Even a cursory mention of minimum wages is enough to set off heated political debates across the world. Welfare economists support minimum wages for their redistribution effects. Mainstream economists argue that minimum wages drive down demand for labour by companies. And—especially relevant to India—minimum wages coupled with rigid labour laws send firms scurrying outside the regular formal job market—“to negotiate regulatory cholesterol", in the words of the latest Economic Survey, released in February. Firms thus hire contract labourers at suboptimal rates, which reduces the chances of a Pareto improvement.

In this context, the executive decision by the government to provide a minimum wage of ₹ 10,000 per month to contract labourers has led to many raised eyebrows. However, the policy has come a step “closer to universal wages" rather than minimum wages per se, as pointed out by Bandaru Dattatreya, minister of state for labour and employment.

Minimum wage widens the wedge between the two wage rates, by taking care of permanent employees and contract workers, whereas universal wages involves paying an optimal amount to every employed person. This year’s Economic Survey estimates that wages are on an average 20 times higher in the formal sector than the informal sector in India. The new minimum wage for contract labour, an integral part of the informal sector, seeks to fix this wedge, at least partially.

The wages payable to contract workmen right now cannot be less than the rates prescribed under the Minimum Wages Act 1948. But this is restricted to just 45 economic activities. According to an estimate by V.V. Giri National Labour Institute, only 16.6% of the informal sector gets covered under the existing Contract Labour (Regulation and Abolition) Act, which deals with the wage norms of contract labourers among other things.

The rest of the labour force trapped in the informal sector languishes with little or no financial security. The study also adds that 30% and 32% of the workers in the private and public sectors, respectively, are hired through contractors.

The new executive order, which will bring an amendment to Rule 25 of the Contract Labour Central Rules, could thus have a considerable influence in shifting the labour curve in favour of the workers. There are valid apprehensions that the move would restrict workers to the informal sector rather than helping them move into the formal sector. And that is where labour reforms come in. While ensuring contract workers’ financial security is important, it is equally necessary to doggedly pursue labour reforms that can facilitate a faster transition to the formal sector. Eventually the need for a minimum wage must itself be done away with.

Contract workers have over the years become a way to circumvent India’s rigid labour laws. The Economic Survey duly notes that contract labour is growing rapidly in states with more rigid labour laws, despite it not being the preferred first option for most firms due to the contracting costs involved. Labour reforms in areas such as industrial relations, small factories and employee’s provident fund must be coupled with job creation to fix the issues of unemployment and underemployment and facilitate the ease of doing business.

The Narendra Modi government’s move to merge the country’s many labour laws into five comprehensive bills is a step in the right direction to simplify the Indian labour market. It needs to simultaneously step up its game in job creation and creatively integrate the Make in India and Skill India campaigns in the action plan. A reformed labour market is also a prerequisite for the success of Make in India and improving the ease of doing business, and not a substitute to job creation.

Since employment is in the concurrent list of the Constitution, the support of the states is also crucial for securing a flexible, transparent, thriving labour market. In fact, the minimum wage determination for contract labour could, and should, be left to the discretion of the states as part of cooperative federalism. Rajasthan, Madhya Pradesh, Gujarat and Maharashtra have already begun labour market reforms.

Minimum wages only treat the symptoms of a struggling labour market. The cure would entail a more flexible labour market.

Will fixing a minimum wage for contract labour resolve labour market issues? Tell us

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