The wage debate in India usually starts with one idea—raise the minimum wage and incomes will improve. But a recent report by the Foundation for Economic Development suggests the problem may not be that simple.The report, released in April, argues that minimum wages could actually end up hurting the very workers they are meant to protect. Around 64% of workers currently earn below the legal minimum wage. That is not just a compliance issue. It suggests that the wage floor itself is out of sync with what much of the economy can support.
“Rigorous research repeatedly establishes that minimum wage reduces employment opportunities, especially for the least-skilled workers. In India, we have compounded this effect by setting the legal floor well above where the average worker can be employed,” the report argues.
This is where the debate around raising minimum wages starts to miss the point. The assumption is that higher mandated wages will translate into higher incomes. But in practice, firms don’t always respond by paying more. Instead, they adjust in ways that protect their costs.That could mean hiring fewer workers, choosing only more skilled employees, cutting back on expansion, investing in automation, or shifting some operations to lower-cost locations.Some may move more activity off the books or rely more on contract labour. In extreme cases, businesses may shut down altogether. In other words, a wage hike doesn’t lead to just one outcome, and many of these responses can end up limiting job opportunities, especially for lower-skilled workers.
This also helps explain why nearly 88% of India’s workforce remains outside the formal system, where wage rules have limited reach.The impact is also visible in how jobs are created. Sectors that typically absorb large numbers of workers, such as textiles, leather, and footwear, have not grown as fast as they could. India has a large labour force, but it is not fully translating into jobs in these segments.The report estimates a shortfall of about $60 billion in labour-intensive exports each year. That gap reflects missed opportunities to create jobs at scale.As Manish Sabharwal of TeamLease Services pointed out to CNBC-TV18, “India has a wage problem because we have low productivity sectors and employers and low skilled people… 45% of our labour force working on farms means that wages cannot go up,” he noted, adding that only 11% works in manufacturing.The report reinforces this gap. In its first 30 years of reform, China shifted 32 percentage points of its workforce out of agriculture, while India shifted just 19 percentage points.This is why focusing only on minimum wages may not solve the problem.India adds millions of workers every year. In trying to protect these workers, the current approach can end up working against them. When the minimum wage is set too high, it can shut the most vulnerable workers out of formal jobs altogether.The real choice is between a wage floor that sounds good on paper and one that actually helps people get a foothold in the formal economy.
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