Impact of minimum wages on wages and employment in selected Indian States

This paper attempts to gauge the impact of minimum wages on wages and employment in selected States and industries in the Indian context using the NSSO Periodic Labour Force Surveys 2017-18 and 2018-19.

The purpose of minimum wages is to protect workers against unduly low pay. Minimum wages should be set considering economic and social elements, aligned to the Minimum Wage Fixing Convention, 1970 (No. 131). However, once minimum wages are fixed, it is crucial to monitor its impact on the economy, particularly employment.

The ILO minimum wage guide emphasises the need of monitoring the effects of minimum wages as a critical element of an evidence-based process. It highlights that different and credible methodologies should ensure that biases in choosing methods do not drive conclusions. Therefore, it is essential to use available data and empirical approaches to monitor the effects of minimum wage policy.

This paper provides an overview of the minimum wage framework in India and the recent legal reforms. And it attempts to estimate the effects of minimum wages on wages and employment in selected states and five industries. To assess the impact, it focuses on low-skilled workers, individuals from Periodic Labour Survey PLFS who are unskilled or semi-skilled, according to the National Classification of Occupation (NCO).

It uses the NSSO PLFS 2017-18 and 2018-19 to provide a descriptive analysis of the minimum wage compliance in different sectors in selected states in India. It uses economic regressions to estimate if there has been an impact on wages and employment. It adapts an econometric model using a two-way fixed-effect model and a border discontinuity design model to capture the effects of minimum wages on wages and working hours. The latter model introduces local area or regional controls in the regression design, controlling heterogeneity and policy discontinuities present in different states. The results in both models provide evidence that minimum wage impacts are both positive on wages and employment in the Indian context.