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Issue of minimum wage in India : where does it lack and what can we learn from Europe

November 27, 2021

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This article is penned down by Ojasvi Gupta, a student of Law School, Banaras Hindu University. It brings to light the concept of minimum wage in India, the related legislation, and its shortcomings.

Table of Contents

Introduction

Minimum wages have been accepted globally as an important system for combating poverty and stabilizing the economy. A statutory national minimum wage impacts the economy in several ways. It helps in increasing the wage level, bridging the wage inequality gap, and thus, acts as a major step in attaining inclusive growth. Its success is determined by the extent to which the minimum wage set is both fair and economically valid. Ground implementation of the minimum wage has the potential to benefit the wage earners significantly, especially those working in the unorganized sector of the market.

The concept of minimum wage

The International Labour Organization (ILO) succinctly defines minimum wage for the work performed during a specific period by wage earners as the declared amount of remuneration which cannot be further reduced, not by mutual agreement nor coercion by the employer.

Various countries, including the member states of ILO, have defined minimum wage according to their labor market. The components of minimum wage may include:

Basic pay;
Annual bonuses;
Tips;
In-kind benefits;
Productivity and performance pay;
Allowances and premiums for non-standard work hours or dangerous work.

Minimum wage systems can only be efficient when they are specific in stating which component of the wage is to be counted in the minimum, to what extent payment-in-kind is acceptable, if the calculation is meant for hourly/weekly rate, etc. The effectiveness of minimum wages can be analyzed through a three-factor study:

Coverage:

Whether all wage earners are brought under its scheme, be it women, youth, or migrants? Its implementation must be uniform in private as well as public industries.

Level:

The wage must be set at such a level that it is sufficient to cover the basic requirements of the workers and their families by taking into account the crucial economic factors.

Compliance:

The theoretical part alone cannot ensure the fulfillment of the purpose for which the minimum wage system has been designed. Employers must comply with the minimum wage regulations effectively.

Historical background

The first global attempt was made by the ILO through the Minimum Wage-Fixing Machinery Convention, 1928. Currently, a total of 105 countries have ratified the Convention. It particularly aims to provide an arrangement of effective regulation of wages for workers who work in private settings or an unorganized sector. Member states ratifying this Convention undertake the duty to maintain the machinery which provides adequate wages to all. Since then, many Sessions of the ILO have been held in order to complement the Convention of 1928 by protecting the disadvantaged groups of wage earners, especially in developing countries.

In the Indian context, the concept of minimum wage is provided statutorily as a responsibility of the State. Article 43 of the Constitution of India lays down the State directive to ensure living wages along with such conditions of work as to maintain a decent standard of living and social and cultural opportunities. To achieve the purpose of this directive, a Labour Investigative Committee was set up by the Standing Labour Committee in 1943 which suggested in its report of 1946 the need for specific legislation which deals with the issue of minimum wages.

To further the intent, a Fair Wages Committee was also established, consisting of the government, employers, and employees to introspect and report on the matter of ‘fair wages’. The tripartite committee defined three different levels or standards of wages:

Living wage;
Fair wage;
Minimum Wage.

Indian legislation on minimum wage

Until 2019, the minimum wages were fixed through the Minimum Wages Act, 1948 the result of the contemplation of various committees. Although labor activists have stated it to be a source of much confusion in implementation as it gave central as well as state governments both dominion over deciding the wages. This Act provided the roadmap for setting the minimum wages in various industries of the Indian economy. According to this, the Central government fixed the wages of the workers engaged in scheduled employment such as railways, oilfields, etc while the authority to decide the minimum wage for the rest went to the State government including the private sector.

Earlier, there were a total of 44 legislations that governed the labor market and anything incidental to it. The four labor wage regulations namely the Equal Remuneration Act, 1976, the Minimum Wages Act, 1948, the Payment of Wages Act, 1936, and the Payment of Bonus Act, 1956 have been combined into the Code of Wages, 2019.

The Code of Wages, 2019

In 2019, the Code on Wages was introduced by Santosh Kumar Gangwar, the then Minister of Law and Justice in an effort to fill the legal lacunae in previous legislation which was used to exploit the workers. This was done in an attempt to bring uniformity in the implementation of legal policies governing the payment of wages.

For only by making the laws universal, the timely payment of the wages to the workers and employees can be ensured without any discrepancy. It applies to both the sectors, organized and unorganized.

Key Highlights

Definition of wages

For the purpose of minimum wages, payment of wages, and payment of bonus, the Code provides a single uniform definition of the term wages. Earlier, the definition used to vary across various labor legislations of the country. Now the unified definition constitutes 3 parts, inclusion, exclusion, and conditions limiting the quantum of exclusions.

Minimum Wages

The Code also establishes the concept of ‘floor wage’ in concrete, an initiative long-awaited. It is the minimum wage determined by the Central government after contemplating the geographical needs for a minimum standard of living. No State government can go below this wage level. Furthermore, a government having a minimum wage higher than the provided floor wage is not allowed to reduce the same. The wages provided for overtime by the employees are required to be at least twice the rate of normal wages. This wage level is to be revisioned at an interval of not more than five years to keep up with the changes in the market.

Payment of wages

The Code expressly provides for the fixing of the wage period, be it on a daily, weekly, or monthly basis. Now, the employer has to pay the wages under each wage period based on the stipulated time period. E.g. the 7th day of each month is the settlement period for the previous month’s work. In case the employer resigns or is removed for any reason from the post, wages must reach the hands of workers within two working days. Earlier, the limitation period for filing a claim for minimum wage or equal remuneration was anywhere between 6 months to 2 years, this has been increased to 3 years.

In total, clubbing several legislations under the umbrellas of a single code was a welcome step and is a great step towards providing better clarity and uniformity. It ultimately works in the best interests of the employers as well as the employees.

What issues challenge the implementation of policy?

Implementation:

The vast informal sector makes the enforcement of minimum wage a difficult task in India. According to a report, around 35% of total wage workers did not receive any benefit from this scheme in 2009 -2010. Subsuming the labor laws in one Code was done with the intent to improve compliance but how this transition of more and more workers being paid the minimum wage can be enforced remains a mystery.

Consumption:

Food being an essential requirement of the human body, calories consumption is one of the crucial factors which determines the minimum wage. The Code specifies the energy requirement at 2700 kilocalories. Conventionally, a working-class includes the wage earner, a spouse, and two children, and their consumption units are measured in the following way:

1 unit for the wage earner, traditionally taken to be a male, 0.8 unit for the spouse, traditionally the female, and 0.6 unit per child, giving the total of 3 consumption units.

Many experts think this calculation may not be enough for growing children, apart from being discriminatory. They propose the break-up in 1+1 + 0.75 + 0.75 to give an equivalent of 3.5 consumption units, the present calorie requirement of a standard family. There also lurks the question of non-food consumption which is given much less significance in comparison to the recent trends.

Representation:

The Code also proposes a technical committee, members of which will be selected from the tripartite stakeholders of government, employers, and employees. However, the representation lacks an element of productivity. There should have been a place for the National Productivity Council, as wages are inherently linked to productivity as they are linked to social justice.

Dynamic concept:

The concept of minimum wage depends on many factors which change over time, giving it its dynamic nature. The most harrowing of them is inflation which pushes down the purchasing power. To ensure that the wages are maintained at a level that is enough for a certain amount of consumption, the real wages must be revised periodically. Though there are provisions for adjusting Dearness Allowance, the basic part is not subject to such revision, rendering the purpose of minimum wage ineffective with regard to changes in consumption patterns over time.

Work hours:

Contrary to the standard 8 hours, the Code stated the total hours of work in a day as 9. This is rather odd in times when the developed countries are trying to reduce the work hours. Moreover, the maximum number of hours of work including a period of rest is 12. This could prove harmful to employees if any of the employers utilize it to reduce the shifts from three to two. The exploitative nature of the Indian labor market is no news and spoon-feeding a provision that unfolds in the favor of the employer at the cost of misuse might be a step backward.

European policy on minimum wages

The European Union sets out its commitment to fair wages for workers in the proclamation of the European Pillar of Social Rights. It ensures that workers are paid adequate wages for their labor, allowing them a decent standard of living along with maintaining the financial attraction of work.

The majority of EU Member States have a fixed statutory national minimum wage but their adjustments mechanisms and coverage may vary. Some countries work with the minimum wage fixed through collective agreements. For instance, Cyprus has set statutory rates for different occupations. In 2020, the minimum wage ranged from €312 in Bulgaria to €2,142 in Luxembourg. The main reason behind such a wide range is the difference in the cost of living in these countries.

To safeguard this right, the European Commission proposed an EU Directive on October 28, 2020. It aims that all workers earn a fair living wage and not just minimum wage by 2024. Minimum wages in EU countries have taken two forms:

Statutory minimum wages: they are regulated by statutes or formal laws. Most member states have such rules.
Collectively agreed minimum wages: in six EU countries, wages are determined through collective agreements between trade unions and employers, including in certain cases minimum wages: Austria, Cyprus, Denmark, Finland, Italy, and Sweden.

In October 2019, a resolution was adopted before the Commission to legislate a legal mechanism for fair minimum wages in the EU. In 2020, the Commission came out with a proposal with an aim to improve the concept of minimum wage by transitioning it into fair wages. It also includes provisions for bridging the gender pay gap and working towards a level playing field for all in the market.

Taking into account national competencies, it promotes collective bargaining of wages through unions and associations in labor markets. These are primarily based on the regional and sectional differences and the socio-economic conditions prevalent at the time. Member states have to consider all the criteria such as the poverty rate, purchasing power, etc., and prepare a report on the effectiveness of minimum wages.
Collective bargaining has been promoted explicitly and active steps are to be taken in states where these collective negotiations are available to less than 80% of the workforce. Allowing collective bargaining gives the control back in the invisible hand of the market without giving exclusive exploitative power in the hands of employers. Any trade union or such organization cannot be restricted or undermined in its way of collective agreement on wage setting.
Providing the rights is not enough as it is crucial that the rights are protected. Therefore, the draft proposed by the Commission stipulates the national authorities to take necessary steps if the rights of workers are infringed. The right to redress protects the workers, laborers, and trade union representatives from being treated unfairly because of any proceeding they initiated to enforce their rights against employers.

What can India learn?

Be it in Europe or Asia, no country was able to face the financial crisis that came with the pandemic head-on. In Europe, owing to the confidence and trust held in trade unions, many draconian, macro-level interventions by the government were not made in the financial crisis. During the financial crisis, trade unions were willing to offer concessions, regular overtime wage rates and many came up with a structured lay-off system that helped the workforce to get through the difficult times to a large extent. Comparing this to the Indian situation paints an abysmal picture of the conditions of the laborers. The social dialogue could be a major factor in revolutionizing the labor market.

Another important factor which India lacks is the concept of a minimum fair wage. Developed countries have brought along the term ‘fair wage’ to emphasize maintaining a living standard that is more than the bare minimum. The Indian concept of minimum wage is still hooked on the aim to ensure that everyone gets a two square meal but the food is not the only component of a decent living. There is the issue of health, education, social security, and sustainable living which needs to be reviewed.

Though the Code was supposed to be effective from April 1, 2021, the implementation has been delayed to a future date yet to be notified. This delay could be justified considering the potential impact of the Code on per-employee costs for enterprises. On the other hand, is the fate of many wage earners who had to survive in the thickest of the times with less than minimum assistance.

Conclusion

The yet-to-be-implemented Code has sparked debate and discussion on the topic of minimum wage. As explained above, the umbrella legislation attempts to remove the multi-jurisdictional format of fixing the wages by introducing the floor wage. When applied effectively, it might be beneficial for all the major stakeholders.

Though there have been some points of contention raised by labor activists, there cannot be a parallel comparison between Indian and other developed countries. There is a lack of research on the impact of minimum wage on the employment level in developing countries like India. This is a major factor that prevents the government from determining the wage level that is fair to all wage earners. The monopolistic nature of the domestic and construction sector of the Indian economy also obstructs the purpose of the minimum wage.

References

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