Getting minimum wages right

With inflation likely to remain in double digits in the ongoing fiscal year, federal and provincial governments are seen jacking up minimum wages when they announce their respective budgets for the next fiscal year. Amidst pressure from labour unions who are demanding living wages instead of minimum wages, and amidst a political pressure to appear more pro-poor than rival parties, the increase in minimum wages may end up a little more than usual. The one thing that might remain constant is the lack of transparency and public debate on the subject.

One of the biggest issues surrounding the subject is that while minimum wages should be linked to various indices like the cost of living index or cost of living of industrial workers, the methodology behind minimum wages in Pakistan is rather arbitrary compared to the practices in peer economies. Nor is it linked to productivity levels or to the differences in cost of living in different regions. For instance, in Sindh, the minimum wages applicable to an industrial establishment in Karachi is equal to that applicable to an industry set up in Khairpur economic zone, when in fact the cost of living for workers is different in both regions.

Second, there seems to be little appreciation of the fact that the setting up of minimum wages ought to be a technocratic process because of the nature of trade-offs involved. For instance, when minimum wages are high, some workers might end up being sacked by the employers who might think it is better to lay off workers instead of raising their level to the minimum wages. Similarly, while a rise in minimum wages may give mileage to political leaders in the short term, little attention is paid to the medium- or long-term risks.

These risks being – companies purchase labour saving machines and boot out workers or they outsource certain business operations to smaller players in the informal sector where amongst other problems, minimum wages are not followed at all. These kinds of trade-offs require serious academic & policy research as well as public deliberation. And both are missing from the discourse on minimum wages in the country.

Another major potential risk is to misconstrue minimum wages as living wages. Living wage is the lowest wage at which the wage earner and his/her family can afford the most basic costs of living. Conflating minimum wage with living wage may be misplaced because when a worker joins the labour market, he/she is not the only bread earner of the family. In that sense, living wages ought to be seen in a family income context, albeit of course, as is the case of trade-offs, this matter too also needs to be researched before arriving at a conclusion.

This is not to make a case against minimum wages. There is no doubt that people ought to have sufficient means of living. And that sufficient means of living should not only include ‘roti, kapra, makan’, but also education, health and other productivity enhancement measures to allow them to break away from the poverty trap and fall into the lap of equal opportunities.

Again, the trouble in measuring sufficient means of living is getting the methodology right, and creating a buy-in for that methodology, since no methodology is going to perfect and free from criticism. But if the level of minimum wage ‘Y’ (that does not provide for sufficient means of living) is lower than the level of living wage ‘X’ (that does provide for sufficient means of living) then the solution is not to increase minimum wage and boot businesses out of business. Instead, the solution is that the state picks up the tab on education, health and so forth. One hopes, reason, not populism, will prevail! And soon.