Raising minimum wages limits workers' choice

After the Karnataka government notified new minimum wages for 83 types of employment late-May, with upto 60% increases in some cases, employer unions have approached the courts challenging the notification.

- Rahul Ahluwalia and Ajit Patwardhan

When the Haryana government raised minimum wages in April, neighbouring Uttar Pradesh saw protest by workers in Noida; the UP government immediately raised minimum wages by 21%. It may seem like a win for the underdog, but the Foundation of Economic Development's report on minimum wages shows that such moves are actually an extension of our legacy policy approach to labour — mandate unrealistically high worker “protections” that backfire and hurt workers, especially the most vulnerable ones. This has been a historical hurdle to labour-intensive industrialisation taking off in India.

Imagine a situation where the average worker makes ₹9,000 a month as a farm or construction worker in a small town. An investor can compete with Bangladesh in making T-shirts for the US if they pay workers ₹12,000. The investor would be happy to set up a factory and employ large numbers of workers, all of whom would be thrilled to work at a 30% hike. Sounds great—until you remember that it is illegal to employ workers formally unless you pay them ₹13,500.

Suddenly, the plan seems unprofitable and more factories open in Bangladesh instead. The profit margin for a garment-maker is typically under 5%, and large, legally mandated hikes in labour cost — 30% of the cost — would leave no reason to invest.