Consumers need to pay more if workers are to be given a fair deal

President Joe Biden’s administration was able to push through a major fiscal package in March worth 1.9 trillion dollars and includes another round of 1400 dollars of stimulus cheques for individual Americans, 350 billion dollars to states and local governments as grants, and 160 billion dollars for coronavirus testing, tracing and vaccines. But it failed to get the voting support needed to raise the nationwide minimum wage to 15 dollars an hour. The Democrats have a comfortable majority in the Congress (the lower house), but it is a knifeedge situation in the Senate (the upper house). And within the party itself, there are voices opposing increase in the minimum wage which is currently 7.25 dollars per hour.

This minimum wage number was set back in 2009. However, individual states in the federal system are free to add to that and have done so. For instance, in New York, Washington DC etc., the minimum wage is far higher. For the rest who follow the 2009 number, in inflation adjusted terms, the minimum wage is even below what prevailed in the 1970s. Surely that needs a correction.

But Republicans and a significant number from the Democrats feel that this increase would put an undue burden on employers, at a time when the economy is coming out of a deep recession. As a compromise, don’t be surprised if an 11-dollar wage is voted successfully. But that is yet to happen. It may also subsequently get indexed to the inflation rate.

That this is happening in capitalist America is a very significant development. Even in the United Kingdom, which has had a conservative, pro-business, pro-employer government for more than 10 years, the minimum wage has been raised to 8.7 pounds for all adults above the age of 25. This may go up further. This wage is roughly two third of the median wage earned by all workers in the UK.

In America too, if the 15-dollar minimum wage is imposed, it would be close to two third of the national median. As such the total income (i.e. earnings from wages, salaries and other sources) for a median American household has stagnated for nearly four decades. This has happened despite the growth in national income, and a roaring stock market. Which means that substantial gains of income and wealth were going to the top tier in society.

This has lessons for India. Wages have to grow, if incomes and standards of living have to improve. Will a higher minimum wage help? Will that crimp employers and lead to lower employment?

While per capita income rose by nearly 7 per cent per year during 2003 to 2012 in India, subsequently this growth has slowed down. This was also a period when rural wages were rising. India’s labour market has 90 per cent of its workforce in the informal or unregistered sector. Which means that they work either without a written contract, or without any health and retirement benefits.

Even in sectors where there is a significant registered (‘permanent’) employment, the ratio of permanent to contract workers is very skewed, which is also reflected in their respective benefits and pay. Sometimes this creates a de facto caste system, where for the same work, a contract worker is paid much less than a permanent worker.

Such conditions can create stress and unrest, sometimes leading to intemperate outcomes, like the violence a few years ago in an auto plant in Manesar. Due to the large number of informal and seasonal workers, the data on wages and earnings is notoriously bad. But survey data indicates that wages have stagnated. Of course, during the pandemic, there have been large scale job losses too.

When surplus labour moves out of agriculture, it is coming from disguised unemployment, so productivity is nearly zero. Hence even a small wage is a decent improvement on zero. This process of absorbing surplus labour from zero wage, can continue for a long time, until agriculture no longer has any surplus labour.

Indeed, this was the strategy of sustaining high growth and high exports, at low and constant wages, in China. The low wage workers were taking away higher wage jobs from advanced countries. The low wages in China meant that much of the benefit of high GDP growth was going to capitalists, in this case mostly State-owned enterprises. That profit was continuously re-ploughed leading to high GDP growth rate.

To some extent it can work in India, only if industrial employment increases continuously. But unlike China, India’s services sector is nearly 60 per cent of the GDP (national income). It employs only 25 per cent of the workforce. Besides India’s consumption expenditure as a share of GDP is much larger than in China.

It is not as if raising the minimum wage in India will make the jobs vanish out of the country. This is because these low paying jobs are mostly in services sector, which is a non-tradable sector. Besides if the increase in the minimum wage is not very large, it does not even affect the demand for those services. Think of the wages paid to farm labour, or security guards, or courier services workers. An increase in their wages surely will not affect the demand for those services, nor will it lead to a decrease in employment. The increase in minimum wages in most sectors just means that consumers pay more. When a McDonald worker gets a fifty per cent higher minimum wage, the burger price goes up by 25 cents.

This is a way of transferring incomes from consumers to workers, without causing a burden to the exchequer. It is similar to increasing the minimum support price to farmers, so that urban consumers pay a bit higher for food, and the farmer earns a bit more. This removes the urban bias of the food policy.

Similarly, an increase in minimum wage will remove the pro-employer bias of the wage policy. The current national minimum wage of 176 rupees per day certainly needs to be revised upward.

(Dr. Ajit Ranade is an economist and Senior Fellow, Takshashila Institution. Views are personal) (Syndicate: The Billion Press)