People's Democracy

(Weekly Organ of the Communist Party of India (Marxist)


No. 24

June 16, 2013


Globalisation Widens Inequality in Wage Pattern: ILO Study


Sukomal Sen


IT was predicted by many bourgeois economists not very long ago that globalisation, the growth of international trade and capital flows, would reduce inequalities in the developing countries. The standard trade theory predicted that a fall in trade barriers would trigger massive exports of goods that used a large number of relatively low skill workers, the most abundant production factor in developing countries. Hence, it was expected that in these countries, globalisation would raise the demand for, and wages of, relatively low skill workers, and thereby reduce wage inequalities. The plausibility of this prediction was reinforced by the earlier experiences of some countries and territories, notably the Republic of Korea, Singapore and Taiwan (China), which had succeeded in reducing inequalities while undergoing trade reforms in the 1960s and 1970s.              




However, the story of globalisation in the 1980s and 1990s has been quite different. Reviews of the relevant literature show that all existing measures about inequality in developing countries point to an overall increase in inequality over the last three decades, which in some cases was quite severe. In fact, with the notable exception of Latin America in recent years, almost all developing countries seem to have experienced an increase in the skills premium during this period. What explains this apparent paradox? One possibility is that the entry of giant countries such as China and India into the global marketplace has put downward pressure on the prices of labour intensive products everywhere across the world, hence reducing the wages of previously protected low skilled workers. It has also been observed that the sectors and industries that experienced the largest tariff cuts in developing countries were often those with the highest shares of less educated workers and the lowest wages to start with. In Colombia and Mexico, for example, it was found that after trade liberalisation, wages in the low wage industries declined most, hence increasing inequality.


The minimum wage is another key labour market institution. It means setting a wage floor applicable to wage earners, ensuring that they receive a minimum level of pay protection. Therefore, it mostly affects the low end of the wage distribution, whereas the other wage-setting institutions (such as trade unions and collective bargaining) affect the whole distribution. Although most countries in the world have some form of minimum wage, the characteristics of minimum wage schemes vary across nations, making the elaboration of comparable data sets on minimum wages a difficult task. Minimum wage fixing procedures (including government legislation, collective bargaining), the coverage rate, eligibility and other operational details all change from country to country. There can also be different minima, according to hourly, daily, weekly or monthly time frames. Outside the single minimum wage, reduced or sub-minimum rates for specific group of workers, such as young people, can also be set.




A study by the International Labour Organisation (ILO) --- Perspectives on Labour Economics for Development --- shows that workers being part of a trade union in India considerably reduces the probability of low pay for both salaried and casual workers. For salaried workers, the probability of low pay for otherwise similar workers falls by 25 per cent in urban areas and by 14 per cent in rural areas. This means that, for workers, being part of a union is the third largest determinant for escaping low pay, next to the education and sex variables. Interestingly, being part of a union or an association that defends the interests of workers is also an important factor in the wages of casual workers, reducing the probability of low pay by 16 per cent in urban areas and 11.5 per cent in rural areas. In spite of the challenges, public employment guarantee schemes in India such as possibly by Nehru Rozgar Guarantee Scheme may have contributed to raising the effectiveness of minimum wages.


The overall collective bargaining coverage in India remains relatively limited, with an estimated 24.9 million unionised workers in 2002, representing a union density of 6.3 per cent. While many of the same problems related to frag­mented trade unionism in other countries in the region also apply to India, the case of West Bengal, where an estimated five million workers are unionised, is interesting. One important reason for the relatively high collective bargaining coverage in West Bengal is linked to the increasing inclusion of unorganised sector workers into the ambit of industry-wide collective bargaining. So, for example, many small units in the sponge iron industry, cold storage enter­prises and hosiery workers have been covered as a result of government facilitating the signing of agreements in industries hitherto uncovered by collective agreements during the rule of Left Front government. At the same time, it is also recognised that the economic impact of the trade union movement in India is not without its problems and that trade unions should perhaps operate a paradigm shift from "political unionism" to a tradition of services based trade unionism, more suitable for developing industrial relations. (What ILO terms as political unionism is actually meaningless).


Another important area of wage policy relates to the design of minimum wages in India. Through the adoption of the Minimum Wages Act in 1948, India became one of the first developing countries to introduce a minimum wage policy. The system, however, is one of the most complicated in the world, where state governments fix different minimum wage rates payable to different employees in a limited number of sectors and occupations (the so-called "scheduled employments") where collec­tive bargaining is absent and where workers are seen as being vulnerable to unduly low wages and exploitation. The result is a complex system with no less than 1,171 different minimum wage rates but in which many million workers remain uncovered because they do not work in any of the "scheduled employments."


The ILO estimated that partial coverage together with non-compli­ance have resulted in a situation where 73 to 76 million salaried and casual work­ers, out of a total of about 175 million, were being paid below the statutory minimum wages, This calls for a rethinking of the way minimum wages in India are fixed and implemented, moving in the direction of a simpler system with better implementa­tion and broader coverage.


Certain key statistics, however, such as the ratio of the minimum wage to the average wage, are often used to capture the effects of minimum wages on employment or on the distribution of earnings in different countries. In developing countries, given the limited collective bargaining coverage and the challenges the trade unions face to organise low paid workers, the minimum wage scheme can play an important role in protecting the purchasing power of low paid workers. Moreover, it is often used as a reference for other worker benefits and by informal workers and employers (the lighthouse effect, which refers to the minimum wage used as a reference point for settling wages even in the informal sector).


The main objective of the minimum wage is to improve the welfare of low wage earners. Whether the wage actually achieves its intended purpose is another issue that has been the subject of great controversy for several years, says the ILO.




The following section begins with elements of cross-country comparisons, and then describes the main theoretical predictions of the effects of minimum wages; Finally, the main empirical findings are presented. A large number of studies, both theoretical and empirical, have examined the effects of the minimum wage. Theory provides unambiguous predictions only in relation to a competitive labour market. Empirical evidence provides mixed results, depending on the country, the level of the minimum wage, the existence of a single or several minimum wages, the methods of analysis and the economic model used. Thus, empirical evidence may actually show contradictory findings.


Unemployment compensation can be provided by insurance or assistance schemes. In most European and OECD countries (except, Australia and New Zealand), un­employed people receive unemployment benefits through unemployment insurance (UI) schemes that provide at least partial income replacement, maintain a certain standard of living and provide workers with the means to search for a suitable job during the transition period. Such unemployment benefits are typically funded by contributory schemes and offer compensation related to the previous earnings of the beneficiary after a qualifying period, mostly for a limited period of time.


The income support provided by the unemployment benefit schemes can play an important role in cushioning the social impacts of an economic recession and serve as an important automatic stabiliser during a showdown. In addition, public unemployment assistance systems exist in a number of countries (especially in high income nations) but play only a residual role in closing the relatively small coverage gaps. These are usually not based on prior earnings but are flat rate non-contributory cash transfers to those who are still unemployed, either once their entitlements to unemployment benefits have expired, or when they have never been entitled. Income support to the long-term unemployed and their families is often taken over by general means-tested social as­sistance schemes.


The absence of unemployment insurance or other statutory income support pro­grammes for the unemployed in most low and middle-income countries has often made mandated severance payments the only available protection in the event of job loss and has led to higher employment protection legislation, at least de jure protection for those workers in the formal economy. However, while both sever­ance payments and unemployment insurance do provide income compensation to job losers, they arc different instruments with different approaches: unemployment insurance schemes arc worker-oriented (e.g. linked to the individual status of being unemployed), while severance payment schemes arc rather job-oriented (e.g. linked to the specificity of job matches and the value of seniority). Moreover, differences also exist related to their financing and the level of security provided. Severance pay is based on employers’ liability, while unemployment insurance is financed from pooled contributions paid by workers and employers. The latter does not entail any additional financial pressure on ailing enterprises (unlike severance payments, which in practice are often not delivered to workers) and tends to provide protection also for workers with shorter periods of job tenure and lower wage levels. Moreover, severance pay is a lump sum, while unemployment insurance provides periodical benefits, usually for a prescribed duration. Finally, severance pay tends to be more strongly related to the wage level and job tenure in a specific enterprise than unemployment benefits, which affects the level of protection and labour mobility.

Unemployment insurance systems exist, however, in Brazil, China, the Russian Federation, South Africa and Turkey.




So several countries, typically the Central and South American ones, have introduced hybrid systems to combine these two approaches: various reforms took place in that region during the 2000s to allow individual savings accounts or experience-rated unemployment insurance, which combines layoff taxes paid by firms (a form of employment protection with collective unemployment insurance (for example in Chile from 2002 to 2005 and in the Bolivarian Republic of Venezuela from 2002 to 2005). These private schemes often provide complementary support, such as the Chilean unemployment insurance system which combines the individual capitalisation accounts (unemployment insurance savings accounts, UISA), from which the contributions accumulated by the worker are paid out on Job separation) with a subsidised solidarity fund for those dismissed for economic reasons (to which the employer and the state contribute). Again, it is important to highlight the fact that the UISA, UI and severance pay are not alternative forms of income support and that each instrument has its own features and limits. UISA schemes are based on mandatory individual savings. They are usually marred with extremely low take-up, both for workers and employers, even for those workers in the informal economy with relatively good contributory capacities, and more so for those with low contributory capacities and those who face disadvantages in the labour market (often women and various vulnerable groups). Further challenges linked to private individualised savings options relate to possible regressive effects, low coverage and high administrative costs.


Within the labour market package, the unemployment benefit schemes (contributory and non-contributory) aim at maintaining income levels after losing a job, providing insur­ance to maintain consumption levels and time to search for a new job. They are part of the labour market regulations that have been argued to drive cross-country differences in labour market outcomes (in particular unemployment patterns). As previously indicated, unemployment compensation systems vary quite dramatically between countries and features with respect to the level of unemployment benefits, their duration and the conditions of eligibility, which may impact both firms' decisions to hire and fire workers in response to changing economic circumstances and employees' decisions to stay or leave their current Jobs. According to theoretical arguments, unemployment benefit schemes provide good income protection to formal sector workers and can help reduce poverty. However, they also suffer from two potential shortcomings: they leave out informal sector workers and can create moral hazard that increases work disincentives and Imposes efficiency costs.


The lesson we may draw from the ILO study is that trade union struggle is the biggest determinant for achieving minimum wage as well as unemployment benefits in the era of neo-liberal globalisation where the capitalist governments would not resort to any labour welfare scheme out of their own volition, as maximisation of profit is the aim of world capitalism.