Economy

Raising Minimum Wages Recognises the Problem, But Doesn’t Solve It

Labour market policies need to be seriously rethought, given the slow rate of job creation and rapid increase in automation.

Representative image. Credit: Asian Development Bank/Flickr CC BY-NC-ND 2.0

Representative image. Credit: Asian Development Bank/Flickr CC BY-NC-ND 2.0

The Delhi government last week announced an almost 50% hike in minimum wages for unskilled, semi-skilled and skilled labourers. The revised monthly wages for these categories will stand at Rs 14,052, Rs 15,471 and Rs 17,033 respectively once the order is put in effect. While the government’s intent of improving the lives of the most impoverished sections of society is well placed, hiking minimum wage may turn out to be ineffective, or rather counter-productive, for achieving its intended outcome.

Critics point towards the flight of industries to bordering states with lower minimum wages such as Rajasthan (151% lower) and Haryana (82% lower). Others point towards the large share of the informal economy, resulting in low coverage and weak enforcement of the law due to a corrupt, and incompetent labour department, resulting in no penalty for employers who don’t abide by minimum wage laws. Another argument given against the move, more universal in nature, is that hiking minimum wages would fundamentally incentivise automation and result in the loss of jobs.

The threat of automation

While most criticisms only highlight the relocation of jobs, insufficient coverage of the policy and the efficacy of the government machinery to enforce a law, it is the threat of automation that should worry people, policymakers and politicians alike. Some experts dismiss these as classic Luddite concerns and argue that new jobs would be created in new unknown industries. What they may forget to say is that these newly created jobs could be fewer than the jobs destroyed and require different and on average higher skill levels, leaving much of the current workforce unemployable.

The ‘Future of Jobs’ report released by the World Economic Forum last year concluded that “current trends could lead to a net employment impact of more than 5.1 million jobs lost to disruptive labour market changes over the period 2015–2020”. A comparison of wages and the cost of automation would govern this transition. But minimum wages don’t actually have to rise to trigger this transition, as the cost of technology is rapidly falling today. This means that jobs to be relocated may be lower to begin with, as automation absorbs a chunk of jobs.

The question around the evolution of jobs is one that politicians and policymakers have been consciously trying to avoid for many years now. It’s not only India that is facing this issue, but the problem is more severe in highly populous countries like India. Unemployment, underemployment and vulnerable employment is a chronic problem prevalent worldwide, but politicians either ignore it at their own peril or tend to wrap it in different clothes. Many countries, such as the US and the UK, are increasingly seeing blame being put on immigrants, globalisation and capitalism, without addressing the real issue at hand.

Need for national and global policies

There is an urgent need for countries to discuss, coordinate and cooperate on the issue of unemployment at global institutions and forums such as the International Labour Organisation, the G-20 and the G-8, amongst others. They need to come together and try to redistribute the fruits of globalisation and advanced technology that is currently concentrated in a few hands. They also need to not engage in beggar-thy-neighbour policies of exporting unemployment, because solutions like hiking minimum wage will need cooperation both among states at a country level and among countries at the global level.

In 2014, the Narendra Modi government came into power on the promise of development and jobs, backed by a euphoric election campaign unlike anything India had seen before. The government is trying hard to spur the job market with policies such as Make in India, Startup India and Skill India. However, only 135,000 jobs were created in the top eight employment-intensive sectors, including IT and textiles, in 2015 – 67% lower than the number of jobs created in the same sectors in 2014, the lowest job growth India has seen in the last six years. This rate of job creation is minuscule compared to the 12 million people entering the workforce every year. Many pundits suggest focusing on quality vocational courses as opposed to the Nehruvian model of IITs and IIMs that can only create jobs for a handful of Indians, flexible hiring and firing (openly opposed by our supposedly market-friendly prime minister in a recent interview), wage subsidies instead of capital subsidies to businesses and so forth. But domestic policies are only an ingredient and not the full recipe for a healthy job market.

Many other forces govern labour markets in today’s highly interconnected world. The world economy has slowed down considerably post the financial crisis, stagnating at the so-called ‘new mediocre’ – low growth for a longer period of time. Excessive capacity has been created in China due to its investment-led model in the last quarter century. This capacity is either operating at low load factors or lying idle. Low cost labour benefits that emerging countries like India and China enjoyed in the last two decades that helped Asia become a services and manufacturing hub are slowly eroding in the face of new technological developments such as artificial intelligence and 3D manufacturing. India’s exports have been steadily decreasing over the few years due to these factors.

But the primary problem still remains the same. Even if the world starts growing faster and China’s excess capacity somehow finds purpose and markets, the share of labour in producing goods and services is on a steady decline worldwide. This means that fewer jobs created will not be enough for an ever-increasing Indian workforce.

With the impoverished sections living on the fringes and having no political voice except casting a vote every five years and an ignorant class of Indian elites, real demand for change is expected to come from the middle classes. A portion of India’s employed middle class is expected to feel the pinch of the changing nature of technology over the next decade. This brewing ob crisis has the potential to put an extraordinary burden on the social and cultural fabric of society in the short to medium term, where skill levels will see a demand and supply mismatch. In the long run, it can have serious and irreversible impact on the growth potential of the Indian economy.

India is already seeing a backlash in the form of the demand for reservation in government jobs from the supposedly dominant castes. For instance, the Patel agitation and the Jat agitation. While reservations have helped in the upward mobility of socially backward communities, it is not a nearly sufficient response to the present and brewing job crisis. The middle class is always considered more fickle in its political loyalties. A broad coalition of lower and upper castes, and lower and middle classes needs to be formed across the country to press our politicians to recognise the real issue at hand and not just pay lip service to the problem.

There are already various public policy options available at our disposal, such as the urgent reskilling of the current workforce, encouraging lifelong learning by making quality education and health accessible and affordable to all, a universal basic income and so on. A universal basic income ensures that governments pay all their citizens a basic income, unconditional of needs or requirements.

Far more progressive changes, such as the meaning of work and employment, need to be rethought. A few countries such as Finland and the Netherlands are already planning to experiment with universal basic income pilots from next year, though at a much smaller scale and speed. While India is at a different developmental stage compared to these countries, it need not and cannot follow the same developmental trajectory that these countries followed. Large-scale surveys and studies need to be commissioned to assess the fiscal feasibility and behavioural change requirements of all these options in the Indian context, while simultaneously communicating the results to the public so that the expectations of the electorate are in line with reality.

There is no panacea for the universal problem of unemployment, underemployment and vulnerable employment. Politicians and policymakers are not expected to know all the answers but a serious recognition of the issue and deliberation on the same will augur well for politicians. As American theologist James Clarke very rightly said, “The difference between a politician and a statesman is that a politician thinks about the next election while the statesman think about the next generation.” It will be interesting to see if there are any real statesmen left in India who don’t resort to populism, pandering and demagoguery.

Manu Aggarwal works for CEEW, a leading Indian think-tank. His views in this article are personal and do not reflect the views and policies of his employer.