The new Code on Wages Bill must address the key problem of inconsistent minimum wage determination by the States

The controversy over the Code on Wages Bill has taken the debate away from the core issue. Minimum Wages (MW) are declared for three categories – unskilled, semi-skilled and skilled. Most States also declare MW for these three categories industry-wise and zone-wise. For example, the current MW of Maharashtra has 61 industries and for each industry, there are three zones and three categories.

An analysis of the MW in Maharashtra is very revealing:

• The MW vary from Rs 13,650 per month (skilled construction) to Rs 9,022 per month (skilled retail petrol pumps). There is a 51% variation for the same skilled category between sectors in the same zone.
• An unskilled construction worker earns 15% more than a skilled engineering worker or 28% more than a skilled factory worker, in the same zone.
• An unskilled club worker earns 3% more than a skilled factory worker in the same zone.
• A skilled factory worker in Mumbai (zone I) will get only Rs 600 per month more compared to a skilled worker working in a very small town (zone III).
• Even more shocking is the skill premium (unskilled vs semi-skilled). For the engineering industry in zone 1, the skill premium works out to only 5% or Rs 500 per month (Rs 19 per day).

Right Minimum Wages

The current way is to fix the MW of the unskilled worker in the lowest cost zone and extrapolate the rest. This is a crucial flaw. The correct way is to determine the MW of the semi-skilled category first. This will incentivise youth and unskilled employees to pick up skills. Employers are often happier to pay more to semi-skilled and skilled workers because they are fewer in number and wage increases can be recovered through productivity training.

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Startling Findings

In an article published in the Economic and Political Weekly (July 26, 2014 issue), three facts were established after analysing government data:

• Real Wage Stagnation: During the 12-year period from 1999 till 2011, the average factory worker’s real wages (after inflation) remained constant at Rs 45,000 per annum. In more than 50% of industries, real wages declined.
• Supervisor Gains: Supervisor compensation went up two to four times the labour compensation. Managers managed to secure higher wage raises and hence dominate the manpower costs.
• Weak Productivity Link: The study shows a very weak (12%) productivity-real wage linkage. If productivity goes up by Rs 100, only Rs 12 was passed on to labour. Management focus on automation and technology drove productivity, but increases were not passed to labour.

Supply Exceeds Demand

Over 12 million Indians enter the workforce every year. Between 2011 and 2015, agricultural jobs reduced by 26 million while non-farm jobs rose 33 million. According to McKinsey Global Institute, the net growth in employment was a meagre 7 million over 4 years. What happens when supply of onions far exceeds demand? Prices crash. The same thing happens in the labour market.

Entry Level Wages

In manufacturing, manpower cost varies from 6% in automated plants to 20% in labour-intensive industries like apparel. A 50% increase in MW will only impact the total manufacturing cost by 0.5% to 2.5%. If the increase is mainly in the semi-skilled category, the impact will be even lower. Most industries are impacted more by energy costs than entry-level labour costs. The claim that MW increase will kill industry is more emotional than factual.

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Ensuring Compliance

Revision must be paired with enforcement:

• Declaration: Employers must be asked to declare their compliance in their annual reports.
• Transparency: The Labour Ministry must set up a portal and call centres for MW complaints with time-bound investigation.
• Differentiation: This portal should encourage compliant companies to share their experiences in improving productivity to offset the increase in MW.

(The author is Chairman, TMI Group, and Independent Journalist)