Economics of Minimum Wage Legislations—Lessons for Emerging Market Economies

Abstract

Philosophical bases for the origin for minimum wage legislation are implicit in the concepts of subsistence and natural wages evolved by classical economists.11 The earlier version of this article was presented in the annual conference organized by The Indian Society of Labour Economics, held at IIT Guwahati in November 2016. The comments given by the participants of the conference have been incorporated. However, conceptualization of the working of market, evolved by microeconomic theory, propounded that minimum wage law distorts working of the labor market. These alternative formulations give impression that this law is politically correct but not based on sound economics. Since the beginning of the process of economic reforms in most of the emerging market economies, some of the scholars, following the strand of thought advocated by microeconomic theory, are arguing for the amendments in minimum wage legislations to make the labor market flexible. In the present article, an attempt has been made to evaluate the appropriateness of this strand of thought with the help of existing theoretical and empirical studies. The evaluation clearly shows that strand of thought based on microeconomic theory is not appropriate. This is because demand of the factor of production in an economy is not based on the price of the factor alone. It also depends on price of substitute factor and the growth rate of the economy. Moreover, minimum wage legislations act as determinant of efficiency wages for the workers employed at the bottom of the job ladders.