India’s minimum wage policy backfires, hurting vulnerable workers: Study

A sweeping policy report released by the Foundation for Economic Development (FED) argues that India’s minimum wage regime has become counterproductive, pricing millions of workers out of formal employment and costing the economy an estimated $60 billion in unrealised low-skill exports annually.

Titled “Minimum wages hurt the most vulnerable workers,” the report draws on Periodic Labour Force Survey (PLFS) 2023-24 data, global academic research, and cross-country comparisons to conclude that India’s legally mandated wage floors are set so high that they inflict the greatest harm on the very people they aim to protect.

According to the report, 64% of all workers across India’s 14 most populous states earn below the statutory minimum wage, with state-level figures ranging from 40% to 79%. Even more strikingly, the report finds that for 47% of India’s workers, hiring them at a 30% raise over their current earnings would still be illegal under existing minimum wage laws.

“This mismatch between the mandated minimum wage and on-ground economic reality forces many firms to operate informally,” the report states.

Interstate Comparisons: Richer States Are Not Spared

The report offers several revealing comparisons between India’s larger and richer states, showing that even economically advanced regions face distortions from high minimum wages.

- Formal employment gap: In Tamil Nadu, Telangana and Karnataka — three of India’s wealthier states — roughly a third of workers are in formal employment. But the report notes a counterintuitive pattern: “Where the minimum wage is set high relative to what the state’s economy can support, the formal sector is thinnest.” In Jharkhand and Uttar Pradesh, formal employment is barely one in eight. The states with the highest relative floors — including some richer ones — have the fewest formal jobs.

- Karnataka vs. Tamil Nadu — a striking border contrast: The report dedicates a full case study to the two southern economies. Karnataka’s minimum wage is already 7% higher than Tamil Nadu’s. But a proposed hike in Karnataka would raise the monthly floor to ₹20,000. “At that level, hiring a worker in Karnataka would cost 52% more than hiring the same worker in Tamil Nadu,” the report warns. It cites the example of a precision-tooling owner near Bengaluru who now plans to relocate his 200 formal jobs across the border.

- Where the floor is highest, median wages are lowest: In a cross-state analysis, the report finds that states which set their minimum wage well above per-capita income are the same states where the median worker earns the least. “The states on the right of the plot — Uttar Pradesh, Jharkhand, Odisha, Madhya Pradesh — have some of the lowest median wages. The floor is not lifting them; if anything, it is holding them back.”

- Manufacturing employment shrinks with higher relative floors: The data shows that states with higher minimum wages relative to their per-capita GDP tend to have smaller manufacturing workforces. While the relationship is weaker than for informality, the report notes that Uttar Pradesh, Jharkhand and Madhya Pradesh again cluster in the low-employment tail.

India’s Minimum Wage Is an International Outlier

The report highlights several benchmarks that position India’s wage floor as unusually high relative to productivity and income:

- India’s minimum wage stands at 169% of what the median casual worker earns. By comparison, the U.S. minimum wage is 26% of its median, while Japan, Canada, and the UK range between 46–59%.

- At 77% of monthly per-capita GDP, India’s floor is 54% higher than the average among major export competitors such as Vietnam and Bangladesh, where minimum wages sit at roughly 50% of per-capita GDP.

- Across 14 states, the minimum wage runs 1.3 to 2.2 times higher than the government’s own NREGA safety-net wage.

The $60 Billion Export Gap

The report warns that high minimum wages are directly undermining India’s export competitiveness. Citing research by Chatterjee & Subramanian (2020), it notes that India and China each hold roughly 20% of the world’s low-skill labour — yet China captures 42% of global low-skill exports while India claims just 7%.

“India’s export share sits 14 points below what its labour endowment would predict — roughly $60 billion in unrealised exports every year,” the report calculates.

This shortfall translates directly into lost jobs. The report estimates that India’s informal workforce stands at approximately 88% — a figure higher than Vietnam, Thailand, Bangladesh, and Mexico.

The report draws a sharp contrast between India’s and China’s economic trajectories. In the first 30 years of reform, China shifted 32 percentage points of its workforce out of agriculture. India managed only 19 percentage points — a 40% slower transition.

Data from the Annual Survey of Industries (2013-14 to 2023-24) shows that labour-intensive sectors such as footwear, leather, and apparel grew at just 7–9% annually, while capital-intensive sectors like auto components and metal parts expanded at 13–14% — roughly 1.7 times faster.

Case Studies: Workers Caught in the Gap

The report illustrates its argument with hypothetical but representative case studies drawn from average wage data.

Laxmi, a construction worker earning ₹9,000 per month without contract or benefits, could have been hired at ₹12,000 — a 33% raise — by a prospective t-shirt exporter. But the legal minimum wage of ₹13,500 made the unit unviable. The factory opened in Dhaka instead.

Raju, a 19-year-old migrant from Odisha to Surat, found every textile unit unwilling to train him from scratch. “He had been willing to work for less while he learned. The law did not allow it,” the report says. After two months without a job, he returned home.

Rekha, a home-based garment worker in Varanasi earning ₹6,000 monthly in cash, has no contract, provident fund, or legal recognition. Her contractor abandoned formal registration after a labour inspector’s calculation made the unit unviable.

Sunita, a former shoe-assembly worker in Agra, lost her formal job when her factory closed — unable to compete with informal operators or Bangladesh-based manufacturers. She now sells vegetables from a handcart, earning less than half her previous income.

The report presents a conceptual framework arguing that when minimum wages exceed worker productivity, employers have nine realistic options: layoffs, automation, shutdowns, exit from labour-intensive sectors, relocation (domestic or overseas), upskilling requirements, operating informally, reducing non-wage benefits, or — the sole beneficial response — paying the higher wage.

“Far from preventing exploitation, the floor creates the very conditions it claims to prevent,” the report concludes.

Recommendations

The Foundation for Economic Development offers three policy alternatives:

1. Free negotiation — Allow workers and employers to freely negotiate wages, even starting below the current floor, while retaining formal employment protections.

2. Wage subsidies — Replace further minimum wage hikes with government-funded per-worker subsidies.

3. Regional floors — Allow any national floor wage to reflect regional economic realities, noting that “the interior of Uttar Pradesh is very different from the outskirts of Bangalore.”

With India adding 8–10 million new workers to its labour force each year, the report frames the issue as urgent. “India will do far more for its workers by making it easier to create jobs than by continuing to mandate ‘protections’ that hinder job creation.”