Minimum Wage, Maximum Control - India's Labor Laws
India's labor laws are a classic case of regulatory overreach and stifling federalism
What is common to every elected government since 1947? Their insatiable desire to act as a nanny for India’s unwashed masses. With Nehru’s embrace of Fabian socialism1, the Indian state spread its tendrils into every nook and cranny of the economy. The result was that even America’s Big Government looks tiny next to India’s Giant Bureaucratic Behemoth. Wikipedia lists all past and present Public Sector Undertakings (PSUs) in India, and it runs into hundreds of names. PSUs made tyres, wagons, jute, bicycles, fluorocarbons and much more.23
Pre-1991, the growth rate for the Indian economy wasn’t high. Excessive bureaucratic control over the economy, the license raj and endemic corruption pushed down growth. Pure socialist approaches usually result in some combination of the above. Socialism’s monopoly on economic control naturally breeds corruption in government corridors.4
There’s a common myth that the BJP is a capitalist party and the Indian National Congress (INC) is a socialist party. This couldn’t be further from reality.. Arun Shourie famously quipped that “BJP is Congress plus cow”. The BJP brought to the fore issues of cultural importance, but on the economic side, it continues the previous government’s policies, albeit with much greater efficiency.
The new labor laws passed in 2019 make my point. The Code on Wages was passed by Parliament in 2019, consolidating four labor laws related to wages. While deregulation and consolidation is better than nothing, the Wages bill leaves much to be desired. Find me a better example of the Indian state’s penchant for micromanaging and nannying its people than the Code on Wages (CoW).5
Minimum Wage
In most countries, minimum wage laws are implemented at two levels. One at the federal level, and one at the province level. Federal minimum wage is the floor, and provinces are free to to adjust it upward taking cost of living into consideration6. This pattern works well across the world. In the US, this pattern is highly decentralized, with states, counties and cities being able to set different minimum wages, as long as it is above the federal minimum wage.
How does the Code on Wages specify the minimum wage? Quoting directly from the bill7
The minimum rate of wages shall be fixed … keeping in view the following criteria*,
(I) the standard working class family which includes a spouse and two children apart from the earning worker; an equivalent of three adult consumption units;
(II) A net intake of 2700 calories per day per consumption unit;
(III) 66 meters cloth per year per standard working class family;
(IV) Housing rent expenditure to constitute 10 per cent of food and clothing expenditure;
(V) Fuel, electricity and other miscellaneous items of expenditure to constitute 20 percent of minimum wage; and
(VI) Expenditure for children education, medical requirement, recreation and expenditure on contingencies to constitute 25 percent of minimum wage;
I have so many questions. Who came up with the figure for 2700 calories? The adult nutrition guideline is 2000 calories as general advice. Depending on the composition of the 2700 calories, the food bill will be very different. Does the committee also consider that? Why aren’t other necessities also included? Why is electricity a necessity but not water? I am sure other readers will have different questions.
If that wasn’t enough, here’s another gem
While fixing the minimum rate of wages under section 6, the Central Government shall divide the concerned geographical area into three categories, that is to say the metropolitan area, non-metropolitan area and the rural area.
You could be forgiven for thinking that the attentiveness to detail ends here. A final concern that the bill has, relates to the arduousness of the work in question. So8
For the purpose of fixation of minimum rate of wages under this section, the appropriate Government shall primarily take into account the skill of workers [and] may […] take into account their arduousness of work like temperature or humidity normally difficult to bear […] (emphasis added)
Why not set a standard federal wage and then devolve the area specific to the state or city involved? How would the Central government sitting in Delhi know the prices for skilled labor in rural Visakhapatnam?
The primary effect of such detailed, centralizing regulations is the stifling effect it has on businesses. An unintended effect is that it increases the surface area for corruption for bureaucrats. Is a carpenter skilled or unskilled? And should he be paid extra for the humidity or heat in the summer? Who decides this? Who would enforce it? In practice, it is likely that all regulations would be ignored, and when an inspection occurs, palms would be greased to let the matter be.
Minimum wage laws have a pernicious effect on socio-religious minorities by reducing the cost of discrimination, making it easier for prejudiced employers to exclude certain groups. I previously discussed the broader impact of price controls in a post on Indian agriculture.
Minimum wage, like the Minimum Support Price (MSP), is a form of price control—a price floor. While the MSP leads to surplus production, minimum wages result in surplus labor. In a free market, an employer choosing to pass over minorities must either raise wages to attract other candidates or accept lower-quality workers. However, surplus labor eliminates this choice, making it easier for employers to engage in discriminatory hiring practices.9
Are you skilled? (Don’t) let the government decide
The Central government decides to fix a different minimum wage for different metro areas. It divides each geographical area into a metro region, a non-metro region and a rural region. For each such area, the wage differs for skilled, semi-skilled and unskilled labor. The outcome of the process is 78 different minimum wages across the country.
In its appendix, the CoW lists an exhaustive list of professions that it considers skilled, unskilled or semi-skilled. I often wonder which bureaucrat came up with this list. For example, a butcher or an office boy is considered unskilled. A cobbler, cook and a butler are considered semi-skilled, while blacksmiths, plumbers and welders are considered skilled.10
The fundamental problem with these kinds of categorizations is that skill is relevant to the job at hand. An office boy working in a highly productive11 office space can perform better skilled work with better tools. The converse of this is that blacksmiths and welders working at low productivity companies might not be able to add as much value to a company as the aforementioned office boy could.
My favourite example of the entire list though is that a stenographer with 7 years of experience is considered to be “highly skilled”. This classification allows a peek into the minds of lawmakers. It reveals a pre-industrial mindset, where the skill you possess is defined by the number of years you have spent in that profession. In the Information Age, someone right out of college could be as skilled at stenography compared to someone who’s spent 10 years in the profession12.
Shouldn’t the government stay clear of such classifications and allow the market to decide on the price of wages? The unintended effect of such regulations is to increase the surface area of corruption and allow bureaucrats to harass businesses.
As time passes, some professions eventually get so automated that the skills needed to complete that job become part of general education. An example would suffice here. The earliest programmers came from an electrical engineering background. Writing software was arduous, tedious and error prone. Computers’ time was precious and creating good software was an exceptionally rare skill. With improvements in technology, writing software has become commonplace and there are many WYSIWYG13 code generators, such that any high school graduate can write correct code. The law cannot encode such flexibility. With time, such regulations become fertile ground for corruption.
Competitive Federalism? What’s that?
Let me state at the outset that this is an unfair criticism. The CoW was meant to consolidate and replace a bunch of wage codes that had been in force since independence. It is highly likely that these wage codes also had provisions that were highly centralizing. So the same mindset carried over while drafting the new Act.
This centralization infringes upon states' rights. Labor being a subject on the Concurrent list14, both states and the Centre can make laws. However, in case of a conflict, the Central laws prevail. This takes away states’ agencies and doesn’t allow them to respond to local conditions.
For instance, in a rich state like Maharashtra or Gujarat, some skilled professions might be unskilled, because they have enough capital to invest in technology and automation. Why should businesses there continue paying higher wages that skilled professions have been entitled to by law? I have shown in my posts on agriculture, that distorting markets comes with heavy consequences. Interventionism eventually leads to socialism.15
Such interventionist attitudes, once again, broaden the surface area for corruption to flourish.
How does the US do it?
The US has a Fair Labor Standards Act (FLSA) that enacts a country wide minimum wage. All subnational governments (counties, cities, states) are free to set their minimum wage as they see fit as long as it is above the federal minimum.
Changing the minimum wage set by the FLSA requires another act of Congress. The hidden advantage is that if a minimum wage is set too high, it is highly likely that in a few years inflation would erode away its purchasing power. The impact on the economy doesn’t end up damaging it.
Because each state can set its own minimum wage, there have been a variety of approaches. Some states change it every once in a while using a law, while some index it to inflation. The beauty of federalism is that with such diverse approaches, it becomes a sort of natural experiment allowing the best approach to cement itself.
India could take inspiration from the same process. Set a base floor wage16 across the country and allow states to set their own processes for the minimum wage. The best approaches thrive and the hope is that other states copy the successful processes.17
Under the spirit of competitive federalism, states need to be trusted to pass the right laws. In the present case, the Centre can put in a floor wage, but it should be upto the States to pass living wage requirements according to their best interests. No one sitting in Delhi can know how much a skilled artisan in rural Jharkhand needs.
It might seem that these moves are anti-labor. Nothing could be further from the truth. The biggest beneficiaries of these changes would be the laboring class. When laws simplify, businesses thrive, providing more opportunities for the skills that labor brings.
There need to be protections because businesses usually end up being the single biggest buyer of labor. Economists call this situation a monopsony. Protections like prevent unfair wage withholding, ease of access to money among others are necessary and do not distort markets, nor do they end being regulatory burdens. There is a fine line and the Indian State must learn to walk it. 10%+ growth depends on it. This is the difference between Viksit Bharat 2047 and a middle income Bharat in 2047.
To give Nehru’s socialism a royal lineage, it appears that academic historians propped up Ashoka’s kingdom and brushed a lot of inconvenient evidence of his poor governance under the carpet. See this excellent article by Swarajya magazine for more on the topic. To my knowledge, this theory was first propounded by Sanjeev Sanyal, who physically went the various edicts and translated them.
There are 389 PSUs operational in India. See this for an exhaustive list. Corruption is rampant in some PSUs as well.
I can still get behind a PSU in a national security sector. Some examples would be DRDO and ISRO. The private sector has difficulties in entering into these sectors, more so when the country itself is very poor. But why is the government involved in making roofs and bicycles?
Case in point: Most Latin American and African countries that tried socialism. I am not going to claim that socialism is the only source of corruption, but there’s yet to be proven a successful model of socialism. Nordic and most European countries are socialist democracies with highly free markets, albeit regulated, compared to India.
I concede that this is an exaggeration, but not by much. I am sure that the Indian state will surprise me with other laws designed to be equally paternalistic.
The federal wage is much lower than the provinces because cost of living varies across the country. A high federal minimum wage would push out most businesses in the low cost heartlands.
To be pedantic, I am quoting from the Rules for the Code on Wages. Because implementations details cannot be specified in an Act, the government publishes a separate Rules document.
I am quoting this from the Act itself.
Thomas Sowell illustrates that the minimum wage laws damaged black workers precisely due to this reason. I take a quote directly from his book, Basic Economics:
From the late nineteenth-century on past the middle of the twentieth century, the labor force participation rate of American blacks was slightly higher than that of American whites. In other words, during this long period before the escalation of minimum wage rates, blacks were just as employable at the wages they received as whites were at their very different wages. The minimum wage law changed that and those particularly hard hit by the resulting unemployment have been black teenage males.
The complete list enumerates 123 unskilled positions, 127 semi-skilled positions, 320 skilled positions and 111 highly skilled positions. Take a look at the list for yourself.
I use productivity here in the Total Factor Productivity (TFP) sense. I do not mean individual productivity.
With YouTube, Instagram, Twitter, Coursera and other tools at one’s disposal, anyone can gain mastery over a desired skill set if they’re willing to work and put the time in. For example, in software, there are many instances of 25 year olds starting billion dollar companies. They employ many software engineers in their late 40s and early 50s. Defining skill in terms of experience is a fool’s errand.
What You See Is What You Get.
India's federal structure divides power between the Centre and the States through the Seventh Schedule of the Constitution. This Schedule categorizes subjects into three lists: the Union List, the State List, and the Concurrent List. Subjects in the Union List are under the exclusive jurisdiction of the Centre, while those in the State List fall within the authority of the States. For subjects in the Concurrent List, both the Centre and the States have the power to legislate, with certain provisions for resolving conflicts.
My series on Indian Agriculture illustrates this point well. I would recommend readers to give it a look over to understand the dynamics of markets and how price controls affect them.
If you want your mind blown, consider that the CoW sets a floor wage and a minimum wage. What is the difference between the two? Not much in practice, according to me. If someone thinks otherwise, please let me know!
It remains to be seen how much the politics of the day affects all of this, but at the end, people always have a choice to vote with their feet.