GDP, minimum wage and reality – some numbers

While working at US, I always noticed those mandatory notices about federal minimum wage. $5.15 an hour. $42 a day. Around $10100 an year. Compare that to the estimated GDP per capita of US – $42000. That is around 4 times the minimum wage.

Though I don’t see any minimum wage notices in my office here, I read around that minimum wage in India is Rs 54 a day, around Rs 13000 an year. Compare that to per capita GDP of $3400 ~ Rs 150000 an year. That is around 12 times the minimum wage. [I picked up PPP (Purchasing Power Parity) based data from here.]

Perhaps the gap – 4x vs 12x – is in line with huge rich poor divide we see in India.

Then I wondered if I am exploiting the domestic help we employ. We pay her Rs 1200 a month. That would be Rs 40 a day, assuming all 30 days. And she spends around 2 hours each day. Effectively, we pay her Rs 20 an hour. Compare this with the recommended minimum wage of Rs 7 an hour. I know houses in other localities in Bangalore, where domestic helps get paid as little as Rs 400 a month. OK, smaller house, so assuming 45 minutes to an hour spent each day, it would be Rs 13 – 18 an hour. Still beats the minimum. Not bad. So may be, we don’t have to feel guilty about exploiting the poor. But hey, is that number – Rs 54 a day – a fair one?

Let us use a PPP like comparison to get some perspective on the minimum wages.

In US, a medium pizza comes for $10. A low-end restaurant will serve me a buffet lunch for $3. And I could buy a burger for less than $2. The numbers hold well against $42 a day.

Forget a pizza in India. A medium costs Rs 150 here. A rice meal at a low-end restaurant (equivalent to a low-end US buffet lunch) will cost me Rs 10-12. A hot Dosa can be had at a pavement stall for Rs 8-10.

So, My minimum wage gives me 14 lunches in US, compare with 5 in India; 23 burgers in US, versus 6 Dosa’s in India. Now go back to the gap between minimum wage to per capita GDP ratio: 4x in US versus 12x in India. Notice how similar the two comparisons look. The gap is 3 times, and so is the food affordability.

Is that an accident or simple economics? What if we were to raise the minimum wage to say the lowest amount anyone pays to the domestic help here – Rs 13 an hour, or Rs 104 a day. That will be double the current minimum wage.

When we all use PPP to figure the “real” GDP of the country, why shouldn’t the minimum age as well be recommended as the US number multiplied by the same PPP factor – you may want to ask. But this wouldn’t be realistic, as labor wages are a function of demand and supply, and not just a matter of government policy. The current estimated PPP ratio is about five to six. If you were to apply the PPP yardstick to minimum wage, that will set the number to 5.15 x 5-6, around Rs 30 an hour, or Rs 240 a day. Around 4-5 times the current number, Rs 54 a day. Interesting.

The funny thing is – government recommended the wages via the Minimum Wages Act of 1948. That was almost 48 years ago!! Anyhow, there are arguments for and against implementing minimum wages. Wikipedia talks about it. And labor reforms are some way down the road in India. I was just trying to make some sense of the numbers.

Disclaimers: All lunch prices apply to Bangalore. I have tried to generalize on them. Yes, minimum wage workers may not be eating out, but I need some rough data to compare things. PPP ratio of 5 to 6 was obtained after some googling.

Some reading:

• An NYTimes article with some stats: “Indian wages are also relatively low, beginning at about $2 a day for factory jobs. That compares with a minimum of $3.50 to $4.50 a day in Thailand, and $4 to $8 a day for some Chinese workers, …”
• Some more stats: “India (directly employed regular workers): 22 euros/week
• A write up on living wage support in India