7 PM Editorial |Demand and Growth Revival by Enhancing Minimum Wages|8th August 2020

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Demand and Growth Revival by Enhancing Minimum Wages


Private consumption demand which is one of the levers of economic growth has been slowing down even before COVID pandemic in India. After the pandemic induced lockdowns and restrictions, it has fallen drastically as jobs and incomes have been lost. Economic revival needs revival of domestic demand as external demand(exports) will stay muted in the foreseeable future.

India’s growth story of the 21st century was based on consumption demand. This demand came from top of the socio-economic pyramid i.e. well off and middle class. But this has reached its limit. For further growth, demand must be generated at bottom of the income pyramid i.e. informal workers. They have high propensity to consume which makes them a good source of demand, provided they have adequate income.

Incomes in India for informal workers:

PLFS(Periodic Labour Force survey), 2018-19 data points out:

  • 10% of employment is formal(job security, social security like pensions, provident fund, insurance). They have decent minimum wage(about Rs.26000 per month) for adequate consumption
  • Organized informal employment constitutes 14% of total workforce. Their average incomes are Rs.9500 per month. This is equal to or below minimum wage.
  • Self employed constitute 50% of total workforce with average income of Rs.8400 per month
  • Casual wage workers constitute 24% of workforce with daily income of Rs.209

This shows India’s employment challenge includes inadequate incomes. For self employed and casual workers, incomes are well below decent wages which are needed for consumption of goods. These wages only ensure a subsistence level of income and cannot create demand. These incomes have to be increased to ensure that consumption demand comes from the bottom of the income pyramid.

Increasing incomes can be done by 2 ways:

  • Increasing productivity growth in informal economy
  • Raising minimum wages
Raising Minimum wages to improve incomes:

Code on wages act, 2019 guides minimum wage in India. Based on occupation and skills, minimum wages are set. But there is a Floor wage(Rs.178 per day as per draft rules) based on minimum living standards, which is the threshold wage in any sector(organized and unorganized) and employment(formal and informal). Any minimum wage for any sector cannot be lower than floor wage. Yet considering enforcement difficulties in the informal sector, realization of the same is challenging.

Better interventions will be:

  • Focus on casual wage workers: 2 sectors where 80% of casual wage workers are present are agriculture and construction. Ensuring decent living wages in these sectors will increase incomes of casual labour and hence consumption demand. It will also increase floor wages of other informal workers due to market forces.
  • Public employment programmes like MGNREGAwhich employ unskilled workers must ensure minimum wages are paid. Further, they must be extended to the whole year and to urban areas. This will ensure other sectors will pay at least minimum wages in fear of labour migrating to MGNREGA.
  • Criteria of setting minimum wage to be decent living standard: Current criteria in setting minimum wages is based on subsistence living and just out of poverty. It must be changed to ensure adequate income which inturn will increase consumption demand.
    • Anup Sathpathy committee recommended Rs.375 as living wage.
    • Minimum wage can be linked to regular informal worker incomes. This will ensure yearly upgradation of minimum wage as per PLFS data.

By raising minimum wages of casual labour and public unskilled employment, consumption demand can be increased from the bottom of the income pyramid. This will not only reduce inequalities in India, but also ensure sustainable economic growth revival. This can be a complementary strategy to cash transfers to ensure minimum income guarantee to vulnerable households.

Source: https://indianexpress.com

Mains question:
  1.  Bad quality of jobs with low wages is a greater challenge for India than unemployment. Discuss? What step must be taken to ensure minimum wages in the economy? [15 marks, 250 words]
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