The Effectiveness of Minimum Wages in Developing Countries: The Case of India

We would like to thank Raymond Torres and Mito Tsukamoto for their comments on an earlier draft. The views expressed in this article are those of the authors and do not necessarily reflect the views of the International Labour Organization.After years of relative neglect, minimum wages are again perceived as a useful and relevant policy tool which can make a major contribution to social justice by improving the lives of low-paid women and men worldwide. A number of countries around the world have experienced positive changes which have contributed to this change in perception. In the United Kingdom, for example, a survey by political experts1 has identified the national minimum wage introduced in 1999 as the most successful government policy of the past 30 years. In emerging countries, too, minimum wages are making a strong comeback. In Brazil the reactivation of the national minimum wage since 1995 is widely credited - together with Bolsa familia, a cash transfer programme - for the recent reduction in poverty and inequality (Berg and Tobin, 2011). In South Africa, wage floors were introduced in 2002 to fight the racial discrimination introduced under apartheid and to support the wages of millions of low-paid farm workers, hospitality workers, domestic workers and others in sectors where unions are weak. In China, new regulations were issued in 2004 in the face of growing concerns about increasing wage inequality. Finally, in Egypt and other countries rejuvenated by the "Arab Spring", governments have been forced to respond to the demands for minimum wages by young revolutionaries and trade unionists.In developing countries, however, two questions frequently arise. First, to what extent can minimum wages be enforced in a context characterized by a large number of casual and informal wage earners who operate beyond the reach of understaffed labour inspection services? Second, where minimum wages are implemented, do they benefit the poorest and most vulnerable groups in society or do they merely reinforce the segmentation and inequality between a few fortunate salaried workers and all the others? Our paper discusses these questions in the context of India, a developing country with a particularly strong minimum wage tradition. India was one of the first developing countries to introduce a minimum wage policy. According to John (1997), the enactment of the Minimum Wages Act in 1948 was the result of both internal and external factors. Internal factors included the increase in the number of factories and wage earners during the first half of the twentieth century, as well as the growing number of industrial unrests and strikes of workers who rebelled against their "starvation wages". External factors included the adoption by the International Labour Organization (ILO) in 1928 of Convention No. 26 on minimum wage fixing in trades in which no effective collective bargaining takes place or where wages are exceptionally low. The Minimum Wage Act of 1948 is still considered to this day to be one of the most important pieces of labour legislation in India.The first section of the paper describes briefly India's complex system of minimum wages. The second looks at the effectiveness of minimum wages in the country. Using the 2009-10 Employment-Unemployment Survey data, we estimate the proportion of salaried and casual wage earners among India's workers. We then discuss the extent to which the minimum wage is paid for wage earners at all-India level, and also for certain specific schedules of employment. The third section considers who benefits from the various minimum wages in India. Finally, we discuss the role of the National Rural Employment Guarantee Scheme2 (NREGS) in enforcing minimum wages.Minimum wages in IndiaWhile India was one of the first developing countries to adopt minimum wages, its system also remains to this day one of the most complicated in the world. The 1948 legislation determines that the "appropriate government" should fix minimum wage rates payable to employees in a number of listed sectors (or "scheduled employments"). …