns that need to be addressed. Minimum Wages (MW) are declared for three categories – unskilled, semi-skilled and skilled. Most States also declare MW for these three categories industry-wise and zone-wise. For example, the current MW of Maharashtra (from July 1, 2017) has 61 industries and for each industry, there are three zones and three categories. 

An analysis of the MW in Maharashtra is very revealing:

• The MW vary from Rs 13,650 per month (Rs 550 per day for skilled category for construction industry) to Rs 9,022 per month (Rs 347 per day for skilled category for retail petrol pumps). There is a 51% variation for the skilled workmen category between construction and petroleum retail sector in the same zone.

• An unskilled construction worker earns 15% more than a skilled engineering worker or 28% more than a skilled factory worker, in the same zone.

• An unskilled club worker earns 3% more than a skilled factory worker in the same zone.

• A skilled factory worker in Mumbai (zone I) will get only Rs 600 per month more compared to a skilled worker working in a very small town (zone III)  

• Even more shocking is the skill premium (difference between unskilled and semi-skilled for the same industry, in the same zone). For example, for engineering industry in zone 1, the skill premium works out to only 5% or Rs 500 per month (Rs 19 per day) 

What is the core issue here? It is the way the MW are extrapolated across industries, across zones and across skill categories by each State.

Right Minimum Wages

The current way is to fix the MW of the unskilled worker in the lowest cost zone in the lowest paying industry and extrapolate the MW of all the rest. This is the crucial flaw that has resulted in the above anomalies.The correct way is to determine the MW of the semi-skilled category first, based on the norms and derive the rest. Why? Because it will incentivise the youth and the unskilled employees to pick up skills. The employer is happier to pay more to the semi-skilled and skilled because they are fewer in number and because there are ways to recover the wage increase through productivity training. While government undertakings and large corporate houses may comply with this norm, a large section of medium and large employers do not comply with MW. This has resulted in the actual wages being determined by market forces. In fact, one of the strongest arguments of employers is that any stipulation of MW will distort wages and that it must be determined by market forces.  

Startling Findings

In an article published in the Economic and Political Weekly (July 26, 2014 issue), three authors (including me) clearly established three very little known facts after analysing voluminous data from government sources:

1. During the 12-year period from 1999 till 2011, the average factory worker’s (the average worker earns much more than the entry level worker) real wages (after adjusting for inflation) remained constant at Rs 45,000 per annum. In more than 50% of the industries, the real wages declined.

 2. The supervisor compensation, during a similar period, went up two to four times the labour compensation. Clearly, the managers managed to secure higher wage raises and hence dominate the manpower costs of the organisation

.3. The study shows a very weak (12%) productivity-real wage linkage in Indian manufacturing. If productivity goes up by Rs 100, only Rs 12 was passed on to labour. It shows that productivity has gone up owing to the management focus on automation and technology. Managements willingly did not pass on productivity increases to labour. 

Supply Exceeds Demand

While India’s GDP growth is one of the world’s fastest, employment creation in eight sectors, including textiles and automobiles, as per a 2016 Ministry of Labour report, was the slowest in seven years. Over 12 million Indians enter the workforce every year. Between 2011 and 2015, the number of agricultural jobs reduced by 26 million while non-farm jobs rose 33 million.

According to McKinsey Global Institute, the net growth in employment was a meagre 7 million over 4 years or less than 2 million per year. What happens when supply of onions far exceeds demand for onions? Onion prices crash. The same thing happens in the labour market as wage is the price paid for labour.

Analyses of past data validate the fact of wage stagnation and this is because of huge supply over low demand. Demographic dividend is the main cause for real wage stagnation. Most of the employers get away with paying lower than MW because of the desperation of the unskilled worker to find and keep the job. 

Entry Level WagesIn manufacturing, the total manpower cost as a percentage of the total cost varies from industry to industry – from 6% in highly automated plants to 20% in labour-intensive industries like apparel. We need to estimate the entry level factory worker cost as a percentage of the total manufacturing cost after subtracting for supervisory costs, experienced worker salaries, etc, which may vary from 1% to 5%. Hence, a 50% increase in MW will only impact the total manufacturing cost by 0.5% to 2.5%. If the increase is mainly in the semi-skilled category, the impact will be far lower owing to fewer numbers. This can be offset by increasing productivity through skill training and tool kits. Most industries are impacted more by energy cost than entry level labour cost of semi-skilled manpower. So, the claim that MW increase will kill the industry is more emotional than factual.

Ensuring Compliance

If most enterprises are already beating the MW regime at the current MW, what will happen when the MW are revised significantly upwards?  Surely, this is an area of concern. Firstly, there is a need to make medium and large employers and all employees aware of this new CoW Bill and the consequences of non-compliance. Employers must be asked to declare their compliance in their annual reports. Secondly, the Labour Ministry must set up a portal and activate call centres for MW complaints with time-bound investigation and publish their findings. This portal should also encourage compliant companies to share their experiences in improving productivity to offset the increase in MW and this will differentiate the compliant and non-compliant employers and quality labour will move to work for employers who comply with this.

Over a period, non-compliance will become more expensive than compliance. The MW need to be revised significantly upwards to offset the wage stagnation due to excess supply over low demand.  The Central government must intervene in this since MW cannot be left to market forces and State’s interpretation and extrapolation. However, the increase in MW should be in the semi-skilled category rather than unskilled wages. The CoW Bill can be used to strengthen the skill ecosystem. A strong CoW Bill along with fair MW is the need of the hour. Concluded
(The author is Chairman, TMI Group, and Independent Journalist)