The labour laws of the country say that unskilled labour, working 40 hours a week, should be compensated by a minimum wage of Rs 7,000 a month. People, irrespective of what they get hired for, should at the very least be making Rs 7,000 a month.
Although it is not clear how the government of Pakistan has arrived at Rs 7,000 as the minimum wage figure, the usual thought about minimum wage is that it is tied to the idea of a bare minimum. The poverty line in Pakistan is, roughly speaking, around Rs 1,000 per person per month, and the average household size approaches seven persons. So, the minimum wage, again roughly speaking, will allow families to stay at the level of the poverty line. And if another member of the household works even part time, the family could be a little above the poverty line.
It should be clearly understood why minimum wage laws make sense. A lot of people feel that if markets work, and demand and supply determine prices efficiently, there is no need for minimum wage laws. But there is a problem here. Working markets ensure efficiency but they do not ensure a level of income that is needed to keep body and soul together. If there is an over-supply of unskilled labour, the market clearing price of that labour is going to be low. Then it is not ensured that that market clearing wage will be enough for sustaining even a basic standard of living. Pakistan clearly has a large supply of labour and the job situation is poor enough for government to worry about the market clearing wage.
The argument against introducing a minimum wage floor is that it interferes with market clearing and efficiency. It raises the cost for producers (employers) and it also reduces the number of people employed in equilibrium as employers substitute away from labour due to its higher marginal cost. But, in Pakistan, where poverty is pervasive, ensuring at least a minimum standard of living is an important objective perhaps more important than efficiency. If most of the polity was more educated and/or skilled, the minimum floor would not have been as important.
The main problem comes from lack of implementation of the legislation. Even in the formal sector, most factories get round the law in a variety of ways. Some just ignore the law and pay off labour department people, if needed, to ensure they are not pushed for compliance. Some outsource unskilled labour to contractors and evade their responsibility by saying that it is up to the contractors to ensure that all laws are abided by; others play around with the definition of full time to get round the legislation. Since the government has limited means of ensuring compliance, and there is also corruption, the end result usually is non-compliance.
Informal sector is much worse of course. Since there is no enforcement, the labour has no option but to work at whatever wage is available. And in the case of domestic labour the conditions of work are sometimes nearer bondage or slavery conditions.
What is extremely worrying is that though drivers and cooks, in urban areas, cost, on the average, around the minimum wage level or more, the salaries for primary school teachers, especially in rural areas, but even in some urban areas, are much less than the minimum wage. In some areas, primary school teachers are reportedly paid as low as Rs 1,500 per month!
This is clearly a violation of the labour laws. Even if one allows for the fact that teachers work for six hours a day usually in schools, though all teachers put in extra time for grading and preparation usually at home, the wages given would still be below the proportional rate needed for 30-hour weeks.
What does this tell us about the market for teachers? There are clearly a number of females, with at least some education, who are looking for teaching jobs. On the other hand, the demand does not seem to be too strong. Hence the low wage. The low fee private schools are taking advantage of the situation to provide low fee schooling to children from poorer sections of society.
But this is not a good equilibrium. Apart from flouting the wage law, low fee schooling is also low quality schooling and there is no incentive for buyer or seller to change this poor equilibrium. The government is happy because it has given up on public education and this poor education allows them to be off the hook. Private sector makes some money off this education and it looks, due to lower costs, that the private sector education is more efficient compared to the public sector. If private sector was asked to pay the minimum wage too, would the lower cost result still hold? Maybe, but the difference would not be large.
Minimum wage law is the law. In the Pakistani context it needs to be enforced. In most countries teachers market is not considered to be an unskilled market. Due to the poor quality equilibrium allowed by the state here, it has become one and the low fee private sector is taking advantage of the low priority that the state is according education sector issues. This is not going to resolve the education problems, even while it complicates the poverty issue. We clearly need better policies and much better implementation of the minimum wage law.
The writer is an Associate Professor of Economics at LUMS (currently on leave) and a Senior Advisor at Open Society Foundation (OSF). He can be reached at [email protected]
