Academic journal article Asian Development Review

The Impact of the Minimum Wage on Male and Female Employment and Earnings in India

Academic journal article Asian Development Review

The Impact of the Minimum Wage on Male and Female Employment and Earnings in India

Article excerpt

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The minimum wage is primarily used as a vehicle for lifting the incomes of poor workers, but it can also entail distortionary costs. In a perfectly competitive labor market, an increase in a binding minimum wage causes an unambiguous decline in the demand for labor. Jobs become relatively scarce, some workers who would ordinarily work at a lower market wage are displaced, and other workers see an increase in their wages. Distortionary costs from minimum wages are potentially more severe in developing economies given their large informal sectors. A minimum wage primarily protects workers in the urban formal sector whose earnings already exceed the earnings of workers in the rural and informal sectors by a wide margin. Employment losses in the regulated formal sector translate into more workers seeking jobs in the unregulated informal sector. This shift may result in lower, not higher, wages for poor workers who are engaged predominantly in the informal sector. Even a small increase in the minimum wage can have sizable disemployment effects in developing economies if the legal wage floo is high relative to prevailing wage rates and a large proportion of workers earn the legislated minimum.

To the extent that female workers are relatively concentrated in the informal sector and men in the formal sector, fewer women stand to gain from binding minimum wages in the formal sector. Further, if minimum wages discourage formal sector employment, a disproportionate number of women can experience decreased access to formal sector jobs. For women who remain employed in the formal sector, the minimum wage can help to raise their relative average earnings. Because the female earnings distribution falls to the left of the male earnings distribution in most economies, a policy that raises the legal minimum wage irrespective of gender, if properly enforced, should help to close the male-female earnings gap (Blau and Kahn 1995). Although the gender wage gap in the formal sector shrinks, the wage gain for women can come at the expense of job losses for low-wage female workers. Hence, disemployment effects may be larger for women than men in the formal sector.

Critics of the minimum wage state that employment losses from minimumwage-induced increases in production costs are substantial-Advocates, however, argue that employment losses are small and any reallocation of resources that occurs will result in a welfare-improving outcome through the reduction of poverty and an improvement in productivity. Our study contributes to this debate by analyzing the relationship between the minimum wage and employment and earnings outcomes for men and women in India.

India constitutes an interesting case given its history of restrictive labor market policies that have been blamed for lower output, productivity, investment, and employment (Besley and Burgess 2004). As a federal constitutional republic, India's labor market exhibits substantial variation across its 28 geographical states in terms of the regulatory environment. Labor regulations have historically fallen under the purview of states, a framework that has allowed state governments to enact their own legislation, which includes minimum wage rates that vary by age (child workers, adolescents, and adults); skill level; and detailed job categories.2 Each state sets minimum wage rates for particular occupational categories regardless of whether the jobs are in the formal or informal sector, with the end result that there are more than 1,000 different minimum wage rates across India in any given year. This wide degree of variation and complexity may have hindered compliance relative to a simpler system with a single wage set at the national or state level (Rani et al. 2013, Belser and Rani 2011).

To examine how the minimum wage affects men and women's employment and wages in India, this study uses six waves of household survey data from the National Sample Survey Offic (NSSO) spanning the 1983-2008 period, merged with an extensive and unique database on minimum wage rates over time and across states and industries. …

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