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Four Reasons For Wage Boom-

Since the escalation of the global financial crisis a wage boom has engulfed the Indian

macroeconomic environment. This apparent wage boom has been consistent during the last

three years and it has been primarily been due to the following four factors.

Rapid GDP Growth

NREGA The Employment Guarantee Scheme

Inflation

Rise in Global Commodity Prices

Indias GDP has been growing every year as it has been able to sustain a steady growth rate

of 8-9% in the last 5years. Even during the global economic meltdown it was able to grow at

a rate not lower than 6.5%. For the FY11-12 it is expected that the Indian GDP will able to

grow at an impressive rate of 9%.

During the last three years the labor forces have not grown proportionally with the GDP,

which in-turn has created a labor shortage. Due to this disproportion and excess in allocationof funds available for Labor, the wage rates have risen very sharply.

Another contributing factor to wage boom is the Mahatma Gandhi National Rural

Employment Guarantee Act. According to the RBI report called Macroeconomic and

Monetary Development the NREGA has been instrumental in the increase of wages in the

last 3 years.

Inflation has also been a driving force in escalating wage rates in the recent past. According

to RBI Faster increase in wages vis--vis inflation poses the risk of wage-price spiral,

particularly for food inflation, as the revision in MSPs take into account wage cost

escalation.

The fourth and one of the most important contributing factors to make an impact on the wage

rate is the increase in global commodity prices, especially crude and gold. Along with two of

the most significant commodities in the world agricultural commodity prices have also

escalated to sky high level, which has caused increase in profitability in the agricultural

industry which in-turn resulted in higher farm wages.

Economist Sir William Arthur Lewis came up with the, Economic Development with

Unlimited Supplies of Labor in 1954. In this work Lewis combined an analysis of the

historical experience of developed countries with the central ideas of the classical economists

to produce a broad picture of the development process. In his story a capitalist sector

develops by taking labor from a non-capitalist backward subsistence sector. At an earlystage of development, there would be unlimited supplies of labor from the subsistence

economy which means that the capitalist sector can expand without the need to raise wages.

However in the early years of 21st century it is seen that there comes a point when the GDP

growth absorbs the reserve laborers which causes the wages to rise sharply. The same

situation has occurred in India as wage increase cannot be contained anymore. Wages have

increased in many sectors not just in the agricultural industry alone. Although farmers and

construction contractors still complain about the shortage of labor forces.

Apart from these four prime factors responsible for the sharp rise in the labor wages during

the course of last three years, consistent rise in the wages have also added to the

multiplication in its rate in various forms. One giant among those is the sharp and consistentfall in the participation of females to the whole labor force across all regions. Actually what

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has happened due to this consistent rise in wage is that it has economically lifted the status of

the households which has led to families restricting the females from participating in to the

labor force due to status issues. The wage differential between male and female labor fell 4%

in rural areas and 7% in urban areas. Two prime reasons behind this are:

One, young females are shifting from employment to higher education. Two, as incomes and

female education improve, families pull females out of the workforce for status reasons.

The working age is defined as 15-60 years, but as demand for higher education rises, the

proportion of students aged 15-25 rises. This aids skill creation, but reduces worker

participation, and so offsets the demographic dividend created by falling fertility.

Questions:

1. Is NRGEA really responsible for the rise in wage rates?

2. Why has there been a lower level of employment generation in the last 5 years in the

farming industry?

3. Has the increase in wage rates triggered the high levels of inflation in the recent past?