Consequences of the new Minimum Wage law

Just recently, Prime Minister KP Oli announced that the minimum wage will be set to Rs. 15,000 per month from mid-July of the coming fiscal year 2021/22. Currently, the minimum wage is Rs. 13,400 which was set in 2018/19. Similarly, the daily wage of laborers has also been increased to Rs 577 from Rs 361. Likewise, the per hour wage for workers has been increased from Rs 48 to Rs 77. 

Now, to talk about the implications of the new minimum wage, most economists tend to have a negative consensus towards Minimum wage for causing artificial unemployment and inefficiency in the economy. Minimum wage is a popular example of Unintended Consequences. The minimum wage is targeted to improve the standard of living of the low-wage workers who are usually low-skilled. However, employers will instead be forced to lay off the low-skilled workers due to the increased cost of employing them. Employers will hire efficient high-skilled workers in place of the low-skilled workers. Thus, instead of benefitting the low-skilled workers with an increased pay, minimum wage forces them into unemployment. Additionally, there are also concerns related to inflation which can arise due to a rise in purchasing power with an increase in pay, which ultimately offsets the benefit that a minimum wage is supposed to beget. 

On the other spectrum, there are recent empirical findings from reputed research institutes in the USA that suggest that there is no statistically significant loss of employment caused by an increase in the minimum wage. Additionally. they found a significant increase in pay among the workers of the low wage industry. The limitation of the study however is that they have only focused on one low-wage industry and neglected others. The researchers argue that even if there are negative effects on employment on other industries, the low-wage community will overall gain from an increase in pay. This could be due to the expenditure multiplier effect and as well as positive externalities in a wealthier community, that produce an overall net positive effect on society. There is also another explanation that the federal minimum wage of $7.25 hasn’t caught up with inflation, which has remained unchanged since 2009. Therefore, the increasing minimum wage will have a positive effect till a certain threshold. 

The response to the minimum wage has been mixed. Accordingly, the concerned parties have spoken out and their responses naturally reflect their self-interest. The private sector is dissatisfied with the rise in the minimum wage. Due to the pandemic, there has been a prohibition order in place in most of the districts throughout the country. Thus, they argue that enterprises and businesses cannot afford to pay the wage. On the other hand, the Trade Union argues that the reform in the minimum wage is according to the labor law which requires that the minimum wage must be updated every two years. Moreover, they are concerned that the minimum wage is still low compared to inflation. Regarding the pandemic, they say that the enterprises have been reaping enough benefit from the government, which makes the rise in minimum wage justifiable. 

Overall, to give a verdict on this matter is a difficult thing. Due to the lack of data and research as well as a large informal sector in Nepal, it is hard to decide what the implications of the new minimum wage will be. If the increase in minimum wage doesn’t harm any sector then it is indeed a good thing, as shown by recent empirical findings. Society as a whole could benefit if there is a significant increase in the pay of workers. However, it is also debatable whether the empirical findings are applicable in the context of Nepal or anywhere else in the world. Further research is needed on the relationship between minimum wage, inflation, and unemployment, to give a more concrete conclusion for our economy.

Most likely, given the current scenario of the pandemic, the minimum wage will do more harm than good. Increasing the Minimum wage will most likely not only induce further unemployment but will also deter and impede the recovery of the already crippled economy. It is tough to imagine sectors like the hospitality sector having to pay more to their employees when most of them were even already struggling to carry their day-to-day operations before the prohibition order. We are still not sure how long the second wave will last and even more unsure when the pandemic will be brought under control. Therefore, the decision to increase the minimum wage is almost certainly a bad one. 

 

Saujan Khapung

Saujan Khapung works as an intern at Samriddhi Foundation. He has an undergraduate degree in Economics from Kathmandu University.

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