Minimum wage and its impact

Minimum wage and its impact

Minimum wage and its impact- Today Current Affairs

The minimum wage law is becoming one of the most popular tools to address concerns regarding inequality and poverty. More than 100 countries have instituted some form of wage floor, and there is renewed impetus to adopt new minimum wage rates or strengthen the existing ones. An estimated 19% of all wage earners globally are paid at or below the applicable minimum wage (ILO 2020). There has been a measurable positive impact of minimum wages on societal welfare, which is the reason behind increasing the implementation of minimum wage laws. Out of the cacophony of divergent views, I will argue that we still need the minimum wage.

Impact of Minimum Wages: The Hindu Analysis

There is a lot of ambivalence over the impact of a minimum wage. The Organization for Economic Co-operation and Deve­lopment (OECD), an intergovernmental organization of mostly rich countries of the world. However, in 2018, the same study by the OECD stated that “minimum wages can help ensure that work is rewarding for everyone” and that “when minimum wages are moderate and well designed, adverse employment effects can be avoided” . Similarly, in a survey of the members of the American Economic Association, conducted in 1992, 79% of respondents agreed that a minimum wage can lead to unemployment among young and low-skilled workers, but the number reduced to 46% in the same survey carried out in 2000 .

Price Pass-through: The Hindu Analysis

The firms may pass on some or most of the cost arising because of the minimum wages. This is true, especially, for industries that have a low elasticity of labour demand, like restaurants and retail stores. There is some evidence supporting such price pass-through in restaurants . For example, in the case of Hungary, researchers found out that 75% of the cost of a large increase in their minimum wage was passed on to the consumers . Price increases were more evident in non-tradable industries (like restaurants and department stores) than tradable industries (exportable goods like manufacturing products). Moreover, if low-income households consume products, which require substantial input from minimum wage workers, the price pass-through effect of minimum wage law can be regressive . However, the wage hike in Hungary was far more dramatic than anywhere else—it jumped from one of the lowest in the world to one of the highest. 

Differences in Earners: The Hindu Analysis

One reason why the impact of the minimum wage may come out differently in different countries is because of the variation in the constitution of the low-wage earners. For developed countries, the workers earning at or below the minimum wage are mostly teenagers, who themselves may belong to high-income families . In such countries, while the minimum wage laws may work to ensure that teenagers are not subjected to any exploitation, they may not have any impact in reducing inequality. However, the situation is quite diff­erent in developing countries, where the majority of low-wage earners come from low-income families.

Take the case of domestic workers, who are seldom covered under the minimum wage laws of developing countries. In India, there were only some states that had minimum wage laws for domestic workers . According to researchers, there was a strong short-run positive impact of the minimum wage legislation on real wages and an insignificant effect on the employment of domestic workers . It is encouraging that the Government of India, in 2019, extended the cover of the national minimum wage law to all the casual workers, including the domestic workers. But to have any appreciable long-term impact, the enactment must be followed by efficient monitoring and implementation.

Marginalized Groups- Today Current Affairs

The existence of a wage floor may also help reduce inequity between two identifiably different groups of people. In the US, the 1966 Fair Labor Standards Act extended the federal minimum wage coverage to sectors that employed mostly Black workers, like agriculture, restaurants, and nursing homes. The effect of the minimum wage was almost double in the earnings for Black workers than for the White workers. The act was responsible for more than 20% of the reduction in the racial earnings and income gap between 1965 and 1980, when a third of Black workers were employed in the above-mentioned sectors. Moreover, the minimum wage laws had significant contributions in the reduction of the gender wage gap, as shown in the case of Poland and Indonesia. Such an effect was possible because there was a systemic difference in how different groups of people were em­ployed and shows us how the minimum wage is an effective tool for giving economic empowerment to disadvantaged and margin­alised groups. For a country like India, where caste-based discrimination is responsible for the low wage income among the disadvantaged groups , there is little intergenerational mobility to high wage jobs among the lower-caste persons . An effective minimum wage, thus, can help provide a basic minimum standard of living that can go a long way to diminish inter-caste income gaps and help eradicate such discrimination.

Non-wage Compensation- Today Current Affairs

The minimum wage laws, however, do not always include other non-wage benefits, like pension, sick leaves, on-the-job training, or working conditions. According to the US Bureau of Labour Statistics (2020), wages and salaries account for roughly 70% of the total compensation costs. One study found a modest negative impact on employer-provided health insurance because of the minimum wage . Also, it is not intuitive to reduce on-the-job training of the workers after a hike in minimum wage, as it is in the interest of the employer to in­­crease the productivity of workers, who are already receiving higher wages . While it appears to be common sense to trade off increase in wages by employing less workers or diminishing non-wage compensation, it is not the case because low-productivity workers increase their work effort after a rise in the minimum wage .

Technology: The Hindu Analysis

In the present age of globalization, some firms may become uncompetitive after an increase in the minimum wage. They may either exit the market or change the production technology by substi­tuting labour with capital and by adopting modern technologies. For the US, it has been found that more automat­able low-wage jobs decreased after an increase in the minimum wage. This shows how firms may respond to a rise in the wage floor by adopting more labour-saving tech­no­logies. Moreover, if recent technological advances are such that the productivity gains to employment fall short of their labour displacing effect , the disemployment effect of the minimum wages may no longer be “elusive.” . The technology is leading to job polarization, with routine mid-level tasks getting automated, all the while generating more low- and high-skill jobs. In such a scenario, we will still need a minimum wage law to prevent the low-skilled from getting wages below some social minimum.


Countries like Germany used to have the minimum wage based on negotiations between the employer federation and labour union. The rise in statutory minimum wage across the world is a result of increasing de-unionisation and the rise in employment by big firms. Thus, the fear of exploitation of low-wage earners is still as large as it was when the first minimum wage laws were passed in the early 20th century. If maintained at sufficiently moderate level, the minimum wage serves to ensure that everyone can enjoy a minimally decent life in society.


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