Economic Development and Developing Economies of Wages

Read this article to learn about the economic development and developing economies of wages in advanced economies.

The wage policy in advanced economy has to be of such a nature as to meet the requirement of stabilization at a high level of productivity.

Stabilization, in turn, depends upon the continued maintenance of aggregate demand for commodities as well as for factors of production at a level of full employment of resources available at any particular point of time.

For achieving high level of employment equilibrium in advanced economy, we need a wage policy, which prevents inflationary wage increases.

A full employment wage policy, thus, involves:

(i) Control of the level of wage rate, as aggregate demand is expanded, so as to promote an equilibrium rates of wages to profits, on the one side, and prevent increases in unit costs of prices on the other;

(ii) A balanced wage structure so as to prevent important products from being priced out of the market; and

(iii) Cost reduction involving both advances in techniques of removal of monopolistic and restrictive prices.

It is, therefore, evident, that wage policy based on consideration of cost shall have to give way to wage policy based on consideration of purchasing power, and therefore, the fundamental cure for cyclical fluctuations and maintenance of high level of full employment is to be sought in more even distribution of income. It is also clear that even in advanced economies, stabilization, if it has to be achieved, must be achieved by means of other sources and measures than by wage policy alone.

Modern theory of wage determination which lays emphasis on productivity and efficiency and the concept of social wage does not hold true in backward economies. Similarly, marginal productivity is indeterminate in such economies. The problem of wage determination in such economies is structural—the formula appears to be “as the traffic would bear”. Wages are mostly near subsistence level, therefore, the classical as also Keynesian remedy of increasing employment by reducing real wages become obsolete not to speak of general Keynesian Apparatus in terms of “Keynes Effect” or “Pigou Effect”.

Wages in these economies are more in the nature of a scramble than being dependent on any “set principles”. Wage levels in such countries are part of the existing social structure, the most important feature of which is the application of different standards. The margins of production are not the points at which the contribution of producers are measured, but are the points at which are relative strength and weakness of conflicting interests are revealed and established.

Agricultural wages particularly have hardly been influenced by the utility of labour to the employers, the current price level of the commodity in the production of which labour was employed. On the other hand, it appears, Ricardo’s Iron Law of Wages had been having full sway in these economies. The wages are not determined by the magic of margin or the scissors of demand and supply.

Therefore, the classical as also the Keynesian remedy of increasing employment by reducing real wages became obsolete in the context of underdeveloped economies, not to speak of Keynes Effect Proper. Keynes’ model is that of an economy in which the supply of labour is perfectly elastic at current money rate of wages, the model to which the economies of underdeveloped countries are a close approximation is one in which the supply of labour is perfectly elastic at current real rate of wages.

It is quite clear that wage planning must form an integral part of economic planning in underdeveloped countries. The aim of such planning is to direct the available quality and quantity of labour skill into desired channels. As planned development proceeds, it may be found, at some stage, that manpower bottlenecks present a serious problem. A formulation of national wage plan could not be postponed simply because of its very complicated nature in underdeveloped countries.

Wage policy for economic development in such countries must aim at raising the poor sub-human level of wages. In early stages of economic development of underdeveloped countries wage policy must aim at distributing essential consumer goods at reasonable prices to workers.

Thus, a physical plan of production without a physical plan of distribution amongst the crucial sections of population comprising workers would be a mere “exercise in economic arithmetic”. It may be proper to conclude that level and structure of wages in a developing economy may not be determined by the market forces of demand and supply, or any predetermined set of economic principles but must be set out by a national wage policy.

Broad features of a wage policy conducive to promote economic development could be enumerated. Firstly, the share of consumption in national product has to be lower than in advanced economies. Secondly, wage rates in industry must be so low as to enable capital saving techniques to be used. Thirdly wage differentials within industry have to be wide enough to encourage the development of skills and know-how in the labour force.

Fourthly, there must be difference of real wage rates in industry and real consumption standards in agriculture sufficiently wide to attract and keep labour in manufacturing and extractive industry. It is obvious that one wage policy which will satisfy these very different features will not be easy to lay down or if laid down to operate to the satisfaction of all concerned.

The main objective of a national wage policy should aim at stepping up internal savings and consequently reduce the pressure on supply. It is really distressing to note that wage policies followed in developing economies like India, are fragmentary, shifting and indefinite.

These are the patchwork of many different ideas and are not based on the exposition of a set of a well-knit principle that naturally goes together. The general consensus amongst the economists’ is that growth in investment, productivity, national income, and employment alone would make substantial progress towards the formulation of widely acceptable national minimum wage policy acceptable to all classes.