Forget toxic shortcuts
A national minimum wage will murder the formal job creation our youth need and corrode competitive federalism
The Ministry of Labour is clearly more ignorant than the young boy at a job fair in Gwalior who told us: “Give me a monthly salary of ~4,000 in Gwalior, ~6,000 in Gurugram, ~9,000 in Delhi, and ~18,000 in Mumbai; my bags are packed, so tell me where you want me to go.” The proposal for national minimum wages of ~18,000 is like the Mahatma Gandhi National Rural Employment Guarantee Scheme – a rigged benchmark – and will murder formal sector job creation by mandating wages not linked to cost of living. This decision is even more horrifying because most entrepreneurs thought that lessons had been learnt from the extreme short-term policymaking of the last government’s National Advisory Council that converted a high-growth lowinflation economy to a low-growth high-inflation economy. This government deservedly prides itself in taking intelligent policy risks (demonetisation, the bankruptcy code, and the goods and services tax, or GST) while taking the long view (India’s problems means that a 10-year plan is not 10 one-year plans). But there is nothing intelligent or long-term about a rigged national minimum wage; it is an unnecessary, diversionary, and toxic shortcut by a ministry that has massively underperformed on reducing the regulatory cholesterol for formal job creation.
More dangerously, this move undermines one of the most impactful innovations of this government — competitive federalism. While there may be some such thing as India’s capital market, there is no such thing as India’s labour market and 29 chief ministers matter more than one prime minister for massive formal creation. An export labour market such as Uttar Pradesh (where thousand migrate to another state everyday) is very different from an import labour market such as Kerala (which is now 9.5 per cent Bihari). The Centre already sets minimum wages for 45 industries according to Section 2(a) of the Minimum Wages Act of 1948. An indicative national rate – we currently have a national floor minimum wage level of ~160 that is non-binding on states – is acceptable but the new proposal dangerously takes away state government power to set wage levels for 1,679 industries. Why confiscate power from chief ministers?
Labour reform is controversial all over the world; pursuing it caused a youthful Italian prime minister to lose his public support, a socialist French prime minister to not stand for reelection, and popular Germany Chancellor Angela Merkel’s unpopular opponent for national elections in September has gained traction on his promise to reverse the 2001 Hartz Commission labour market reforms. Labour legislation often protect the old at the expense of the young. Trade unions, a geriatric but vocal minority, have cleverly positioned job preservation as a form of job creation. And countries often pursue them when they run out of options; the Hartz commission happened because Germany in 2001 was seen as “the sick man of Europe”, with an unprecedented process of decentralisation of wage bargaining during the 1990s as its only recovery option. Japan’s twodecade coma and low participation of women in the labour force ensured Prime Minister Shinzo Abe’s three arrows in Japan tackled labour legislation, and the President of France Emmanuel Macron, who has been in office for only three months, did not get punished in elections despite pledging labour reforms because the French finally recognise they are in a job emergency.
India’s job emergency needs overdue labour reforms. Given political optics, we suggest a five-year strategy because the 75th year of Independence is a good milestone to acknowledge the difference between independence and freedom. Freedom comes from having options and the best vehicle to create options for citizen is formal jobs. The formalisation of India driven by the GST, demonetisation, ease of doing business, and much else is making good progress; we added 10 million new Provident Fund payers and 13 million new employees’ state insurance (ESI) payers in the past three years. Why kill this progress and momentum with a policy hack job like a national minimum wage?
Over the past three years the Ministry of Labour has not displayed strategy, stamina or sequencing, and unimaginatively equated labour reform with tackling Chapter VB of the Industrial Disputes Act. Its poor performance now make it desperate but it should pursue competition for Employees’ Provident Fund Organisation (this loots employers by running the world’s most expensive government securities mutual fund and harasses employees with four times more dormant accounts than lives one) and ESI (this is India’s most inefficient health insurance with a claims ratio of 45 per cent and ~30,000 crore of bank deposits that belong to employees). It should accept moving to a universal enterprise number for enterprises instead of insisting on a universal establishment number to cover for its lack of technology. It should move all returns, challans, registers, licences, etc online and give India a drop dead date for 100 per cent paperless, presenceless, cashless for 100 per cent of labour legislation.
The national minimum wage legislation is baffling because it negates the strategy of using the Constitution’s Section 252 (2), used by seven states to amend central labour laws. How can states curate jobfriendly habitats if a hukumnamafrom Delhi says that the wages in Mumbai will be the same as Etawah, Kanpur, Kishtwar, or Mysuru? The kid we met at the start of this article said he needed four times more money in Mumbai than Gwalior because all the kids who went to Mumbai for ~10,000 are back because “khaana, rehna or office jaana nahin banta (the salary doesn’t cover rent, food and fares to go to work)”. The only way to sustainably raise minimum wages is massive non-farm formal job creation; China has raised minimum wages every quarter for the past four years despite massive increases in productivity (20 people now produce the same GDP that 100 people used to produce in 1990) because of a massive migration to non-farm employment (640 million since 1978).
Legislating high minimum wages is popular with politicians all over the world because voters believe it is a “free lunch”, i.e., it is an inexpensive alternative to higher taxes, has no real costs, and helps the poor. But setting high national minimum wages has real costs for India like lower formal employment and sabotaging competitive federalism. But the most toxic consequences of the national minimum wage hukumnama are reserved for our youth; instead of higher wages, their formal wages may be zero. It must be stopped.