Minimum Wage – The Bare Essentials

Published in Dawn, March 21st, 2021

No aspect of labour economy is as divisive and as controversial as minimum wage. On one side are economists and employers who think minimum wage creates distortion in the labour market, leads to unemployment and lowers productivity. Add to this the anti-poor section who thinks the poor are lazy, illiterate and deserve low wages! On the other side are sociologists, political economists, pro-poor policymakers who think all human beings have a right to a decent living and thus need a wage floor to put their feet on the ground so as not to fall into the abyss of poverty.

Debate on minimum wage has intensified in the 21st century since the American economists challenged the classical view and presented empirical evidence that minimum wage increases do not have adverse effect on employment in Myth and Measurement: The New Economics of the Minimum Wage in 1995. Factors which impact productivity are workers’ education and skills and technology. However, these topics, worthy of greater debate in Pakistan, do not receive as much attention or ignite sentiments as does minimum wage.

Despite the Covid-19 pandemic, which has hit hardest the lower-tier workers, minimum wage increases are resisted on the ground that the industry cannot afford a wage raise now. If you do a little calculation you find the current minimum wage in Pakistan (Rs17,500 per month) translates for an average household with a family size of 6.4 and 1.9 earning members, in to Rs173, or $1.11, per person per day, grossly insufficient to meet the basic needs — food, clothing, shelter, schooling, healthcare — of family members. The Sindh government proposed to increase the minimum wage to Rs19,200 in December 2020. This 20 per cent increase means the household would get Rs190, or $1.22, per person per day. A pittance of an increase, you would say. Yet, the Sindh business lobby has rejected this raise.

The key function of minimum wage regulation is to ensure protection against unduly low pay to vulnerable workers who are not in a position to bargain. Minimum wage setting takes place either through state legislation or collective bargaining within the enterprises, or a combination of the two. In Pakistan, wage fixing works through provincial tripartite wage boards. If the system is refined and effectively implemented, periodic minimum wage increases — calculated on the basis of fair criteria that include cost of living and inflationary trends — can benefit disadvantaged workers and help reverse the trend of declining real wages for low-wage workers.

Minimum wage fixing system evolved rather late in Pakistan compared to other South Asian countries (ie Sri Lanka 1941; Burma 1945; India 1948). In Bangladesh (then East Pakistan) the Minimum Wage Board was established in 1959. In India, the state governments fixed respective minimum wages under the 1948 law until it was replaced recently with Code of Wages Act 2019 which unifies four laws related to wages and sets up the national minimum wage floor (currently IR 4,576 per month). The wage prescribed is less than half of the figure recommended by a high-powered labour ministry panel. In Bangladesh, the minimum wage is 8,000 taka since 2018 when it was raised after five years from 5,300 taka (51 per cent increase) as a result of prolonged protests by workers who wanted it to be doubled (16,000 taka). It is complicated to compare minimum wages between the three countries as the factors involved are manifold, complex (ie GDP growth, labour productivity, labour force participation, monopsony power) and vary in each country.

The Pakistan Minimum Wages Ordinance 1961 was the first legislation to regulate minimum wages. After the 18th Amendment in 2010, the Sindh Minimum Wages Act 2015 and the Punjab Minimum Wages Act 2019 were enacted. The old law is applicable in Balochistan, Khyber Pakhtunkhwa and Islamabad. Provincial laws have retained gaps. No criteria are set for minimum wage fixing and its revision. Also, law remains exclusionary: it does not apply to certain categories such as agriculture workers. The Board is not authorised to recommend minimum wages on its own initiative. The discretion to set minimum wages rests entirely with the provincial government.

Enforcement of minimum wage legislation — despite clear rules (ie, for selection of a wage board, publicity of rates, penalties for false records, appointment of inspectors) — is poor. Reasons are many and the foremost is a crumbling labour inspection system. Political interference in state institutions is an area of concern. Informality of the economy is another hindrance. According to a 2016 State Bank research, 47.6 per cent of firms in the informal sector pay workers below the minimum wage. In the formal sector, 17.5 per cent firms pay below the minimum wage. Compliance can be improved through effective design of minimum wage policies, strengthening of labour inspectorate, formalisation of the informal sector, and tripartite consultation between expert state officials and genuine representation of employers’ and workers’ organisations.

View this article on Dawn’s website.

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