India has pulled off a quiet economic feat: it has narrowed its wage gap significantly and done so without costing jobs. This progress has come from use of one of the simplest tools in the policy kit: the minimum wage.
Between 1999 and 2018, the wage gap between the lowest- and highest-paid workers shrank sharply. The poorest workers saw their real (inflation-adjusted) wages rise by almost 24 percent; the richest, by less than eight. New evidence from state-level data show that increases in minimum wages - the legally mandated lowest hourly or daily pay - were a major driver of this compression.
The findings challenge the long-standing view that in countries with large informal sectors, wage floors either fail to work or do more harm than good. But they also reveal limits that policymakers must address if these gains are to last.
A Tool That Narrowed the Gap
Over the two decades studied, wage inequality - as measured by the Gini coefficient, a standard index where higher numbers indicate greater inequality - fell by 5 percentage points. Statistical analysis indicates for every one percent increase in the mandated wage floor, earnings for the bottom fifth of workers rose by 0.17 percent in rural areas and 0.22 percent in urban areas relative to the top fifth. The gains were strongest among the least-skilled and least educated workers, relative to their starting points. Without these hikes, wage inequality in 2018 would have been up to 18 percent higher. At least a quarter of the observed decline in wage gaps can be directly traced to minimum wage policy.
The gains were broad-based among workers covered or indirectly affected by the policy. They reached both salaried and daily wage workers, and were felt in both formal jobs and informal work. Informal workers without contracts, often saw wages rise in response to the statutory benchmark. The effects were also visible across rural and urban areas, with the poorest workers in each setting seeing the strongest improvements.
Enforcement and Federal Gaps
The gains are significant, but they have not reached every worker. Over 80 percent of non-farm workers are in the informal sector, where jobs often lack contracts or formal records. Statutory protections are harder to enforce here, and in rural India, average pay for the lowest-paid workers remains below the legal minimum. This rural shortfall mirrors a wider problem: even with the “lighthouse effect,” where the official minimum serves as a benchmark for fair pay, many workers across the country still earn less than the statutory floor.
Coverage is also uneven, in part because the number of labour inspections per million workers has fallen substantially over the past decade, weakening compliance capacity. This enforcement gap is compounded by India’s unusually decentralised minimum wage system, in which states set their own rates, categories, and revision schedules. In total, there are more than 1,700 job-specific minima across the country. The 1948 Minimum Wages Act distinguishes between “scheduled” and “non-scheduled” employment, with different legal requirements, revision cycles, and definitions of “wages,” creating complexity for both employers and inspectors.
The Global and Legal Perspective
India’s model stands out internationally for its combination of state-level autonomy and broad statutory coverage. By contrast, countries such as Brazil and China operate more uniform wage floors, often with stronger compliance. India’s approach offers lessons in flexibility but also carries warnings about the cost of excessive complexity.
Simplifying the legal framework - for example, by reducing thousands of wage categories to a manageable number, would make it easier for workers to know their rights and for employers to comply. Better coordination between states, while preserving their autonomy, could ensure more consistent protection.
Managing Risks
So far, there is no evidence of job losses from higher minimum wages. The challenge is to ensure that future increases remain sustainable, especially by avoiding wage floors rising ahead of productivity growth. Smaller businesses, particularly in the informal sector, could otherwise respond by reducing hours, shifting workers to casual contracts, or bypassing the law altogether.
Wage compression, meaning narrowing the gap between low- and mid/high-skilled jobs, can be positive for equity, but may also reduce incentives for skill-building if better qualifications no longer bring higher pay.
To avoid these pitfalls, wage revisions should be regular, predictable, and linked to living costs rather than driven by arbitrary administrative changes. Enforcement must be upgraded through better data, digital monitoring, and public transparency.
Looking Ahead: From Minimum to Living Wage
The government is exploring a shift to a “living wage” benchmark - one that reflects the actual cost of basic needs such as food, housing, health care, and education. The Code on Wages, passed in 2019 and partly rolled out in 2020, was meant to pave the way by replacing older laws and setting a national wage floor. But several key provisions remain stalled: a uniform floor wage has yet to be announced, states are still finalizing their own rules, and enforcement challenges persist. For now, the promise of a living wage remains more a policy goal than an on-the-ground reality.
International experience shows this can be a powerful tool against poverty, but it is also administratively complex. Accurate, up-to-date local price data would be needed, along with simplified wage categories and a stronger inspection system. The transition would require political will and careful calibration to avoid unintended shocks to small employers. Embedding wage policy within a broader framework of skills, productivity, and social protection is equally important.
A minimum wage is just a number on a statute book. But with sound design and committed enforcement, it can be a foundation for inclusive prosperity - a policy success worth building on.
