Real wages remain stagnant

The Modi government, like its predecessor UPA government, is pursuing economic growth as a path to securing welfare of the people. Assumption is that economic growth leads to increase in the wage rates and improved standard of living of the people.

The ground reality, however, is very different. The rate of growth has increased substantially after we have embraced globalisation. But this has not been accompanied with an increase in real wages.

Wages are reckoned in ‘nominal’ or ‘real’ terms. Nominal wage is the payment received in cash by a worker. Let us say, a carpenter received Rs 500 per day in 2017 and Rs 525 per day in 2018. His nominal wage has increased by 5 per cent.

Now, let us say he was getting 10 meters of cloth for Rs 500 in 2017. Price of cloth has increased in this period and the same cloth is available in the market in 2018 for Rs 550. As a result, he is able to buy only 9.5 meters of cloth from a day’s wages in 2018 (Rs 525/550=9.5).

His cash income has increased from Rs 500 to 525, but he is getting only 9.5 meters of cloth from a day’s wages against 10 meters previously. His real income has decreased by 5 per cent. Needless to say, the standard of living is determined by the amount of cloth the worker can buy. Thus, his nominal wage has increased while real wage and standard of living have declined.

Data indicates that the nominal wages have risen continuously in the last two decades. However, the real wages have stagnated except for a short time. The nominal wages increased between 1998 and 2010. But the prices also increased at the same time.

The increase in nominal wages was almost equal to the increase in prices. Growth rate was high around 7 per cent. It led to increase in nominal wages but not to an increase in real wages because the prices increased at nearly the same rate.

Then there took place a steep increase in real wages between 2010 and 2014. The growth rates remained high as previously. The increase was the impact of the Employment Guarantee Scheme. Workers stayed back in their villages because they got some assured employment.

They demanded higher wages and got the same. A combination of high growth rate and MNREGA led to an increase in real wages. Then the real wages declined again between 2014 and 2016 after the NDA Government came into power.

My assessment is that this was because there was a marginal decline in the growth rate. This means that, left to itself, economic growth is barely able to secure increase in nominal wages equal to the increase in prices.

Accordingly, economic growth has produced only a stagnation in the wage rates. The high growth rate in the UPA period prevented a decline but could not secure an increase in the wage rates. More action such as by MNREGA is required to secure an increase in the same. It is clear from these data that economic growth alone cannot be relied upon to secure an increase in the real wage rates.

Worse, inequality has risen at the same time. Remember that poverty is not an absolute concept. It is reckoned comparatively. A family living in a pucca house in the slums of Mumbai is considered ‘poor’ even though it has a fridge and desert cooler; while one living in a pucca house in the village is considered to be ‘rich’ even without an electricity connection.

It is possible, therefore, that the income of the poor increases but they feel impoverished because the increase in the incomes of others has been much more and they have been left behind in comparison. Thus, the impact of economic growth on poverty has to be assessed by looking at inequality as well.

There are many indications that inequality has increased. Fifteen years ago, the top graduate of IIM received a starting salary of about Rs 10 lakh per year. The daily wages of an unskilled worker at that time was Rs 50 per day or Rs 15,000 per year.

The IIM graduate received 67 times the wages of an unskilled worker. Today the top graduate gets a starting salary of Rs 2 crore per year while the unskilled worker’s wages have risen to Rs 100,000 per year. The gap between the two has increased from 67 times to 200 times. That implies that inequality has increased along with relative poverty.

Economic growth has not led to increase real wages because it promotes capital-intensive production. For example, about 20 years ago 10 tons of goods were carried in a truck. Nowadays three-axle trucks carry 30 tons of goods, courtesy globalisation.

Previously three drivers and three cleaners were required to transport 30 tons of goods. Now only one each is needed. The share of labour in the income from transportation has declined while that of capital has increased. Real wages have declined in tandem with the reduced share of labour in production.

Another argument in favour of the positive impact of economic growth on wages is that economic growth leads to higher revenues and enables the government to run welfare programs which benefit the poor. However, most money is consumed in paying salaries of the welfare bureaucracy.

This is the reason that increase in welfare expenditures between 1998 and 2010 did not bring about an increase in the wages. It was only a particular type of welfare expenditure under MNREGA that led to increase in real wages. The fact that real wages have remained stagnant through most of the last two decades shows that the welfare programs except Employment Guarantee have not had a positive impact.

The conclusion is that economic growth alone is a non-starter. Specific policies like MNREGA are required that directly push the wages upwards.
Author was formerly Professor of Economics at IIM Bengaluru

By Dr Bharat Jhunjhunwala