Minimum Wages in the Time of Globalization

Early June is the time the workers in Pakistan hope for some respite in managing their meager household budgets and look forward to a raise in minimum wage announced with the annual budget of the country. The minimum wage for unskilled workers currently in Punjab, Sindh and Khyber Pakhtunkhwa is Rs10,000 per month, while in Balochistan it is Rs9,000.

With the current family size of 6.8 and 1.5 earning members per family in Pakistan, a monthly income of Rs10,000 translates into Rs73.52 (less than one dollar) per person per day in the household. The picture gets gloomier when we look at the national average monthly wages reported in Pakistan Labour Force Survey 2012-2013 — 20pc workers earn up to Rs5,000 and 41.73pc make an income between Rs5,000 to Rs10,000. With a 9pc inflation rate, minimum wages in real terms amount to even less.

The data indicates the real wages in Pakistan have been declining since the last several years, shrinking the purchasing power of wage earners and swelling the numbers of the poor. So, does minimum wage help workers to ward off growing in-work poverty? Yes it does help. Minimum wage, indexed to inflation, is now considered as an effective tool to help ensure decent living standards for vulnerable households.

The debate on minimum wage gathered momentum in the wake of globalisation and has come full force after the 2009 financial crisis. Financial globalisation has led labour income share to fall far behind capital income share (the profit share) in most countries, leading to gross inequality in income distribution not just in developed economies but in developing countries. A decrease in labour share impacts household consumption.

 

In the countries hit by the 2009 crisis, minimum wage is being vigorously used as a social protection tool for vulnerable workers. Brazil has successfully used minimum wage since the last many years as an effective policy tool to stimulate domestic consumption and it opted for a 12pc (6pc in real terms) raise in minimum wage based on the rate of inflation and GDP growth in February 2009 as a response to a crisis.

The US increased its minimum wage in July 2009 and now a bill is in Congress that recommends a minimum wage indexed to inflation. In the UK, the biggest percentage increase in the minimum wage since 2008 will take effect from Oct 1, 2014. Meanwhile, the Labour Party in its 2015 election campaign has promised a statutory minimum wage linked to average earnings if it comes to power. Germany is introducing a universal minimum wage setting system from January 2015.

Minimum wage setting system is in place in most countries though the system varies in several aspects (periodicity, adjustment to inflation, applicability, compliance) and policy objectives. The opponents of minimum wage argue that it impacts employment adversely: higher minimum wage hurts business and leads to unemployment. The debate is tilting in favour of the proponents who believe minimum wage helps workers in their struggle for a decent living; does not affect employment; reduces turnover and improves productivity.

Though Pakistan has a statutory wage-fixing system in place, it lacks efficiency, efficacy, compliance, clear policy objectives and policy coordination. Pakistan has not ratified any of the three ILO Conventions related to minimum wages — Minimum Wage-Fixing Machinery Convention No. 26; Minimum-Wage-Fixing Machinery (Agriculture) Convention No. 99; and Minimum Wage Fixing Convention No. 131.

The ILO conventions require the minimum wage-fixing machinery to have the capacity to determine and periodically review and adjust minimum wage rates; have force of law; respect the freedom of collective bargaining and ensure full consultation with representative organisations of employers and workers.

After the 18th Amendment and devolution of labour, the federal government does not have the mandate to determine the minimum wage. The provincial governments now regulate minimum rates of wages for all classes of workers (‘skilled, unskilled, intellectual, technical, clerical, manual or other work including domestic’) under the Pakistan Minimum Wages Ordinance 1961. The legislation excludes the employees of provincial governments, coal mines and agriculture.

Under this law, specially constituted tripartite provincial minimum wage boards recommend (to respective governments) the minimum rates of wages (for time work, piece work, overtime work and paid holidays) in specified industries. The law stipulates a monthly wage with ‘revisions done not earlier than one year and not later than three years’.

But the status of the wage boards is only advisory and the boards are not authorised to recommend minimum wages on their own initiative. Neither are they empowered to enforce the wages. The process of minimum wage-fixing (ie, selection of the members of wage boards, publicity of rates, penalties for false records, appointment of inspectors) — is marred by poor governance.

The appointment of the wage board chairman is often based on political expediency rather than the criteria spelled out in the law, ie adequate knowledge of industrial labour and economic conditions. The three board members (one representative of the employers, one of the workers and one independent) are similarly nominated.

It is time the provincial governments remove lacunae and complexities in the existing minimum wage-setting system and carry out amendments in the 1961 Ordinance through tripartite consultation. The conditions for minimum wage indexing to inflation and regular annual revisions must be made statutory and applicability extended to agricultural workers.

Published in Dawn under the title ‘Livelihood Crisis’ on 2nd June 2014: http://www.dawn.com/news/1110083/livelihood-crisis

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