How minimum wages may be hurting vulnerable workers and costing jobs

Minimum wage framework, designed to protect low-income workers, may be inadvertently harming the very group it aims to support, according to a new report by the Foundation for Economic Development (FED). The analysis, backed by global research and India-specific data, argues that high statutory wage floors are reducing employment opportunities, particularly for low-skilled workers, and distorting the labour market.

At the core of the report’s findings is a structural mismatch between mandated wages and actual earning capacity. Using Periodic Labour Force Survey (PLFS) 2023–24 data, the report highlights that nearly 64% of India’s workforce earns below the legal minimum wage, indicating that the floor is set above prevailing market wages.

More strikingly, the report estimates that around 47–50% of workers cannot be legally hired even after a 30% wage increase, effectively pricing a large segment of the workforce out of formal employment.

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High wage floors, fewer jobs

The report draws on decades of economic research to argue that minimum wages, when set too high, reduce employment opportunities. Employers, faced with higher labour costs, often adjust in ways that limit hiring—especially for entry-level and low-productivity workers.

These adjustments include reducing headcount, automating tasks, relocating operations, or shifting to informal employment arrangements. Of the multiple responses available to firms, only one—raising wages—directly benefits workers, while most others reduce job availability or quality.

This dynamic disproportionately affects the most vulnerable workers, including first-time job seekers and those without formal skills. The report notes that for many, the inability to accept lower entry-level wages prevents them from gaining initial work experience, trapping them in low-paying informal jobs.

India an outlier globally

The analysis also positions India as an outlier in terms of wage policy. The minimum wage is estimated to be 1.7 times the median earnings of casual workers, compared to just 0.26–0.60 times in developed economies such as the US, UK, and Japan.

Relative to economic output, India’s minimum wage is also significantly higher than that of its export competitors. At roughly 77% of per capita GDP, it exceeds the ~50% benchmark seen in countries like China, Vietnam, and Bangladesh.

This has direct implications for competitiveness. The report estimates an annual export shortfall of $60 billion in labour-intensive sectors, as firms struggle to compete globally due to elevated labour costs.

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Informality 

One of the most critical consequences highlighted is the persistence of informality. Nearly 88–90% of India’s workforce remains informal, lacking contracts, social security, or legal protections.

High minimum wages contribute to this by pushing firms away from formal hiring. In states where wage floors are set high relative to economic output, formal employment is significantly lower.

The report also links wage rigidities to India’s slower structural transformation. Over three decades, India has shifted a smaller share of its workforce out of agriculture compared to peers like China. Labour-intensive sectors—such as textiles, footwear, and apparel—that typically absorb low-skilled workers have grown more slowly than capital-intensive industries.

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Policy recommendations

To address these challenges, the report calls for a shift in approach. It recommends allowing greater wage flexibility through negotiated pay, enabling workers and employers to agree on wages that reflect productivity.

As an alternative to raising wage floors, the report suggests wage subsidies, where the government supplements worker incomes without increasing hiring costs for firms. It also advocates for region-specific wage policies, warning that a uniform national floor could disadvantage poorer states by making them less competitive for investment.

A broader policy dilemma

The findings present a complex policy trade-off. While minimum wages aim to ensure fair pay, setting them significantly above market levels may limit job creation and push workers into informal, less secure employment.

As India adds 8-10 million workers to its labour force each year, the report underscores the urgency of aligning wage policy with economic realities. The central message is clear: improving worker outcomes may depend less on mandating higher wages and more on enabling access to jobs — especially at the entry level.