The high minimum wages in India coupled with double overtime rates cause job losses, especially for low skilled workers, and slow down the formal-sector job growth in the country, the Foundation for Economic Development (FED) said.
“India’s current minimum wage laws are doing more harm than good to low-income workers,” FED said in its report ‘Minimum Wages Hurt the Most Vulnerable Workers.
Analysing the Periodic Labour Force Survey (PLFS) data for 2023-24, the report said that minimum wages are set so high across states that an estimated 64% of India’s workers earn below the minimum wage, and for approximately 50% of India's workers, hiring them even after a 30% raise would still be illegal.
According to the report, India's minimum wage, which varies by state, is roughly 50% higher than the average minimum wages (adjusted for GDP per capita) in key exporting competitor countries such as China, Vietnam, and Bangladesh.
Minimum wage in India is also on average about 1.7 times the median wage for a casual worker. In countries like the US, Japan, Korea, or the UK, this multiple is 0.26-0.60, implying that the Indian figure is 3 to 7 times higher, it said.
“This high minimum wage, coupled with other uncompetitive labour mandates like double overtime rates, compared to the 1.25 to 1.5 times rates seen in other countries, is a substantial reason why firms cannot hire low-skilled labour and remain competitive in export markets,” it said.
“As a result, labour-intensive industries face an annual export shortfall of approximately $60 billion, losing lakhs of jobs to competitor nations,” it added.
As per the report, this is also one of the contributing factors to slow formal-sector job growth in the country, leaving nearly 90% of India's workforce, millions of individuals, stuck in informal, low-paying jobs that lack contracts or social security benefits.
“Well-intentioned wage floors prevent workers from getting opportunities that would improve their lives. If nearly half of our workforce cannot be legally hired even after giving them a 30% raise, then the minimum wage has backfired,” Rahul Ahluwalia, founding director of FED, said.
To prevent unintended harm and accelerate job creation, the report suggests allowing workers to freely negotiate their wages.
“Since this is a politically sensitive subject, in the meantime governments should use wage subsidies instead of further minimum wage hikes,” it said, adding this will support higher pay without reducing the demand for workers and without making low-skilled hiring unviable.
The report also suggested the government should allow flexibility in the national floor wage to reflect different regional realities and to prevent pricing poorer states out of formal job creation.
“India’s current minimum wage laws are doing more harm than good to low-income workers,” FED said in its report ‘Minimum Wages Hurt the Most Vulnerable Workers.
Analysing the Periodic Labour Force Survey (PLFS) data for 2023-24, the report said that minimum wages are set so high across states that an estimated 64% of India’s workers earn below the minimum wage, and for approximately 50% of India's workers, hiring them even after a 30% raise would still be illegal.
According to the report, India's minimum wage, which varies by state, is roughly 50% higher than the average minimum wages (adjusted for GDP per capita) in key exporting competitor countries such as China, Vietnam, and Bangladesh.
Minimum wage in India is also on average about 1.7 times the median wage for a casual worker. In countries like the US, Japan, Korea, or the UK, this multiple is 0.26-0.60, implying that the Indian figure is 3 to 7 times higher, it said.
“This high minimum wage, coupled with other uncompetitive labour mandates like double overtime rates, compared to the 1.25 to 1.5 times rates seen in other countries, is a substantial reason why firms cannot hire low-skilled labour and remain competitive in export markets,” it said.
“As a result, labour-intensive industries face an annual export shortfall of approximately $60 billion, losing lakhs of jobs to competitor nations,” it added.
As per the report, this is also one of the contributing factors to slow formal-sector job growth in the country, leaving nearly 90% of India's workforce, millions of individuals, stuck in informal, low-paying jobs that lack contracts or social security benefits.
“Well-intentioned wage floors prevent workers from getting opportunities that would improve their lives. If nearly half of our workforce cannot be legally hired even after giving them a 30% raise, then the minimum wage has backfired,” Rahul Ahluwalia, founding director of FED, said.
To prevent unintended harm and accelerate job creation, the report suggests allowing workers to freely negotiate their wages.
“Since this is a politically sensitive subject, in the meantime governments should use wage subsidies instead of further minimum wage hikes,” it said, adding this will support higher pay without reducing the demand for workers and without making low-skilled hiring unviable.
The report also suggested the government should allow flexibility in the national floor wage to reflect different regional realities and to prevent pricing poorer states out of formal job creation.
