Can “minimum wages” become counter productive?

Higher minimum wages are becoming the norm in many countries, including India. Even as a minimum wage policy aims to ensure a certain minimum standard of living, it also gives rise to unintended consequences that may undermine its objective. There is considerable evidence that the wage gains from minimum wage increases are offset, at least for some workers, by fewer available jobs in the market.

- Shri V.P.Nandakumar MD & CEO

The major case for a state prescribed “minimum wage” is that it gives poor households the bare minimum to support the family and take care of basic needs. However, the potential downside is that it may discourage employers from deploying low-wage, low-skill workers. This may happen by increased automation. For example, in the past, the period of sustained increase in rural and agricultural wages after introduction of the NREGA in India was accompanied by a surge in the sale of tractors.

If minimum wages reduce employment opportunities for low-skill workers, winners and losers will emerge. Clearly, the effect on jobs is a critical aspect of this debate as any evidence that higher minimum wage does not lead to job losses will be welcomed by governments who will then see this as an effortless and painless way to reduce poverty. Labour economists have therefore long studied whether minimum wages reduce employment or not.

The impact on employment has long been at the centre of minimum wage research, with much debate over whether (and how) minimum wages affect jobs and hours worked. If minimum wages at progressively higher levels lead to job loss for many of those same people, serious questions would arise with respect to its relative benefits and costs.

History

New Zealand was the first country to implement a minimum wage in 1894, followed by the Australian state of Victoria in 1896, and the United Kingdom in 1909. In 1938, the US under President Roosevelt instituted a federal minimum wage. After the Second World War, the number of countries with minimum wages expanded. Newly independent countries such as India (1948) and Pakistan (1961) were among those adopting minimum wages.