UBI explained: Is a minimum wage programme better than Universal Basic Income?

This is the second part in a series on the Universal Basic Income. Read part one here:Explained: What is Universal Basic Income?

The 2019 interim budget proposed a form of guaranteed income to a section of farmers under the Kisan Samman Nidhi Scheme as per which farmers who own up to 2 hectares of land would be entitled to Rs 6000 per year in three instalments. The government’s announcement comes on the heels of Congress chief Rahul Gandhi promising a variant of the basic income scheme should his party come to power in the upcoming general elections. With a host of countries employing a universal basic income (UBI) in some form, there is an unprecedented level of interest and enthusiasm in the merits of such schemes.

This begs the question — why can’t we just beef up our existing minimum wages schemes, of which NREGA is a variant, instead of investing time and effort in a completely new concept like UBI?

This is the question we will answer this week by comparing it to existing schemes.

Minimum Wage Act—UBI’s cognate?

A few decades ago, in a post-Independent India, a minimum wage was deemed the ideal solution for achieving socio-economic justice. As a result, the Minimum Wage Act was implemented in 1948. It was designed to immediately uplift the disenfranchised sections of society.

The Minimum Wage Act directs that “The state shall endeavour to secure, by suitable legislation or economic organisation or in any other way, to all workers, agricultural, industrial or otherwise, work, a living wage, conditions of work ensuring a decent standard of life, and full enjoyment of leisure and social and cultural opportunities in particular.” For this purpose, a tripartite committee was constituted, which consisted of representation from employers, employees, and the central government. The objective of this committee was to recommend a framework to fix minimum wages. This also proved to be a guide for successive legislations over the years.

The committee defined three different levels of wages: living wage, fair wage, and minimum wage. Living wage, the highest of the three, covered food, clothing, shelter, education of children, health expenditure, and old age insurance. Fair wage, the second highest included subsistence along with standard wage. It is determined by factoring in national income, productivity, and the industry’s capacity to pay. The objective of the fair wage was to ensure continuation and growth of employment, at a level which is comparable to levels in similar occupations. A minimum wage was defined as one necessary for sustenance of life and some measure of education, meeting medical requirements and for amenities for the preservation of the efficiency of the worker. It is the absolute minimum below which wages should not be set.

One of the major reasons for introduction of minimum wages was to ensure that disenfranchised workers, who did not have sufficient bargaining power, were given the assurance of a minimum wage for a stipulated duration of work. As a result of this, multiple trade and labour unions have sprung up around the country to protect the basic rights of their member workers.

In the recent past, there have been successful instances of unions negotiating hikes in the minimum wages allotted to them. In 2016, Finance Minister Arun Jaitley raised the minimum wages for unskilled non-agricultural workers by 42% to Rs 350 per day. In 2018, the Karnataka government raised the minimum wages of semi-skilled workers by 55%. In the same year, the Supreme Court presided over a dispute between the trade unions and the industrial bodies over a wage hike for unskilled workers, and decided in favour of the unions to present a hike of 37% in minimum wages to the workers.

On most occasions, trade and labour unions organise movements and protests to raise this minimum wage. Despite the unions’ success in negotiating a better minimum wage for the workers, the ensuing strikes and protests lead to a drop in productivity and revenue, thereby leading to contempt and derision among the employers and business owners.

Read more: Explained: What is Universal Basic Income?

NREGA, a continuation of Minimum Wage Act?

In 2005, a new social welfare scheme was launched—the Mahatma Gandhi National Rural Employment Guarantee Act (NREGA). As per the Act, the objective is “to enhance the livelihood security of the poor households in rural areas of the country by providing at least one hundred days of guaranteed employment to every poor household whose adult members volunteer to do unskilled manual labour”.

Under the NREGA scheme, instead of private companies, it is the government that generates work and pays the labourers in accordance with the government-mandated rates. This was always intended to be a demand-driven scheme, wherein workers could demand work against pay. According to the official NREGA dashboard, about 25 crore labourers have been given employment, and about Rs 5 lakh crore have been disbursed since the inception of the scheme. The Indian government attributes immense importance to this scheme, and this can be seen from the budget allocated to it every year: Rs 60,000 crore in 2019, Rs 55,000 crore in 2018, and Rs 55,000 crore in 2017.

Are the Minimum Wage Act, NREGA, and UBI different names for the same thing?

It is a popular misconception that the UBI, NREGA, and Minimum Wages Act are three variants of the same concept. At the end of the day, if we are guaranteeing a minimum income to the recipients, aren’t the schemes essentially the same? Although NREGA can be considered an extension of minimum wages through a loose definition of of the latter, UBI is a fundamentally different concept.

Undoubtedly, the underlying aim of all three schemes is to alleviate poverty. However, their approaches make them fundamentally different.. The Minimum Wage Act ensures that all employed workers get a minimum wage from their employees. This is aimed at ensuring that employers do not exploit their employees. An implicit assumption is that every individual with means and ability to work is engaged in a profession covered under Minimum Wage Act, and the channel that provides remuneration to them is efficient.

The NREGA is an employment guarantee from the government in unskilled jobs in return for a stipulated wage for 100 days. This benefit can only be availed by individuals who demand it from their local governing bodies such as the gram panchayat.

The UBI is a completely different concept wherein the government will transfer a fixed amount to all intended recipients without any prerequisite conditions like employment status and gender. A phased UBI implementation might involve segmentation based on economic standing.

The Minimum Wage Act and NREGA have been prevalent in the country for a few years now. Let’s analyse them now.

Pitfalls of of Minimum Wage Act and NREGA

A 2014 research report published by the NITI Aayog offered a comprehensive analysis of the Minimum Wage Act and NREGA implementation in India. Some of the findings from this report were:

• The Act and the scheme do not alleviate poverty:As a result of de-linking NREGA wages from the minimum wages, in most of the states, the NREGA wages were lower than the prescribed minimum wages, which in turn were lower than the poverty line
• Gender pay gap still exists: In most states, the wages of the unskilled women labourers were less than both the wages of the male unskilled labourers and the prescribed minimum wages.
• NREGA isn’t as effective: Gram Panchayats responsible for job creation were not living upto expectations. A huge number of people are excluded from the scheme because of reports of bribery and corruption.
• Smallest sections of an industry are excluded: The Minimum Wage Act excludes workers who are fewer than 1000 in an industry in a particular state. This has resulted in only 60% coverage. Women working in piece rate jobs or as helpers in own enterprises are also excluded from this Act. Furthermore, the entire self-employed sector is outside of the purview of the Act.
• The wage structure is too complex: A 10-page official document from the Office of the Chief Labour Commissioner illustrates the various rates applicable to different industries based on kind of work required and geographies based on sizes of regions, and is classified into 3 major categories. This complexity has resulted in lack of awareness and inefficient implementation by companies
• Proposed wages are not linked to inflation: Another study shows that the variable dearness allowance, which is a part of the minimum wage and is the variable portion which is revised every two years to account for specific economic and geographic conditions., is not linked to inflation as it should have been. This has pushed multiple recipients of minimum wage under the poverty line.
• Companies are not penalised for non-compliance: An International Labour Organisation report found that India has one of the largest rates of non-compliance when it comes to giving minimum wages. The penalties are not too stringent for companies who do not comply. Often, the enforcing officers are complicit in this wilful non-compliance.
• The machines are coming to take our jobs: An implicit assumption within the Minimum Wage Act and NREGA is that there will always be lakhs of unskilled jobs to give to people. However, a World Bank report debunks this assumption, and stresses on upskilling human capital, or risk the possibility of all unskilled jobs being automated.
• NREGA payments are delayed: As of March 31, 2018, about Rs 67,956 crore were not timely disbursed to their rightful recipients.

Is minimum wage truly an effective solution?

In a system governed by government sanctioned wages and unions, one of the easiest ways for workers to grow is to demand higher wages. Even though an increase in wages may not result in immediate layoffs, it may affect future hires. A study shows that a 10% increase in wages results in a 5% drop in new labour recruitments. Nora Lustig and Darryl McLeod, economists who have studied the developing economies of Latin America extensively, have argued that increasing minimum wages is not the most cost effective way to reduce poverty in developing countries. Increasing minimum wages also encourages employers to replace less-killed workers with more skilled resources, thereby crowding out the disadvantaged. Another important statistic to be considered in a country like India is the large number of women engaged in household work who were not counted as part of the labour force in the 2011 census. A scheme based on employment and recognised labour risks leaving out 49% of Indian women.

How is UBI better than a minimum wage?

• UBI is for all: UBI eliminates the inefficiencies born out of inclusion and exclusion complexities that are prevalent in the Minimum Wage Act coverage. Also, unlike the NREGA, the policy is not demand driven, and hence is not prone to corruption and the whims of the local governing bodies.
• UBI is for individuals and not families: It ensures that larger families with only one breadwinner are not at a disadvantage. Unlike the payouts under Minimum Wage Act or NREGA, UBI ensures a basic payout to all adult members of the family regardless of employment status, gender, and ensures it for the entire year instead of just for 100 days.
• UBI is uniform: One compensation for all recipients reduces the possibility of lack of awareness. Even though one might argue that all sections of society in different states need different basic incomes to guarantee minimum sustenance, it would be counterproductive for UBI as a movement to move towards more complex payout structures. This could very well lead us down the murky tunnel of complexity as in the Minimum Wage Act. At least in the beginning of the roll-out, it would be advisable to start with a simple and uniform structure, and then later fashion a more customised structure in subsequent iterations.
• Cost of UBI is borne by the government: A huge problem and the additional cost of enforcing compliance by employers is eliminated.
• UBI is directly given to the beneficiaries and thus circumvents inefficient distribution channels.

What’s next for UBI?

In a recent report published by former Chief Economic Adviser Arvind Subramanian, a Quasi Universal Basic Rural Income (QUBRI) has been proposed. It proposes the transfer of Rs 1500 per month to about 75% of the rural population. This will comprise about 1.3% of India’s GDP. This can be financed by having QUBRI replace a few “dysfunctional agricultural schemes”

As mentioned last week, UBI is by no means a panacea for all ailments. No country has implemented an economy-wide scheme yet. But even the harshest skeptics have to agree that UBI holds ground over minimum wage schemes in theory and in practice.

Next week, we will look at how UBI can potentially be implemented.

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Aditya Mani is a writing analyst at Qrius