Minimum wage compliance and household welfare: An analysis of over 1500 minimum wages in India

Abstract

• We provide a new data set for India with more than 1500 minimum wage regimes by activity. • Noncompliance with the minimum wage is a key feature of the Indian labour market, with rates as high as 90% for some workers. • Minimum wages have a positive effect on wages and consumption, without a corresponding effect on employment. • The beneficial pass-through to wages and consumption is significantly reduced in low compliance regimes. In many developing countries there is a substantial difference between de jure and de facto regulation of minimum wages. We examine the consequences of this by looking at the heterogenous effects of minimum wages across compliance regimes in India. We show that minimum wages have a positive effect on wages, without a corresponding effect on employment. As a result, household consumption increases following increases in the minimum wage. However, the beneficial pass-through to wages and consumption is significantly reduced in low compliance regimes. Labour market reforms can improve workers’ living standards but only if accompanied by effective compliance.