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A state government in India announces a 15% increase in minimum wages for unorganized sector workers. Which of the following is most likely to be a direct economic consequence in that state?

A minimum wage increase in the unorganized sector typically causes firms to raise prices to maintain margins, creating cost-push inflation. Labor-intensive sectors may reduce hiring or hours, as workers become relatively more expensive. These are direct short-term consequences before any adjustment in productivity or efficiency.

  1. AImmediate increase in tax revenue for the state government from increased incomes
  2. BPotential rise in informal sector prices and possible reduction in employment opportunities in labor-intensive sectorsCorrect
  3. CGuaranteed improvement in living standards for all unorganized sector workers across the nation
  4. DImmediate migration of all workers from neighboring states to avail higher minimum wages

Explanation

Wage increases in the unorganized sector can lead to cost-push inflation (firms pass higher costs to consumers) and potential employment reduction if firms substitute labor with capital or reduce hiring. These are standard microeconomic responses. Option 0 overstates immediate tax revenue impact (informal sector taxation is limited); Option 2 is too absolute; Option 3 is unrealistic. The effect is most pronounced in labor-intensive sectors like retail, construction and small manufacturing.

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