Labor Market Minimum wage is the price floor imposed by the government for the welfare of labor. Price floor is the legal minimum on the price at which a good can be sold. It is an attempt by the government to maintain prices at other than equilibrium levels. When a government imposes a price floor, there will be two cases. One the price floor is not binding if the price floor is maintained below equilibrium price level. In this case, the market forces naturally move the economy to the equilibrium level and the price floor has no effect.
In other case when price floor is above equilibrium level, such price floor is binding. In this case the market price equals price floor as government imposes such control on prices for the welfare of labors. At this point the quantity supplied exceeds the quantity demanded which results in surplus of labor i. e. unemployment. Since the supply is high some seller are unable to sell all they want at the market price. The sellers who appeals to personal biases of the buyer, perhaps due to racial or family ties, are better able to sell their goods than those who do not.
By contrast, in a free market, the price serves as the rationing mechanism, and sellers can sell all they want at the equilibrium price. The impact of minimum wage rate depends on the skill and experience of workers. Highly experienced and skilled workers are not affected because their equilibrium wages are above the minimum wages. Thus, the minimum wage raises the income of workers who have jobs but lowers the income of workers who cannot find jobs. A labor market with a binding minimum wage: 1 MINIMUM WAGE PRICE FLOOR EQUILIBRIUM WAGE SURPLUS LABOR SUPPLY LABOR DEMAND QUANTITY SUPPLIED QUANTITY DEMANDE D QUANTITY OF LABORS.
WAGE Minimum wage in context of Nepal: Minimum wages dictate the lowest price for labor that any employer may pay. Wages of workers are considered a principal cause of industrial disputes in Nepal. The prevalence of a low wage rate has aggravated the extent of economic exploitation of employees. An assessment has reflected that employers themselves are retaining a greater part of profits and benefits and only a small part to others sectors including social securities and labor welfare activities. Wages and benefits are not compatible with increasing productivity and overall economic development of the country.
So, to ensure workers a minimally adequate standard of living, the Minimum Wage Determination Committee has set the minimum wage rate for formal sector accordingly. Nepalese labor market is subjected to the forces of supply and demand. Workers determine the supply of labor, and firms determine the demand. If the government does not intervene, the wages normally adjust to balance labor supply and labor demand. If government fixes the minimum wage rate above the market equilibrium level, the quantity of labor supplied exceeds the quantity demanded. The result is unemployment. In Nepal the minimum wage was Rs.
6200 in 2011 which is not relevant due to the fast changing socio-economic realities. This is the reason trade unions negotiating on behalf of employees are demanding that minimum wages should be doubled to Rs. 12400. They have an argument that prices of everything from vegetables to school fees and house rent are continuously rising and particularly in Kathmandu, an expensive city, even a monthly wage of Rs. 12400 for is far from enough for comfortable life.
Some others have been asking for Rs. 15000 minimum salary claiming that it is insufficient to survive in towns and its suburbs with the present salary and wage structure. Considering the view of the need of employees as well as the condition of employees the Wage Fixation Committee fixed the minimum wage of workers at Rs. 8000 on 27th May 2013. According to the report published on Nepal Gazettee, the Minimum Wage Determination Committee has set the minimum salary of Rs. 8000 – a basic salary of Rs. 5100 a month and dearness allowance of Rs. 2900 and daily wage rate of Rs. 318 has been fixed.
The minimum monthly salary has increased by 29 percent and daily wages has increased by 37. 66%. (The Himalayan Times, 2013) 2 Nepalese Labor Market with a binding minimum wage Comparison between three years of minimum wage rate from 2009 to 2013 Year 2009 2011 2013 Basic Salary 3050 3550 5100 Dearness Allowance 1550 2650 2900 Total minimum salary 4500 6200 8000 Daily Wages 190 231 318 According to law, the minimum salary and wages have to be increased every two years. So, the wage fixation committee sets the minimum wage rate in every two years. From the table we can know that the minimum wage rate is in increasing trend due to several socio-economic realities like inflation. The total minimum salary has increased from Rs.
4500 to Rs. 6200 i. e. by 9. 78% from year 2009 to 2011 and the total minimum salary has increased from Rs. 6200 to Rs. 8000 i. e. by 29% from year 2011 to 2013. Similarly, daily wages has increased from Rs. 190 to Rs. 231 i. e. by 21. 58% from year 2009 to 2011 and the daily wage has increased from Rs. 231 to Rs. 318 i. e. by 37. 66 % from year 2011 to 2013. The percentage change in monthly salary and daily wage is given below: Year 2009-2011 2011-2013 Monthly salary 9. 78% 29% Daily wages 21. 58% 37. 66% The sole reason behind such increasing trend of minimum wage rate is the inflation i.e. decreases in the value of money.
Due to the decrease in purchasing power of money, 3 This diagram shows that in Nepal the minimum wage rate determined by the Wage Fixation Committee in 2013 is Rs 8000 including basic monthly salary of Rs. 5100 and dearness allowance of Rs. 1900. This minimum wage is the example of control on prices through price floor to promote the welfare of employees and to ensure a minimum standard of living. The minimum wage is above the equilibrium wage so that the price floor can be binding. If minimum wage is below the equilibrium wage, price floor is not binding.
In this diagram, we can see that quantity supplied of labors exceed the quantity demanded of labors resulting in surplus of labors i. e. unemployment. The minimum wage views the policy as one of the way to raise the income of the working poor. They correctly point out that workers who earn the minimum wage can afford only a meager standard of living. Many advocates of the minimum wage admit that it has some adverse effects, including unemployment, but they believe that these effects are small and that, all things considered, a higher minimum wage makes the poor better off .
UNEMPLOYMENT QQs QD MINIMUM WAGE RS. 8000 EQUILIBRIUM WAGE NUMBER OF LABORS WAGE employees have not been able to maintain a minimum standard of living with fixed minimum wage rate. So, to ensure the employees with minimum standard of living, the wage committee sets the different wage in every two years considering the socio-economic factors. Consumer Price Index and its relation with minimum wage rate: Consumer Price Index (CPI) measures changes in the price level of a market basket of goods and services purchased by households.
Developed countries like United States uses this index for determining wage rate. So, let’s see the consumer price index (CPI) of Nepal to find whether the wage rate is determined on the basis of CPI. Annual National Consumer Price Index Base: 2005/2006=100 4 By comparing the Consumer Price Index and Minimum Wage from 2009 to 2013, we can say that the minimum wages has increased over the years but the real wage has decreased every year due to the increase in the rate of inflation which can be explained through consumer price index as it describes the change in quantity/ basket of goods a person can buy with his income.
Though wages has increased over time, they have always been short of meeting the inflation rates. In real terms of wage of Nepali workers has declined from several past years . Consequently, labor productivity did not increase as of expectation thereby directly affecting the economic development of the country. SOURCE: CENTRAL BUREAU OF STATISTICS Group/Sub-groups Weight (Percent ) Percentage Change 2008/200 9 2009/201 0 2010/2011 2011/2012 2012/201 3 Overall index 100 12. 6 9. 6 9. 6 8. 3 9. 9 Food and Beverage 46. 82 17. 3 15. 1 14. 6 7. 7 9. 6 Non-food items 53. 18 8. 9 4. 9 5. 4 9. 0 10. 0 Highest minimum wage in South Asia:
The minimum wage in Nepal as agreed by the employers and trade unionists in May 2013 is the highest in South Asia. Though Nepal’s minimum wage was highest in South Asia in 2011, it had dropped to third after Sri Lanka and the state of Uttar Pradesh in India raised theirs above Nepal’s. The average minimum monthly salary of India at US $47 still was lower than that of Nepal. Entrepreneurs believe that the problem of scarcity of workers in Nepal will decrease after the salary hike. According to Pashupati Murarka, Vice President of the Federation of Nepalese Chambers of Commerce and Industry (FNCCI), the flight of
workforce will be stopped as the daily wage has been increased along with the minimum monthly salary. Entrepreneurs have also claimed that the Indian workers can be attracted as the minimum daily wage has been increased from Rs. 230 to Rs. 318. Minimum Monthly Salary in Year 2013 Country In US $ Nepal 90 Sri Lanka 77 Bangladesh 38 Pakistan 70 Uttar Pradesh (India) 88 Bihar (India) 70 5 Conclusion: The government has declared the minimum wage but it is difficult to implement because of anti-worker and anti-union mentality .
On the part of the government, there is no system of implementation and mechanism for monitoring the progress. From the very beginning, disputes have emerged with respect to the implementation of the wages particularly in the formal sector. Wage issues have now become the most important agenda in the industrial relations in the country. If the government and employers do not take this matter seriously and if they fail to implement corrective measures, the workers will go frustrated resulting in industrial unrests and other adverse effects in productivity. Over time and again minimum wage has increased.
For long, the minimum wages earned by workers fell far below the amount needed to satisfy the family subsistence. But after unionization of labor, positive developments occurred in terms of real wages. However, only the fixation of wages cannot maintain healthy industrial relations. Regular monitoring of the implementation of the wages is very important. In the case of Nepal, this aspect is fully absent. Workers in enterprises or sectors where union is absent or weak are still compelled to work for a wage that is insufficient to earn a living. It is recommended that the minimum wage is fixed for workers taking into consideration the existing inflation rate.
Employers have been asking for a scientific method for salary and wage hike based on annual inflation rate published by the central bank that will end confusion and help employers concentrate on business expansion rather than having to fear every two years that employees might go on strike. The government’s move to automatically revise minimum salary and wage every two years from the beginning of the new fiscal year will give political parties little room for bickering in the industrial sector and disturb the business environment..