Theories and Principles of Minimum Wages
This essay is related to the concept of minimum wages, various theories and principles of minimum wages and the arguments for and against a country adopting a minimum wages. By using India as an example, we described how the minimum wages is being implemented in the country and also described what are the advantages and disadvantages from adopting that implementation and how such implementation will affect the country. Minimum wages refers as minimum amount of payment which employee has right to receive. It includes basic wages and various types of allowances. Purpose and objective of the concept of minimum wages is to protect the employees for unduly low payment. Its main objective is to provide minimum wages to the all employees who are working in the organized sector. There are also various advantages and disadvantages of the concept of minimum wages.
Minimum wages have been defined as “the minimum amount of salary which employer will be liable to pay to the employees for the work performed during the given period of time, which is fixed amount it can’t be reduced by any agreement or contract between employer and employee” (Webb, 2009). Purpose of minimum wages is to provide minimum amount of remuneration to the employee for their performance, protect employee against low remuneration, reduces discrimination among employees on the basis of age and gender, overcome poverty and it will also reduce bargaining (Singapore Minimum Wage, 2019). There are various factors which affect the effectiveness of minimum wages such as industry in the economy, migrant worker, agreements and contracts and the extent to which company can afford protection to all the employees for maintaining employment relationship. It affect positively on the employment. Firstly minimum wages concepts were implemented in New Zealand in 1894. Minimum wages includes basic salary and other allowances but it does not include travelling, housing and food allowances. Basic salary is calculate by dividing 12 x monthly basic rate of pay by 52 average number of days an employee is required to work in a week. According to the demand and supply model, when there is increase in the minimum wage then there will be decreases the employment of minimum wage employees (Yah & CHEW, 2009). It effects on employment, distribution of remuneration among low paid worker and high paid worker, worker’s skills, prices, profits, on-the-job training and the distribution of income among low income families and high income families (Marginean, 2013). There is National Wages Council which guides and provides all information related wages. Implementation of minimum wages is only relevant if it is above the market wages. It is decided by the federal government.
Implementation of Minimum Wages in India
Following are the benefits while implementing Minimum Wages Laws:
- Reduce poverty: By the concept of minimum wages, poverty level may be reduced. Minimum wage increased the salary of the worker, it will increases their income level, increase the standard of living for the poor employee because if their income will increase then they will spend more on purchasing the products , overcome poverty, removes financial stress and encourage education (Arguments for increasing the minimum wage, 2019).
- Increase productivity: The implementation of minimum wages will help in increasing worker’s productivity. According to the efficiency wage theory, higher wages will motivate and encourage the employee to work more hard thus it will increases their productivity and efficiency. If company will pay higher to the employee then they will perform better because of fear of losing their job. It also help in increasing job growth and efficiency of the organization because the incremental in technological development (Warren & Hamrock, 2019).
- Increase incentives: It will be the additional incentives for the unemployed people who are searching the jobs. It will also help to increase the participation rate of unemployment because it encourages people to join the workforce and earn money.
- Increase consumption: Minimum wages will increase consumption level in the country because it helps in increasing the spending capability of the employees. So, higher consumption level will automatically help the economy of the country (Keller, Halkier, Wilska, & Truninger, 2017).
- Decrease government spending: Minimum wages will effects government cost or spending. It helps in reducing the cost of government towards social welfare programs. If employees get minimum salary then they will on depend on the government for fulfilling their needs rather than they will able to spending money on consumption. So, government will be able to reduce the cost towards social welfare programs and can use that money for investment. It will also help the government in reducing the cost towards budget and government does not need to put extra effort on welfare system because it does not have an essential effect on the unemployment as compared to the other economic factors (Ferandez, Holman, & Pepper, 2014).
- Increase work ethics: It will helps in increasing the work ethics of those people who does not earn more because employer demand more return from the higher cost of recruiting these employees.
- Promote economic growth: Minimum wages will promote the economic growth of the country because the incremental in consumption level of the poor people and the productivity of the organizations.
Following are the disadvantages while implementing minimum wages laws:
- Unemployment: Minimum wage will cause unemployment. When minimum wage curve is above the market equilibrium then demand and supply of labour will not balance because in that case supply will be more than demand. So, in this situation, company wants to reduce supply, so it will result the unemployment. For the implementation of minimum wages laws, company wants the lower number of employment and raising the price of the products, so it will also leads to the unemployment (Colson, 2011).
- Inflation: Minimum wages may cause inflation because increase in price or increase in the money supply for balancing the demand and supply curve. Because of minimum wages laws, all company will try to increase their product’s price for balancing their spending on the wages for the employees (Hall, 2009).
- Increase cost of investment: It will increase the cost of investment for the company because it has to pay more to their employees, so it will increases cost of production for the company, which automatically increases the cost of investment. So, it will result in decreasing the revenue & profitability of the company.
- Affects small businesses and low-skill labourers the most: Enforcing of minimum wages laws means small businesses and low-skilled labourers are forced to pay specific amount to their employees. Because of the minimum wages, company forced to increase their price, change the rate which they charge, so it will result the lower level of customer’s satisfaction and it will affect overall revenue of the company (Mullen, 2018).
- Encourage outsourcing or offshoring: This law encourage the employer to save labour costs, so they can save through outsourcing or offshoring opportunities and by using independent contractors. Example- Suppose if a worker is working in the United States and his salary is $15,000 and a worker with similar skills is working in the Bangladesh and his salary is $12000 then by outsourcing, company can save $3000 per year on the cost of hiring of labour at minimum wages in Bangladesh.
- Decrease in efficiency: When a government fix the minimum amount of remuneration for all the employees then that minimum amount will be considered as maximum amount by the employers. So, if the worker has high quality of skills and very efficient for the work then also he will not be paid higher amount than the minimum wages which is fix by the government. Thus, it will result in decreasing the efficiency of the workers (Palmer, 2018).
Implementation of Minimum Wage in India: –
In India, Minimum wage is being implemented according to the Minimum Wages Act, 1948. This act passed by the Indian Parliament, fixes the minimum wage for the workers, both skilled & unskilled and it is applicable to the whole India (India’s Minimum Wage Structure: A Brief Explainer, 2017). It is also implemented as per Indian Constitution. Its objective is to fixing a minimum rate of wages for all the companies where employees are unorganized and have more than 1000 workers and controlling the exploitation of workers in the companies. It is set by the tripartite committee according to the cost of living index which depends on various factors such as consumption, basic requirement and education etc. and it is differ for skilled, unskilled and semi- skilled workers. Under this act, both state and central government fix the wages as per their own scheduled. So, the wage rate is no single uniform for all states because of various differentiating factors in all states. If worker does not get minimum wage from the company then he has a right to claim on the employer within 6 months under section 20 of Minimum wages act, 1948. There is also penalties for the industry regarding non- payment of wages to their workers. As per section22 punishment is imprisonment up to 5 years or fine Rs. 10000/- or both (Minimum Wages, 2019).
- Unemployment: The above implementations positively affect the unemployment rate in India. By increasing minimum wages, supply will be increases than demand then firms want to balance the demand and supply curve. So, they stop hiring the new employees and it is decreased by 5% as per the report (Fields, 2009).
- Reduce poverty: In India, 30% of the salaried worker and 40% of the casual worker who earn minimum wages belong to the poor families. So, if they receive minimum wage then it will help them to overcome poverty. National minimum wages would reduce poverty by 7 to 10 per cent and state level minimum wages would reduce poverty by 3 to 6 per cent. So, it shows that minimum wages whether at state or national level may help workers to overcome the poverty (Patnaik, 2009).
- Economic Growth: Minimum wages help the country in their development of economy because of increasing in the consumption level and productivity of the businesses, so it will contribute directly to the GDP of the country (Zaccarelli, 2011).
- Lack of awareness: Because of the poor implementation or enforcement of the act various issues arises in India such as people are not aware properly about this act. As per report, almost 80% of the workers in the unorganized sectors earn less than Rs 20 per day or less than half of the amount of minimum wages.
- Inflation: Because of minimum wages act, employer forces to increases their prices of the products to get balance return for their investment.
Minimum wages act, 1948 is being implemented in India for providing minimum wages to the workers and protecting them. There are several benefits of this act such as it helps in boosting the GDP or economic growth of the country, reduce poverty, reduce their cost towards social welfare programs and increase the level of consumption. India also faced many issues such as increases in unemployment rate, inflation rate and unfair determination of minimum wages due to poor implementation and enforcement of the Minimum wages act, 1948. So, India should increase the awareness of the act among workers through various ad Campaign at social media platforms.
Conclusion
Hence, the concept of minimum wages is essential for every country because it will help in increasing the GDP or economic growth of the country. Its main purpose is to protect the individuals from the low amount of remuneration. In India, there is Minimum Wages Act, 1948 applicable and its aim is to provide wages to the every worker for their performance during given period of the time. There is not specific amount mentioned in this act, so it is applicable according to the states. India faced so many issues from such implementation such as increasing unemployment and inflation rates, reduce poverty, improving economic growth etc. If minimum wages is being applied by the country then there will be various benefits by such implementation. It will help in reducing poverty, increasing the consumption level and productivity for the businesses so it will directly contribute to the GDP of the country, job security for the employees, cost control, better utilization of resources, increase incentives for the workers and decreasing the cost of government towards various incentives and subsidiaries which government provide to the poor people for helping them. But it also have some negative impact such as unemployment, increase in inflation level because of increasing in the price of products by the government, increase outsourcing, lack of quality of employees, lack of effectiveness of the companies, may increase corruption, employer does not pay high than minimum wages to the higher skilled workers, decrease efficiency level of workers and increase the cost of investment for the businesses.
References
India’s Minimum Wage Structure: A Brief Explainer. (2017). Retrieved February 28, 2019, from India Briefing: https://www.india-briefing.com/news/india-minimum-wage-a-brief-explainer-15102.html/
Arguments for increasing the minimum wage. (2019). Retrieved February 28, 2019, from Human Resouces: https://www.humanresourcesmba.net/lists/5-arguments-for-increasing-the-minimum-wage/
Minimum Wages. (2019). Retrieved February 28, 2019, from Simpliance: https://www.simpliance.in/minimum-wages
Singapore Minimum Wage. (2019). Retrieved 2 28, 2019, from Minimum-wage.org: https://www.minimum-wage.org/international/singapore
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Ferandez, J., Holman, T., & Pepper, J. (2014). The Impact of Living Wage Ordinances on Urben Crime. Industrial Relations: A Journal of Economic and Society, 53(3), 478-500.
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Hall, R. E. (2009). Inflation: Causes and Effects. Chicago: The University of Chicago Press.
Keller, M., Halkier, B., Wilska, A., & Truninger, M. (2017). Consumtion. London: Routledge.
Marginean, S. (2013). Effects of Raising Minimum Wage: Theory, Evidence and Future Challenges. Procedia Economics and Finanace, 6, 96-102.
Mullen, T. (2018). The Best Argument Against Minimum Wage Laws: You Don’t Own Other People. Retrieved February 28, 2019, from FEE: https://fee.org/articles/the-best-argument-against-minimum-wage-laws-you-dont-own-other-people/
Nadhanael, G. (2019). Recent Trends in Rural Wages: An Analysis of Inflationary Implications. Retrieved February 28, 2019, from Reserve Bank of India: https://rbi.org.in/scripts/bs_viewcontent.aspx?Id=2846
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Patnaik, U. (2009). Neo-liberalism and rural poverty in India. Economic and Political Weekly, 42(30), 3132-3150.
Warren, J., & Hamrock, C. (2019, February 28). The Effect of Human Wage Rates on High School Completion. Social Forces, 88(3), pp. 1379-1392.
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Yah, L. C., & CHEW, R. (2009). Wages And Wages Policies: Tripartism in Singapore. Singapore: World Scientific Publishing Co. Pte. Ltd.
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