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Minimum Wages in Nepal

-By Narayan Manandhar

If collective bargaining is the heart of industrial relations then minimum wage is its pulse rate. Theoretically, minimum wage is the starting point from where other aspects of collective bargaining process are initiated. At present, the debate on minimum wages in Nepal is uncomfortably poised on employers claiming it to be "too high" and employees claiming it to be "too low". Actually, minimum wage is meant neither to be "too high" nor to be "too low". It is a statutory floor price of labor.

Table 1: Summary of Industrial Wages: Some Research Outcomes

Arguments: Statutory vs Economic

The simple economic textbook logic tells us that by fixing minimum wage above (or below) the prevailing market rate, the government creates unemployment (or shortages) of labor in the economy. The opponents of minimum wage also speak that the government’s intervention gives rise to discriminatory hiring practices by the employers. Minimum wage also discourages employers to invest in skill development programs.

However, the statutory reason for fixing minimum wage is to prevent the exploitation of labor, particularly, in a situation where the supply of labor is abundant. It is also meant to protect the vulnerable worker particularly in situations where there are no trade unions.

Bringing these two points of views together looks absurd. The economic argument treats minimum wage as a cause of unemployment while statutory argument treats it as the effects of unemployment. When two guys are walking in two different planks of thoughts it is very difficult for them to meet at a point of consensus.

However, what is acceptable to both sides is that the government has a right to fix a minimum wage. How that wage is going to be fixed may be a matter for debate. Basically, one can approach the problem from two perspectives. One way is to look at it from demand side. The demand side analysis looks at the productivity of the labor. That is, the minimum value the employer can get from employing the labor. It also rests on the assumption of "employers’ ability to pay". The other way is to look at it from the supply side. This means the determination of the minimum subsistence needs of the worker and his family. So even when one accepts the statutory argument for government’s prerogative to fix the minimum wage, the economic argument cannot be ignored. Demand and supply side analysis go hand in hand.

Practices of Minimum Wages in Nepal

Fixing minimum wage has been a most difficult, sensitive and controversial issue in Nepal. This is so because the present wage level is pretty low (Table 1). The unions and employers are using minimum wage fixation as a general wage revision process. In 1994, FNCCI had to file a case against government’s unilateral decision to raise dearness allowance by Rs 300 per month. However, the case was later withdrawn by FNCCI. The determination of minimum wages in Nepal is being complicated by the new amendments made in the Labor Act with regards to the fixation of the minimum wages. The Act has empowered the government to fix not only the minimum wages but also the dearness allowance and the facilities. Now, the government can also fix the minimum wages on a regional basis. An exercise is underway within the government to fix the minimum wage of agriculture workers where a large part of economically active labor force is engaged. Similarly, the government has formed MWFC to fix the minimum wages for the workers and employees at the enterprise level.

Table 2 gives the summary of minimum wages in Nepal since 1965. Since 1992, the government has also fixed the minimum wages for adults and minor workers in tea estates and minor workers (14-16 ages) in other establishments.

Table 2:Minimum Wages in Nepal (in Rs/month)

Note: MDW stands for minimum daily wage. The figure at the left represent the basic minimum wage and remaining additional figures, in bold type, are allowances fixed by the government.

A couple of interesting points can be observed from the table. The first one is the gradual expansion of plus items, i.e., the dearness allowances fixed by the government. Except in 1965, allowances were not recognized as a part of the minimum wage deal. Yet in practice, the government has been fixing the allowances. The allowance of Rs 50 per month that was fixed in 1979 has now snowballed to Rs 500 per month. The position of the employers is very much clear on this point: the government has right to fix the minimum wages but not the allowances. Yet the employers are giving up their rights. As said above now the government is legally empowered to fix dearness allowances and other facilities. The too-high, too-low argument stated at the beginning of this article is basically due to this amorphous and sticky element called allowances. Increasing allowances provide two safety margins. One, the employers can skip financial obligations, like gratuity and provident funds, arising out of increased pay scales. Second, by resorting to increased allowances, the government can play safe with the complicated task of fixing minimum wages.

Second, there are not many revisions in minimum wage in 60s and 70s. However, since 1980, there is a two-year pattern to revise minimum wages.

Third, over the years, the difference between the minimum wages of an unskilled laborer and a highly skilled laborer has narrowed down considerably. If the present trend is to be continued, soon there will be a point of convergence. The narrowing down of the difference between unskilled and skilled labor implies two things. Either the government sees present four-grade classification to be irrelevant or, if not, the government is not concerned with labor productivity.

Fourth, the annual average compound growth rates of minimum wages from 1965 to 1997 for four grades of laborers are as follows: 11.33 percent for unskilled, 10.44 percent for semi-skilled, 8.88 percent for skilled and 7.55 percent for highly skilled labor. If one ties-up the minimum wages with the price rise, saving the minimum wage of the unskilled laborers, the real minimum wage rates for other category of workers have sharply gone down. This is where the unions are showing their concerns.

In addition to the above hard facts, there are three interesting points worth investigating. First is the process and mechanism for arriving at minimum wage figures. In 1965, it was stated that a survey was conducted prior to the determination of wages. However, subsequent figures seem to have been arrived with the consultation amongst the tripartite members of MWFC. It is being criticized that a dilatory committee like MWFC can only negotiate, not fix the minimum wage. Therefore, it is questionable how much real professional inputs have gone into the process of fixing minimum wages in Nepal. Many opine that the recent hike in the minimum wage is, basically, due to the proportionate composition of the members in the MWFC.

Second, minimum wage fixation has come more as a wage revision. There is a total absence of a clear-cut policy on determination of minimum wage in Nepal. What is the purpose of minimum wage fixation? Is it to protect the most vulnerable workers like in the tea estates? Or to alleviate poverty? Or to give a fair wage to the working class? As long as the government is not clear on its minimum wage policy, the fixation of minimum wage will continue to be a controversial issue and will be settled through a negotiation process. That is, the employers and the employees haggling over the price.

Third, in the absence of a strong enforcement mechanism, the minimum wages have little practical relevance. This is where the unions have strong point to argue. For example, the manufacturing census of 1996/97 indicated actual wages of the operatives workers to be less than the prescribed minimum wages of Rs 1800 per month.

Having said this, the important question remains: Is minimum wage a critical issue in Nepal? For a country like Nepal where labor problems are related to supply side constraints, it should not be a critical issue. Rather the economy should be concerned with the displacement of Nepali laborers by the foreign laborers, up-grading the quality and skill of Nepali labor and doing away with unethical labor practices like child labor, bonded labor and gender discrimination. However, where workers are vulnerable and trade unions are pretty weak, the government must fix, revise and enforce minimum wages. In a country where industrial labor force constitutes a mere two-percent of the work force, the coverage and hence the impact of minimum wages are expected to be minimal. A vast number of laborers still work in unorganized agriculture sector as self-employed and daily wage earners. This is where the government should really be worried about. The government’s recent determination to fix minimum wage may help to sort out the problem.

At the time of this writing, it is known that the government is planning to introduce dualistic concepts of minimum wages in the agriculture sector. One is the fixation of "floor wage" at the central level and a "fair wage" at the district level. The floor wage is said to be fixed at Rs 60 per day to be paid in cash. The "fair wages" determined at the district level, cannot be less than this "floor wages". Nepal’s experiment with this centralized-decentralized two layer minimum wages in agriculture is yet to be seen. It will also be interesting to observe how the MWFC will tackle with this age-old problem of fixing minimum wages in Nepal? Will it follow the traditional incremental approach or come with a new solution?

*Dr Manandhar is the Executive Director of Industrial Relations Forum, a project of Friedrich Naumann Foundation in collaboration with FNCCI.

Nepal’s Lessons from Privatization

Business sector in Nepal has always stuck to the principle that there should be less government in business and more business in government. If an economic function can be better performed by the private sector, the private sector should be allowed to undertake it.

In the past, three dictums that are totally antagonistic to the private sector development have contrived to predominate the role of public sector in our economy. First thinking is that due to huge investment and low returns the private sector will not be attracted to a specific economic activity. Second, even if there is attraction, the private sector cannot come simply because it lacks entrepreneurial skills. And finally, even if the private sector is able and capable to invest, it should not be allowed to come due to monopoly situation, high rate of return or social obligations. By early 1990s, these three self-defeating paradigms of public sector interventions have crumbled down. This is very much evidenced by the growth and development of private sector in Nepal. The private sector is good not just in commercial and manufacturing sectors. Given the opportunity, they can equally perform and show results in delivering public utilities, social service and infrastructure projects. In the West, the government is now privatizing even social security, prisons and police force. They are even thinking of instituting ownership right on environmental resources to save these resources from the onslaught, which returns from common property rights.

However, of late, the things that should be happening in the front of privatization are not happening. It is said that privatization is a political process operating in the field of economics. And this fact is so much obvious in Nepal where successive coalition governments and political uncertainties have put a drag on privatization prices. Even today, privatization is not moving in that direction and at that speed as supposed to. The considerable delay in the process is wasting huge sum of money of the government and taking away the confidence of the prospective investors. It is also deteriorating the morale and motivation of the employees. The uncertainty hanging over the heads of the public enterprises in costing enormous sum of money to the government.

Everybody knows that it is far easier to sell a profitable unit than a loss making enterprise. The continued financial losses in the public enterprises are further complicating the privatization process. So the first lesson to be learnt from our privatization experience is that there should be a strong and equally committed government, if privatization process is to be initiated.

It should also be noted that privatization may be necessary but not sufficient condition to effect desired changes. Privatization may bring worse result, if it is used primarily as "a load shedding device" – to shed administrative and financial burden and the burden of running sick enterprises, from government to the private sector. I do not think it to be a proper strategy for private sector development. A successful privatization program must be accompanied by other necessary policy inputs to help, support and sustain the private sector. This includes credit facilities, tax rebate, confessional inputs, and freedom of entry and exit from the market. This is the second lesson to be learnt from our privatization experience.

Third lesson I want to draw is that for long, privatization has been a matter of public sector interest. Primarily it has a "supply side" orientation. When I say supply side orientation, I mean it is basically the government who desires to sell public enterprises. What we need is a demand driven program, i.e., an entrepreneur wanting or demanding to buy public enterprises. This slight change in privatization orientation is expected to have a far-reaching consequence on enterprise valuation, on creation of competitive environment and building private sector capacity. We must remember that privatization has come from the despair of public sector inefficiency rather than from a hope for private sector gains. When I say demand driven privatization program, I want to falsify this proposition and make the true spirit of privatization, namely, sector efficiency, innovation and flexibility, to come to light.

When it comes to privatization, I know that the employees and their representatives are very much concerned about their job security. Security is a matter of individual feeling. Moreover, as long as the boat, I mean, the enterprise, itself is not secure enough, no one can be sure of his job – even an investor is not sure of his investment. All the social partners have to make the boat collectively secure enough.

(Shrestha is the incumbent president of FNCCI)

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