With Karnataka Employers’ Association moving the court and other industry bodies preparing to challenge Karnataka government’s revised minimum wages, arguing that the increase will impose an ‘unsustainable’ burden on businesses and threaten jobs, the argument raises an old and consistent question — do higher minimum wages actually hurt employment and small businesses?
The argument is not new. When Karnataka revised minimum wages in 2016-17, employer associations raised similar concerns, warning of rising costs, loss of competitiveness, and adverse consequences for industry. The matter soon reached the Karnataka High Court, which, however, upheld the revision.
Not static concept
The court observed that minimum wages are not a ‘static’ concept, and must evolve in line with changing economic realities. It also held that wage rates in neighbouring States are not a relevant benchmark while fixing minimum wages in Karnataka. The court maintained that minimum wages must be determined on the basis of local living costs, inflation, and the cost of ensuring a minimum standard of living for workers and their families.
A central claim made by opponents of minimum wage hikes is that forcing employers to pay workers more inevitably results in job losses. According to this view, businesses respond to higher labour costs by reducing hiring, cutting staff, or scaling back operations.
Yet, a substantial body of research has challenged this conventional wisdom.
One of the most influential studies was conducted by economists David Card and Alan Krueger after the U.S. state of New Jersey increased its minimum wage by nearly 19% in 1992. Business groups had predicted significant job losses, particularly in labour-intensive sectors such as fast-food restaurants.
To test the claim, the researchers surveyed more than 400 fast-food outlets in New Jersey and neighbouring Pennsylvania, where the minimum wage remained unchanged. Their findings ran contrary to traditional economic theory. Rather than finding evidence of job losses, the study found that employment in New Jersey remained stable, and even increased slightly relative to Pennsylvania. The researchers also found little evidence that employers offset higher wages through reduced benefits or slower hiring.
The significance of the study extended far beyond the fast-food industry. It triggered a broader re-examination among labour economists of how wage floors affect labour markets. Subsequent studies in different sectors and countries have often reported similar findings, with employment effects either small or statistically insignificant. While businesses may pass on a portion of higher labour costs through modest price increases, research has repeatedly found little evidence of the large-scale job losses often predicted by opponents of minimum wage hikes.
Higher consumer spending, rise in demand
Labour unions like All India Trade Union Congress (AITUC) argue that low-wage workers typically spend a large share of their earnings on essentials, such as food, housing, transport and healthcare. As a result, wage increases often flow back into the local economy through higher consumer spending, supporting demand for goods and services and, in turn, helping sustain businesses and employment.
Beyond wages
The debate, however, extends beyond wages alone.
A growing body of research suggests that many of the challenges confronting small businesses may come from complex structural changes within the economy.
In a detailed 2023 paper on the Indian economy, economist and former Reserve Bank of India Deputy Governor Viral V. Acharya argued that the fortunes of large and small businesses have increasingly diverged since the pandemic. While large listed corporations have reported strong profits and expanded their market presence, many smaller firms have struggled with rising costs, weakening profitability and shrinking market share.
According to Mr. Acharya’s analysis, operating profit margins improved for large firms after the pandemic, whereas smaller firms experienced a deterioration in profitability. Large manufacturers broadly maintained their scale of operations, while smaller manufacturers saw a significant contraction. This divergence is particularly important because small businesses account for a substantial share of employment and economic activity.
Not just labour costs
The paper argues that the pressures facing smaller firms cannot be explained by labour costs alone. Using corporate data spanning three decades, Mr. Acharya finds evidence of rising market concentration across several sectors since around 2015. A relatively small number of large business groups have expanded their presence across industries ranging from construction and metals to retail trade and telecommunications. The concern is that when markets become increasingly concentrated, large firms gain greater power to protect profits and absorb economic shocks, while smaller competitors face mounting pressure.
Long-pending corrections
Workers and labour group argued that low wages are not a natural market outcome but the result of years of bargaining imbalance, where workers at the bottom end have had little power to demand their fair share. Minimum wage hikes, they said, are not economic shocks, as industries claim, but long-delayed adjustments.
The evidence showing limited or no job losses strengthens that argument by challenging the idea that cheap labour is a necessity for employment.
Published – June 04, 2026 09:40 am IST
