Make the move from minimum to living…

The labour ministry is reportedly examining moving from minimum wages to living wages as a means to speed up poverty eradication. A floor for wages indexed to inflation that is not purely benchmarked to survival or productivity is an elegant construct that addresses concerns over setting the right rate and revising it in time. The International Labour Organisation (ILO) estimates global monthly wages declined 0.9% in real terms in the first half of 2022, thereby threatening the post-pandemic recovery. This loss in purchasing power follows loss of livelihood during pandemic restrictions and contributes to rising income inequality. ILO reckons accelerated inflation has eroded purchasing power of minimum wages in several countries despite nominal adjustments.

Seeking inputs from ILO on a possible switch to living wages during its G20 presidency strengthens India‘s commitment to UN’s Sustainable Development Goals. Real wages in advanced G20 economies contracted 2.2% between January and June 2022, while those in the emerging economies of the grouping that contributes four-fifths of global output grew by 0.8%. Inflation exerts an undue effect on the cost of living for low-wage earners who spend a larger part of their income on essentials that are typically price inelastic.

Living wages also subsume some subsidies, thereby restricting their widespread application because of the effects on targeted welfare delivery. This limits their use as an anti-poverty tool. There is also a criticism it shares with minimum wages of depressing employment and encouraging entry-level labour substitution. Finally, a dynamic wage floor would tend to reinforce business cycles, adding complexity to countercyclical economic policy. If living wages are adopted, these need to be reinforced by collective bargaining and legal safeguards for workers. Yet, wages covering the cost of living offer an established method of reducing urban poverty through municipal intervention. India’s labour policy stands to benefit from the global experience with living wages.