Implementation Gaps in Minimum Wages: Comparison of Eight Asian Countries.

AuthorVarkkey, Biju


A well-defined and effectively implemented Minimum Wage (MW) system in a country guarantees not only a decent standard of living for the workers but also protects those with low skills since they are often subject to abuse and exploitation (Jones, 1997; Melo et al., 2012). To reduce wage inequality and poverty, MW acts as one of the most effective tools, especially in developing countries (Alaniz, Gindling & Terrell, 2011; ILO, 2016). Also, disturbances in the labor market equilibriums are adjusted by setting appropriate levels of MWs. (Varkkey, 2015; Varkkey , Korde & Singh, 2016; Heckman & Pages, 2000; Alaniz, Gindling & Terrell, 2011). However, in the recent past, many Asian countries are showing signs of struggles in ensuring proper implementation of MWs to protect worker rights. (Asian Post, 2018). Additionally, administration of MWs such as irregular adjustment of MW rates and ineffective implementation and compliance are problems. (ILO, 1990; Varkkey, 2015). Hence, many Asian countries are a subject of debate and face several criticisms for their complicated structures on political, social and legal fronts.

Much of the academic literature on MW focuses on the employment effects of MW (Rani, 2017; Lemos, 2009), the impact of MW on the profitability of a firm (Draca, Machin & Reenen, 2011), the effect of MW on wage distribution (Neumark, Schweitzer & Wascher, 2004), the role of MW in a welfare state (Dolado, Felgueroso & Jimeno, 2000), and the impact of MWs on health (Horn, Maclean & Strain, 2016). These studies emphasize the immense potential of MW as a policy tool to reward work and improve income for low-skilled and low-wage workers. However, documentation and evaluation of MW policy of different countries, including implementation strategies, have been largely ignored.

The primary objective of this paper is to address this research gap and, thus, contribute to the on-going debate on the implementation issues at country-level. For this study, eight countries namely; Bangladesh, Cambodia, China, India, Indonesia, Pakistan, Sri Lanka and Vietnam are considered. The motivation to consider these countries for the study is that informal workers dominate the labor market in these countries. Moreover, each of these countries has different MW legal frameworks and implementation strategies like procedures, coverage, subsequent adjustments and operation and enforcement.

Background of MW Adoption

To gain insights into MW adoption systems existing in Asian countries, one needs to distil the learnings of the past two decades of formulating and revising relevant policies. For instance, Benassi (2011) after identifying and evaluating various MW implementation schemes emphasized that though the issue of MW implementation is debated at both academic and political levels, documentation of issues faced in implementation and compliance are ignored. Similarly, Rani et al. (2013) used household and labor force survey data of 10 developing countries and highlighted the gaps in MW coverage and compliance. The authors also observe that compliance of MW is better in countries with national MW floor than in those which have an occupation or industry-specific MW systems. Ra (2014), on similar lines, highlighted MW trends and issues in major Southeast Asian countries. Through a model based on microeconomic variables, the study concluded that implementation of MW regulations is highly influenced by political and non-economic factors. Some other studies like Gaski (2004) and Waldman, (2009) have looked at the issues of MW legitimacy from a social justice and civil rights perspective. Many MW debates, from a policy perspective, have raged on for the past two decades; but they have all primarily focused on the macroeconomic effects. None has investigated the effective implementation of MW regulations. Varkkey (2015) noted that despite the existence of institutional mechanisms to ensure wage payments in India, implementation of MW act is challenging because of its highly complex structure.

Implementation & Enforcement

Bangladesh: In the case of Bangladesh, the literature on the implementation and enforcement of MW policy is scarce. Most studies (Blanch & Amirul, 2013; Mahmud & Kabeer, 2003) have focused on the effect of MW on the workers in the garment sector. The first wage board to determine MW was set up in 1958, followed by the enactment of Minimum Wage Ordinance in 1961 (Chowdhury, 2006). However, at present, the Bangladesh Labor Act, 2006 ensures MW for workers. Under the Act, the government's 'Minimum Wage Board' declares minimum rates of wages for workers. These rates are revised every five years as per government directives. In terms of coverage, around 45 sectors are currently covered by sectoral MW, and in the process, leaving behind large sections of industrial workers, who are a part of an informal economy and form the largest workforce in the country (BILS, 2015).

Cambodia: A study by the Economic Institute of Cambodia (2009) notes that there is no official mechanism for setting MW; labor law guarantees it. The study also observes that the substantive requirements for establishing a mechanism for setting MW are complicated and, therefore, the Cambodia government could not establish an official MW setting mechanism. Moreover, MW policy covers only the garment and footwear sector (Nguyen, 2017).

China: In contrast to Cambodia, MWs in China are set through a decentralized collective bargaining process at the company level and, to a limited extent, at an industry level (1) (Hu, 2015). In terms of coverage, the MW regulation passed in 2004 extends coverage to employees of state-owned enterprises, private enterprises, private non-enterprise units, self-employed businesses, and also to migrant workers. Moreover, in contrast to MW policies in other developing countries, a unique feature of the revised MW regulation (passed in 2004) is that it provides two types of MW rates: monthly and hourly, applied to full-time and part-time workers (Fang & Lin, 2013). For better enforcement, violation penalties were increased substantially from 20-100 % to 100-500% in the new MW regulation (Wang & Gunderson, 2012).

India: For India, the literature on implementation and enforcement of MW policy is very scarce and inconclusive. Varkkey (2015) along with Varkkey, Korde, and Singh (2016) found that the Minimum Wage Act, 1948, empowered the government to fix MW for 'schedule employment' (2) based on collective bargaining. Interestingly, collective bargaining was applicable only in the formal sector, whereby its importance has decreased in recent times because of resistance from both employers and governments. The MW Act covers permanent employees, contract employees, and casual workers both in the organized and unorganized sectors. Surprisingly, in contrast to China, the criteria for fixing of MWs in India differ from those of ILO (which are considered by most developing countries for fixing MW). The recommendation of two principal sources, i.e. a) Committee on Fair Wages, 1949 and b) 15th Indian Labor Conference, 1957, are considered as criteria for determining MW (Upadhyaya, 2012). To ensure better compliance, the Act empowers the government to set up administrative machinery in each state to check violations by employers. The Act provides for penalties, which include imprisonment of up to six months and / or a fine of up to rupees five hundred (Hoda & Rai, 2017). Despite such enforcement mechanisms, some studies (Deshingkar, 2009; Rani & Belser, 2012; Srija, 2014) have found several drawbacks in the enforcement of the Act in India. A notable step is taken by Government of India for labor law reforms is introducing the Code on Wages Bill, 2019 which will improve the compliance and remove the complexities in wage rates without compromising social security of workers (Sharma, 2019)

Indonesia: Very few studies were found in the context of implementation and enforcement of MW policy in Indonesia since most research (Comola & Mello, 2011) focuses on the impact of MW legislation on employment. Recently, the exercise of MW setting has invited much social conflict between trade unions and government, as the existing labor law does not protect and help trade unions. Moreover, it does not allow trade unions to bargain for the rights of the workers, hindering thereby the process of collective bargaining (Tjandra & Klaveren, 2015). Evidence on the enforcement mechanism for MW policy in Indonesia is mixed. For instance, Manning (1998) and Rama (2001) found a positive impact of labor inspections on compliance of MW laws. Allen (2016), on the other hand, found ineffectiveness owing to limited labor inspection, supposedly due to resource constraints; this hurt compliance of MW laws. Santoso and Hassan (2014) found both negative and positive effects of labor inspections on compliance of MW laws.

Pakistan: Minimum Wage Ordinance for West Pakistan, 1961 outlines the basic framework of MW setting in Pakistan. (ILO, 2016). The ordinance covers all classes of workers employed only in specific industrial undertakings; it excludes, for instance, employees of federal and provincial governments, coal mines, and agrarian workers. Research on the status of collective bargaining in Pakistan is minimal, possibly because of the lack of availability of data on collective bargaining procedures (Ali, Hisam & Javed, 2015; ILO, 2016). It is therefore not surprising that the only report which looks at labor standards in the garment supply chain in Pakistan finds that collective bargaining exists only at the factory level, that too on a limited scale (CW International, 2016). The existence of a large informal economy in Pakistan weakens the MW enforcement mechanism. Ali, Hisam, and Javed (2015) find that the legal complexity, pro-capital lobby and poor governance in Pakistan have weakened enforcement mechanisms, like the...

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