Since there’s news about India considering replacing the ‘minimum’ wage with a ‘living’ wage, we thought we’d dive into these concepts in today’s Finshots.
The Story
In 1776, Scottish economist Adam Smith published his seminal book Wealth of Nations. If the title wasn’t obvious enough, the central thesis of the book was about how countries can accumulate more wealth through productive means. And he also wrote about labour, saying:
“A man must always live by his work, and his wages must at least be sufficient to maintain him. They must even upon most occasions be somewhat more; otherwise it would be impossible for him to bring up a family, and the race of such workmen could not last beyond the first generation.”
Simply put, if a person didn’t get paid a fair wage that helped them live a full life, it would affect the very growth of the availability of labour in the country. Just think about it, If people didn’t have enough money, they wouldn’t be able to raise children and eventually, the human race would collapse.
Okay, that’s a bit extreme. But the concept of people being paid enough to help them carry forward their genes and live a comfortable life is what you’d call a ‘living wage’. Maybe it’s about having access to nutritious food. Or providing a good education for their children. Maybe it’s about having something left over for treating sickness and for old age. Even something as basic as being able to afford rent in the area where they work. That’s all part of it.
As one article put it, “Living wage is the minimum income standard that draws a very fine line between financial independence and the need to seek out public assistance..”.
Now you and I know that companies don’t really care about all this. They only care about their profits. So they’d prefer to pay employees only in line with the perceived labour contribution. For instance, if a worker contributes ₹10 in extra revenue each day, the company would only prefer to keep them on the payroll if they could pay them less than that.
How much less?
Well, as much as they could stretch it, of course. And when some countries realized that leaving this completely in the hands of companies could be a bit problematic, the governments stepped in. They introduced a form of the bare minimum wage that companies are mandated to pay. They believed this would at least guarantee a basic level of income. And they called it the ‘minimum’ wage.
Take the US for example which instituted such a policy in 1938 in the aftermath of the Great Depression. The government felt that creating a minimum standard of living would stabilise the economy. And it probably did. For many years, the minimum wage also kept rising to keep up with inflation.
But over time, it became a joke. The purchasing power of the minimum wage reached its peak in 1968. And since then it has declined. This means that these employees are actually being paid less with each passing year.
Now what you should note here is that the US minimum wage mandated at the central or federal level stands at $7.25 an hour and it was last increased in 2009. But, many fast food and retail chains pay more than this already. Not because they really want to but because they have no other alternative because the demand for labour is high and supply is tight.
Even so, the pay is nowhere close to a ‘living’ wage. For instance, for a single person living in the capital city of Washington D.C., they’d need close to $20.50 to meet the basic necessities. And if you add on the cost of raising one child, that nearly doubles.
That’s the sort of wage Adam Smith had proposed way back in the 18th century.
But the question is how many companies pay such a wage?
Hardly.
And sure, you could argue that forcing companies to pay a minimum wage would lead to some adverse effects. Companies would find ways of automating stuff or using tech to replace these workers to keep their profits churning. So a higher minimum wage would actually lead to unemployment.
But many economists have shown that doesn’t hold true in real life. Countries in Europe which have increased their minimum wages haven’t suffered from unemployment issues as a result.
In fact, many businesses such as McDonald’s and Ikea which have increased their minimum wage payout have said that the higher morale of employees has actually translated into better business outcomes for them.
So yeah, there goes that argument out of the window.
And maybe those results are nudging the conversation in the right direction. Because 250 years after Adam Smith, people are finally talking in earnest about a living wage.
A few days ago, the International Labour Organization (ILO) finally reached an agreement on this issue. They highlight that these fair wages are necessary for economic development and even for reducing poverty and inequality. And that countries should progress from minimum wage to living wage.
Maybe that’s what got India thinking about it too. Because just yesterday, the Economic Times reported that India is seriously considering replacing the minimum wage in the country with a living wage. To put things into perspective here, India’s minimum wage is ₹176 a day. But it hasn’t been increased since 2017. To make things worse, it’s not even a legal requirement so states can do as they please.
So yeah, it definitely looks like we’re moving in the right direction. And if employers finally open up their purse strings a little, it could even reduce the subsidy burden on the government. Instead, the government could redirect it towards other development activities.
But will the idea even work?
Guess we’ll have to wait and see.
PS: You know what’s the most ironic thing about all this? Adam Smith is considered the father of modern capitalism. But if you didn’t know that, you’d have labelled him a firebrand socialist for advocating for a living wage.
Until then…don't forget to share this story on WhatsApp, LinkedIn, and X.
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