Wage a war against informality

6 May, 2016
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Column: India faces a ‘formal job emergency’. 100% of net jobs since 1991 have been informal

Raising wages by rigging minimum wages is like treating obesity by mandating small sizes

India faces a formal job emergency; 100% of net jobs since 1991 have been informal. Informal jobs usually don’t pay the skill wage premium because they are in small enterprises that are not productive. But they are not generally productive because they are not formal; they do not have access to credit, talent or technology. The only way to solve a chicken- and-egg problem is to become a vegetarian, i.e., do something different. But the recent proposal to specify a national minimum wage at Rs 10,000 for all contract labour independent of location, skill, age, industry, and function will murder our demographic dividend.

India is one of the few countries in the world that does not differentiate between the wages and benefits of permanent and contract staff. This rightly recognises that 21st century employment has migrated from the lifetime employment of the 20th century to a taxicab relationship that is short and intimate, but fixed. Our primary issue is not contract versus permanent but formal versus informal. Informal employment is the slavery of the 21st century and must be eradicated, but raising minimum wage far ahead of productivity or legislating a single national minimum wage for the country is like treating obesity by mandating small sizes. The most successful minimum wage programme in human history has been China’s transition of 350 million people, since 1978, out of agriculture and has been accomplished by massive, formal job creation where demand outstrips supply. The proposed Rs 10,000 national minimum wage is wrong for five reasons:

Does not recognise diversity: There is no such thing as India’s labour market and our states have very different levels of infrastructure, productivity, clustering, skills, urbanisation and costs of living. Kerala has now 9.5% Biharis since they exported the same amount to the Middle East; don’t export and import labour markets have different dynamics? India is a continent and the notion that one size of minimum wages will fit all is delusional.

Will supercharge informality: Ninety percent of India works informally because of various reasons but one of them is unreasonable labour laws. Wages are not paid by shareholders but customers and any attempt to raise minimum wages far ahead of productivity will raise informality. It is important to recognise that the stereotype of the Indian enterprise is wrong; when talking about employers most people think big companies, but India’s 63 million enterprises only translate to 17,000 companies with a paid up capital of more than R10 crores. Most enterprises in India do not have an office (12 million), most work from home (12 million), very few have tax registrations (8.5 million) and even fewer are limited liability companies (1 million).

Will punish youth: Global research studies suggest that artificially legislated minimum wages mostly punish the less skilled and young. Given that 10 lakh kids will be joining the labour force every month for 20 years, shouldn’t we facilitate rather than hinder their labour market entry? A national minimum wage will ensure that our demographic dividend becomes a demographic disaster.

Will retard Make-in-India: Only 11% of India works in manufacturing (the same as post-industrial US). The Make-in-India programme has wonderful goals to accelerate our farm to non-farm transition, but India does not face the same global manufacturing opportunity that China had in 1978 and will have to work harder. A rigged minimum wage will amplify and encourage capital substitution of labour.

Counter to co-operative federalism: This government has wonderfully decided to decentralise funds, functions and functionaries to the state governments recognising that India cannot be run from Delhi. Today of the 1,724 minimum wage categories for permanent employees, 1,679 are set by the state governments. Why take away this power of chief ministers for 29% of the labour force (the amount of our labour force in contract employment)? Twenty nine chief ministers matter more for job creation than 1 prime minister because labour markets are local and we should not undermine their powers.

Contract jobs are jobs for the 21st century; most jobs of this century will have a fixed start and end date. They are particularly attractive to first time time job seekers who are forced into informality as nobody wants to hire a fresher in a country where only 4% of our youth have had any kind of formal vocational training or skill training before joining the workforce. Contract jobs act as a stepping stone—50% of formal contract employees go onto permanent jobs within a year—by giving young people a chance to showcase their skills and learn on the job.

Minimum wage legislation is very important for a modern labour market. But minimum wage setting must be done transparently, consistently and carefully with an algorithm that is influenced by productivity, industry, skills, location and much else. And the notion that there must be different minimum wages for permanent and contract work does not recognise that India’s problem is not tenure but informality. Albert Einstein once said “Make things as simple as possible, not simpler”. A rigged national minimum wage is simplistic. More importantly, it is dangerous.

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Rituparna Chakraborty, Executive Vice President, TeamLease Services Limited

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