Pay and Minimum Wage
What are wages and why are these important?
According to the ILO Convention 95, wages are "remuneration or earnings, however designated or calculated, payable in virtue of a written or unwritten contract of employment by an employer to an employed person for work done or to be done or for services rendered or to be rendered". These wages are to be expressed in terms of money and are fixed by mutual agreement or by national laws or regulations.
Wages are the major focus of collective bargaining between employers and employees. Similarly wages, sometimes, lead to conflict between the two sides. Wages can be a source of deprivation and discrimination especially when non-payment of wages leads to unpleasant results like labour bondage or forced labor. Similarly, non-payment of due wages due wages in time exposes workers to financial problems.
What is Minimum Wage?
According to ILO, minimum wage is the "minimum sum payable to a worker for work performed or services rendered, within a given period, whether calculated on the basis of time or output, which may not be reduced either by individual or collective agreement, which is guaranteed by law and which may be fixed in such a way as to cater to the minimum needs of the worker and his/her family, in the light of national economic and social conditions".
This definition makes two points. First, minimum wage is the minimum amount of money that should be paid to a worker. It is a floor; workers and employers, through collective agreements, can raise the floor but they can't reduce the minimum wage. Second, minimum wage is guaranteed under law. And it is fixed by the government, usually in consultation with employer and employee organizations, in such a way as to cater to the minimum needs of workers and their families in the light of national economic and social conditions. This means that minimum wage is subject to change in response to the so-called national socio-economic conditions.
Why is Minimum Wage an important policy instrument?
According to the ILO, the fundamental objectives of establishing a minimum wage is to” prevent the exploitation of workers at the hands of employers, to promote a fair wage structure (the UN Covenant on Economic, Social and Cultural Rights also calls for fair remuneration), to provide a minimum acceptable standard of living for low-paid workers and eventually alleviate poverty, especially among working families”. Minimum wage is a universal policy instrument and is applicable in 90% of the countries.
Minimum Wage has a small unemployment effect for workers with low skills however, this stands balanced by the positive effect that minimum wage has in raising the incomes of low paid workers and increased consumption which ultimately creates more employment. Minimum wage is also considered a powerful instrument in reducing wage inequality and raising the wages of vulnerable workers including women, youth and non-unionized workers. Similarly, minimum wage is also helpful in reducing poverty as minimum wages in developing countries benefit more the workers, belonging to poor households, by raising their low incomes.
How are Minimum Wages set?
There are two basic mechanisms to set minimum wage in a country. Either the government, after consultation with social partners, sets a statutory minimum wage for the whole country (or region) or it is set through collective bargaining (at sectoral, occupational and national levels). Minimum wage varies in countries on account of age, region, occupation, industry and even job tenure. In most of the developing countries, minimum wage is not applicable to the huge informal sector. While setting the minimum wage, ILO C131 recommends taking into consideration both social factors (needs of workers and their families, cost of living/inflation, social security benefits) and economic factors (creation of employment, productivity, competitiveness etc.). Minimum Wage has not to be set at such a high level that drives firms out of competition or stifles measures for job creation.
What are the factors that determine the impact of minimum wage?
The two most important factors determining the impact of minimum wage are:
- Size of the informal sector
- Enforcement of minimum wage
If size of informal sector is large (in Pakistan, informal sector is around 74% of total economy while in India, it is claimed to be more than 90%), raising the minimum wage will not impact a large number of workers and thus its overall beneficial impact will be limited. Similarly, if government does forcefully impose the minimum wage law (through strict sanctions and penalties), minimum wage will have limited impact on the lives of people.
What does the ILO say about deductions from wages?
In accordance with ILO Convention 95, deductions from wages are permitted, however, under conditions and only to the extent prescribed by national laws or regulations or fixed by collective agreement or arbitration award.
Workers are to be informed about the conditions (leading to deductions) and extent or magnitude of these deductions. However, ILO Recommendation 85 requires that deductions from wages have to be limited in order to safeguard the maintenance of workers and their families. Similarly, deductions from wages on account of loss or damage of goods/products are to be made only if workers are clearly held responsible for damage/loss after a fair probe or inquiry. In this case, workers should also be allowed to present their viewpoint before the competent authority.
- Minimum Wage Fixing Convention, 1970 (No. 131); Protection of Wages Convention, 1949 (No. 95); Protection of Wages Recommendation, 1949 (No. 85)
- The Minimum Wage: Curse Or Cure? (Jan Rutkowski: 2003)
- Global wage report 2008/09: minimum wages and collective bargaining, towards policy coherence, 2008