Delhi Minimum Wage Hike Won’t Change Living Standards of Aam Aadmi

A 50 percent minimum wage hike in Delhi may result in exploitation of unskilled workforce, writes Jairaj Devadiga.

A few days ago, the Delhi government raised the minimum wage in Delhi by 50 percent. (Photo: Hardeep Singh/ The Quint)

Problem with Wage Laws

• It’s a misconception in the minds of lawmakers that by forcing the employers to pay high wages, living conditions of workers can be improved.
  
• Industry looks for cheap labour and doesn’t mind outsourcing the work or shifting base to another country for the same.
  
• This has resulted in large-scale unemployment in US where restrictions on industry has resulted in scarcity of jobs for the American youth.
  
• Wage laws are also responsible for exploitation of unskilled labour who belong to poor families or don’t have required educational qualification.
  

A few days ago, the Delhi government raised the minimum wage in Delhi by 50 percent. It was in the name of helping the poor, of course. But as the great economist Milton Friedman once said, programmes that are labelled as being “for the poor”, or “for the needy” almost always have effects which are exactly the opposite of what their well-intentioned sponsors thought they would have.

The minimum wage law is a perfect example. The well-meaning promoters of the law believe that if only the government forces employers to pay higher wages, the poor workers can have a higher standard of living.

If that is true, why does the international community give billions of dollars in foreign aid to poor countries like Bangladesh? A far more effective and cheaper method would be to raise the minimum wage in Bangladesh to a very high level and those people can be rich like Americans or Europeans. But obviously that won’t happen.

Will Not Solve Unemployment

Industry will simply move to some other poor country (maybe in Africa) where cheap labour is available. Minimum wages are the reason American companies outsource low level jobs to India. People who work in call centres and other similar occupations are willing to work for less than the US minimum wage.

But it causes unemployment in the US. There might be Americans who are willing to work for less than the minimum wage, but the law prohibits them from doing so. It does not raise their standard of living, but in fact lowers it, by keeping them unemployed and their wages at zero.

Moreover, the people who are willing to work for low wages are people who lack skills. Their education was less than ideal, hence they might only be able to produce goods and services worth Rs 8,000 per month, for example. Now the government sets the minimum wage at Rs 14,000. If an employer hires such an unskilled worker, he will be making a loss. So nobody will hire these people. Instead of Rs 8,000 a month, they earn nothing.

The Delhi government’s decision to hike minimum wages by 50 percent may not have the expected impact. (Photo: iStock)

Discrimination Against Unskilled Workforce

Thus, the law forces employers to discriminate against people with low skills; people who come from poor families and have little to no education. And because these people cannot get jobs in the first place, they cannot get on the job training, which would enable them to earn a higher pay.

Employers hire less, they replace people with machines or outsource the jobs; and if that is impossible, they charge higher prices to consumers, making less sales and less profits. Everybody suffers due to enforced minimum wages.

Minimum wage laws also have the effect of increasing crime, as economist Walter Williams showed in his book and documentary, “The State Against Blacks”.

Since people can’t find jobs, but still need to eat, they resort to theft, mugging people on the streets etc.

The well-meaning promoters of the wage law believe that if only the government forces employers to pay higher wages, poor workers can have a higher standard of living.(Photo: iStock)

Impact of Law

The bad effects of minimum wage laws observed in the US might not happen in the case of Delhi in particular or India in general for a few reasons.

First, is the federal structure of India. If the Delhi government sets a wage floor, workers can migrate to other states, whose governments are not as stupid, to find jobs.

Next is the weak enforcement of laws. Inspectors have been known to look the other way for a little bribe. This is one of the few times that I have been grateful for corruption, since the enforcement of minimum wage laws would not benefit, but hurt the workers by preventing employment in the formal sector.

Benefits From the Informal Economy

However the greatest hope lies in the informal sector, which employs more than 70% of India’s work force. Even big companies routinely hire workers on an informal basis. Politicians, sociologists and self proclaimed public intellectuals often denounce the informal economy saying that it operates outside the law.

But that very fact proves to be a great blessing; for the workers, since they get jobs; for the businesses, since they can make profits; for customers by way of lower prices. Everyone benefits in a market not burdened by regulation.

In conclusion, I would say that while the Delhi government made a very bad decision, there is little reason to worry since in the long run the effects will be negligible.

(The writer is an economist who looks for simple solutions to the complicated problems that ail our society.)

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