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Re: Minimum wage

    Our basic position is that markets should be allowed to function
let or hindrance. State's duty is to enable the markets to function
effectively not to interfere with them unnecessarily. Often, such
interventions are
counterproductive on the one hand and defeat the objectives of both
effiiciency and equity. Minimum wage legislation is one such avoidable
    The essence of market mechanism is that prices are determined by the
interaction of supply and demand. If conditions in the labour market are
such that employers offer a certain wage rate at which the employee is
willing to work, state has no business to say that it should be something
higher. If it does, the concerned businesses will have to sell their
products at prices
higher than what may be called 'efficiency' prices.
    Moreover, in Third World countries, there may still be some scope for
the choice of labour-intensive techniques. By artificially jacking up the
price of labour, the relative price structure is altered in favour of
    Thus it is wrong in principle in a free market system. To my knowledge
is no dissenting opinion on the this from any economist on theoretical
    Coming to practice, minimum wage legislation discriminates between
sectors to which such legislation applies and other sectors. People,
including unemployed workers and workers engaged in sectors not covered by
the legislation, would have to pay higher prices. This is doubly
    Secondly, there is every possibility of businesses actually paying less
than the minimum wage (so long as there are people willing to work at those
rates) but accounting for expenditure on the basis of minimum wage. This is
the rule rather than the exception in India in sectors and businesses where
workers are not unionised. It is a sure invitation to generate unaccounted
    Thirdly, jobs will shift from the organised sector to the unorganised
sector. This may be a good thing to happen, and may well happen in a
post-industrial society anyway. Minimum wage legislation need not queer the
pitch at the cost of efficiency.
    So the question we should address is not prescribing minimum wage for
those who are already employed but finding employment for as many as
possible. However, since it is not possible to achieve 100% employment in
any economy, a method has to be found for ensuring minmum
to all.
    Friedman suggested the device of 'negative' income tax. There are some
pitfalls in this as U.S. has discovered. Another Nobel laureate Tobin
suggested a 'credit' income tax whereby eveyone gets a uniform refundable
tax credit. This question has been the subject of my research in the
of tax reforms in the U.S. We can go into it further once we dispose of the
question of minmum wage.
    Since there are several interlinkages in public policy, I suggest that
we 'can' (to borrow film-making language) tentative conclusions so that we
do not move to and forth. For example, if the group concludes that there
should be minimum wage legislation, we need to reappraise our basic
on the free market system.


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