From a Minimum Wage to a Living Wage: Empowering Workers to Thrive, Not Just Survive

Dr M. Venkateshwarlu, Professor of Finance, at IIM Mumbai, writes on the Centre's aim to transition from a minimum wage to a living wage by 2025. The Union government is working closely with the International Labour Organization (ILO) and the move would ensure a decent quality of life.

The government's aim to transition from a minimum wage to a living wage by 2025 is momentous and great news to the workforce. The Union Government is working with the International Labor Organization (ILO) to establish a living wage standard covering housing, healthcare, food, education, and clothing. Thus, the move to replace minimum wages with living wages would ensure a decent quality of life, foster the well-being of individuals, and build more inclusive and sustainable societies.

India introduced a minimum wage policy in its law in 1948. The minimum wage is the lowest remuneration required by law to be paid by employers to employees for work performed during a given period. In contrast, living wages ensure workers earn enough to meet their basic needs and participate fully in economic and social life; living wages contribute to a more equitable and prosperous future.

Minimum wages in India differ in every state. They are classified under multiple criteria, such as region, industry, skill level and nature of work. The national floor level minimum wage in India in 2023 was ₹178 per day, remaining constant for the last few years. The average salary for unskilled workers ranges between ₹ 2,250 to ₹ 70,000 per month under the Minimum Wages Act. However, the average monthly salary is just ₹ 29,400 per month. The wide range of wages is one of the reasons for income inequality in India.

Wages, economic growth, and inflation are interconnected in the Indian context. Wage dynamics can influence inflation through their impact on production costs and consumer purchasing power. A complex interplay of domestic and global factors, government policies and the Reserve Bank's actions influences our country's economic growth and inflation.

Addressing income inequality is necessary for promoting sustainable living by ensuring equitable access to resources. Income inequality is measured using the 'Gini Coefficient', a widely used measure of income inequality, and the score lies between 0 and 1. Where complete equality would result in a Gini Coefficient of zero, and complete inequality would result in 1. The data reveals that the Gini Coefficient has declined from 0.472 during the Assessment Year 2014-15 to 0.402 for the Assessment Year 2022-23. The decline in income inequality is attributed to a significant increase in migration at the bottom of the earnings pyramid. However, the proposed living wage is expected to reduce income inequality further and promote economic growth.

Rising commodity prices have been a significant concern worldwide, with wage inflation unable to keep up. If inflation rises and wages remain constant, it creates economic challenges leading to decreased purchasing power, reduced standard of living and potential social and economic instability. Despite India's experience with inflation being milder than several other emerging countries, the average inflation rate of 10.02 per cent was a concern in 2013. However, India's fiscal and monetary policies have helped bring down inflation to 5.09 per cent by February 2024 in a calibrated manner.

The per capita income and consumption expenditure influence individuals' economic well-being and consumption behaviour. India's per capita net national income (at current prices) for 2022-23 stands at ₹ 172,000, almost a 100 per cent increase from ₹ 86,647 in 2014-15, when the (Narendra) Modi government first came to power.

Meanwhile, the monthly per capita consumption expenditure (MPCE) for 2022-23 was ₹ 3,773 in rural India and ₹ 6,459 in urban India; on average, food and non-food expenditure share is 40% and 60%, respectively. The National Sample Survey report on MPCE shows that India's rural average MPCE was ₹ 1430 in 2011-12 and increased to ₹3773 in 2022-23, a net increase of 2.60 times. Therefore, the rise in consumption expenditure is much higher than the per capita during the past ten years.

Unemployment is a critical factor that continues to challenge India's economic landscape. India's unemployment rate for individuals aged 15 and above dropped to 6.8 per cent during January-March 2023 from 8.2 per cent a year ago.

The primary reason for the proposal to implement a living wage is that the minimum wage set by the government is often much lower than the living wage. In some sectors in India, there is a big gap between what a worker earns and what constitutes the living wage to support the family. As mentioned above, different types of work are associated with different minimum wages, which can also vary significantly from state to state within the country.

The impact of low wages on workers and their families is significant and far-reaching. If the workers are underpaid, it can lead to negative emotions and have a broader impact on communities. The workers who earn low wages may need more financial resources to support their families. Also, low wages can contribute to poverty and inequality, adversely impacting society's overall health and well-being.

The International Labor Organization’s study also confirms that a worker does not earn a living wage with the current minimum wage in India, assuming an average family with 1.6 earners and 2.3 children in a family. Only highly skilled workers receive a wage that ensures a decent family existence. Suppose workers do not earn a living wage; in that case, they face challenges, such as having to work multiple jobs, dropping their children from school, and succumbing to unexpected health issues they cannot afford.

With the new proposed living wage system, workers get higher wages, which benefits the employers and helps them remain satisfied. Additionally, satisfied workers can be more productive compared to an unhappy workforce.

Some people believe that living wages spurt a minimum wage floor that hurts the economy and the small and medium enterprises that cannot afford to pay the increased wages. Indeed, the living wage is expected to be higher than the minimum wage, and due to the fear of increased cost, employers may reduce hiring, leading to increased unemployment.

Economists and policymakers firmly believe decent wages are central to economic and social development and social justice advancement. They also play an essential role in reducing poverty and inequality and ensuring a respectable and dignified life. The move to living wages will help India achieve the Sustainable Development Goals (SDGs), promoting decent work and economic growth; India is committed to attaining SDGs by 2030.

However, it's important to note that implementing policies to ensure a living wage requires a multi-faceted approach involving collaboration between the state and union governments, businesses, and other stakeholders. This might include amendments to minimum wage laws, proposals for incentives to pay living wages, and measures to improve education and skills training to increase employability and productivity. Education, skills development, fair wages, and a sustainable society are interconnected components of a holistic approach to sustainable development, which India is committed to achieving by 2030.

(The views expressed are solely those of the author and do not necessarily reflect the opinions or policies of the organisation he is affiliated with)