Minimum wage

Also called: Minimum wage legislation · Topic: Markets, Equilibrium and Government Intervention · NCERT: Class 7, Ch 12 "Understanding Markets"; Class 9, Ch 9 "The Price Puzzle: What Drives the Market"; Class 10, Ch 2 "Sectors of the Indian Economy"; Class 12, Ch 5 "Market Equilibrium"

Meaning

A minimum wage is a legal rule that stops employers from paying less than a set wage rate. It is a price floor (a legal lowest price) in the labour market. It has an effect only when it is set above the equilibrium wage (w*). A floor below w* changes nothing.

It matters because it is the main legal tool to protect low-paid and unorganised workers. It also raises a classic exam trade-off: higher pay for workers who keep their jobs, but possible job losses for others.

• Binding condition: w_min > w*
• Unemployment created (competitive model): Excess supply of labour = Labour supplied at w_min − Labour demanded at w_min

Explanation

How wages are set without a minimum wage

• The roles are reversed in the labour market.
• Households supply labour. They sell their time and effort.
• Firms demand labour. They buy work to produce goods.

• NCERT measures labour in hours of work, not in number of workers.

• A competitive firm hires until the last hour pays for itself: w = VMPL = p × MPL

• MPL (marginal product of labour) is the extra output from one more hour of work.
• VMPL (value of marginal product of labour) is the market value of that extra output.

• If VMPL > w, hiring one more hour adds to profit. If VMPL < w, cutting an hour adds to profit.

• Labour demand slopes downward.

• MPL falls as more hours are added, because the machines and land stay fixed.

• So a higher wage means the firm hires fewer hours.

• Market labour supply slopes upward.

• One worker's supply curve can bend backward at high wages, because at that point they prefer more leisure over more income.

• But at higher wages, new workers join the market: students, homemakers, retired people and migrants. So the market curve still slopes upward.

• Equilibrium wage (w*) is the wage at which market demand for labour equals market supply.

What a minimum wage does in the competitive model

• Firms hire fewer hours at w_min.
• The wage is now above w*.

• Firms move up along their demand curve and cut the hours they hire.

• More people want to work at w_min.

• The higher wage pulls in more hours of labour.

• The result is excess supply of labour, which is unemployment.

• Worked example:

	Wage (₹/day)	Labour demanded	Labour supplied
Equilibrium	300	100 lakh labour-days	100 lakh labour-days
Minimum wage	400	80 lakh labour-days	120 lakh labour-days

• Excess supply = 120 − 80 = 40 lakh labour-days of unemployment.
• Workers who keep their jobs gain ₹100 per day.
• Workers who lose their jobs, or cannot find one, lose out.

When a minimum wage can help (beyond NCERT)

• Monopsony (one big employer)
• A monopsony is a market with a single main buyer of labour, such as the only mill or plantation in a small town.
• Workers have nowhere else to go, so the employer can pay them less than their VMPL.

• A well-set minimum wage takes away this power to push wages down. It can raise wages and employment together.

• Efficiency wages

• An efficiency wage is a wage that an employer pays above the market level on purpose.
• Better pay makes workers healthier and more motivated, and they are less likely to quit.

• Productivity rises and turnover (staff leaving) falls, so part of the higher wage pays for itself.

• Fairness (equity)

• A minimum wage reduces working poverty.

• It gives bargaining power to weak, unorganised workers who cannot negotiate their pay on their own.

• NCERT's two approaches

• Class 7 and Class 9 present the minimum wage as protection against unfair practice, so that workers "earn enough for their hard work".
• Class 12 looks at its efficiency cost, which is unemployment.

What decides the level of a minimum wage

• Workers' minimum living standards, such as food and clothing [3][4]
• The skill of the workers and how difficult (arduous) the work is [4]
• Changes in the cost of living, which are tracked through dearness allowance (an extra payment that keeps wages in step with rising prices) [5]

In India

• Old law: Minimum Wages Act, 1948
• It covered only "scheduled employments", meaning jobs named in a list. Workers outside the list had no legal minimum wage.

• The Centre announced a National Floor Level Minimum Wage (NFLMW), but states did not have to follow it.

  • It was raised from ₹100 to ₹115 per day from 1 April 2011 [7].
  • It was raised from ₹137 to ₹160 per day from 1 July 2015 [6].

• Expert Committee on how to fix the National Minimum Wage

• Set up on 17 January 2017 and chaired by Dr Anoop Satpathy of the V.V. Giri National Labour Institute (VVGNLI) [8].

• It gave its report on 14 February 2019 [8].

• New law: Code on Wages, 2019

• Passed by Lok Sabha on 30 July 2019 and by Rajya Sabha on 2 August 2019 [4].
• It merged four laws: the Payment of Wages Act 1936, the Minimum Wages Act 1948, the Payment of Bonus Act 1965 and the Equal Remuneration Act 1976 [4].
• It covers all employees, in both the organised and unorganised sectors. The "scheduled employments" list is gone [3][4].
• The Centre fixes a statutory floor wage. Statutory means it is backed by law and is no longer just advice. No state may fix a minimum wage below it [3][4].
• The floor wage can differ by region. The Centre first consults the Central Advisory Board and the state governments [4].
• Who fixes what: the Centre sets wages for railways, mines and oil fields. States set them for all other employments [4].
• Minimum wages must be revised at least once every five years [4][9].
• Overtime must be paid at at least twice the normal rate [4].
• Deductions from wages cannot be more than 50% of total wages [4].
• Wages and hiring cannot discriminate by gender "for the same work or work of similar nature" [4].

• The penalty is up to 3 months in prison plus a fine of up to ₹1 lakh [4].

• When the law came into force

• All four labour codes came into force on 21 November 2025. Together they replace 29 earlier Central labour Acts [2].

• The Code on Wages (Central) Rules, 2026 were notified on 8 May 2026 [5]:

  • The minimum wage is fixed on a day basis [5].
  • The variable dearness allowance is revised twice a year, before 1 April and 1 October [5].
  • This revision uses CPI-IW (Consumer Price Index for Industrial Workers), which tracks the cost of living of factory and industrial workers [5].
  • A gap in the Rules: the 2025 draft had detailed wage-fixing norms, such as calorie needs and housing cost. The final Rules dropped them and left these to later government orders [5].

• Enforcement is weak in the informal sector.

• Many informal workers have no written contract and no payslip.
• They often work far from any labour inspector.

• So the legal floor often does not reach the workers who need it most.

• International standard: ILO Convention No. 131 (1970)

• It asks countries to set up a system for fixing and revising minimum wages, with special reference to developing countries [10].
• Governments must consult employers and trade unions when fixing these wages [10].
• It does not require one single national minimum wage. Recommendation No. 135 allows either one general wage or separate wages for different groups of workers [11].

Don't confuse with

• Price ceiling: a legal maximum price, which is set below equilibrium and causes a shortage (excess demand). A minimum wage is a floor above equilibrium and causes a surplus of labour (unemployment).
• Floor wage vs minimum wage: the floor wage is the lowest level fixed by the Centre [3][4]. Minimum wages are the actual rates set by the Centre or the states, and they cannot go below the floor wage [3][4].
• NFLMW vs statutory floor wage: the NFLMW under the 1948 Act was advisory only [6][7]. The floor wage under the Code on Wages, 2019 is legally binding [3].
• Monopsony vs monopoly: a monopoly is a single seller of a good. A monopsony is a single buyer, here one big employer. A minimum wage can raise employment only in monopsony, not in the competitive model.

Prelims Hooks

• A minimum wage is a price floor. It works only if set above the equilibrium wage. In the competitive model, it causes excess supply of labour (unemployment).
• Competitive firm's hiring rule: w = VMPL = p × MPL. In general, MRPL = MR × MPL. MRPL equals VMPL only when MR = p (perfect competition).
• Trap: a minimum wage can raise both wages and employment only under monopsony, not in the competitive model.
• The Code on Wages, 2019 replaced 4 Acts: Payment of Wages 1936, Minimum Wages 1948, Payment of Bonus 1965 and Equal Remuneration 1976 [4].
• The Centre fixes the statutory floor wage, and states cannot go below it. Minimum wages are revised at least every 5 years. Overtime is paid at 2× or more of the normal rate [3][4].
• The four labour codes came into force on 21 November 2025, replacing 29 Central labour laws [2]. ILO Convention No. 131 (1970) does not require a single national minimum wage [10][11].

Mains Points

• Efficiency vs equity (GS-III)
• The textbook model predicts that a minimum wage causes job losses.
• But many Indian labour markets are monopsonistic, such as plantations, brick kilns and small-town factories. Workers there have little bargaining power.

• A well-set floor can raise wages without cutting jobs. Efficiency-wage gains and lower working poverty make the case for a floor stronger.

• Cooperative federalism (GS-II)

• The statutory floor wage [3][4] stops states from keeping wages low to attract investment (a "race to the bottom").
• Allowing the floor to vary by region [4] respects differences in living costs.

• Risk: if the floor is set too high, jobs in poorer states may move into the informal sector.

• The implementation gap (GS-III)

• Universal coverage on paper [3] means little without enforcement in the informal sector.
• The 2026 Rules dropped the detailed wage-fixing norms [5], which leaves room for decisions made case by case.
• The Satpathy Committee's evidence-based method (2019) [8] has yet to be put into practice.
• Linked reform: merging 29 laws [2] cuts compliance costs and supports both formalisation (more jobs moving into the formal sector) and ease of doing business.

Read more

• Labour market: wage determination and minimum wages