India’s blue-collar wage revolution3 min read . Updated: 04 Jun 2013, 06:16 PM IST
Slowing of inter-state migration and greater time spent in education are sending worker wages northward
To repeat a well-worn cliché, India is best described as a land of paradoxes. For instance, although economic growth sagged in the past two years, house prices rose by 26% year-on-year (y-o-y) in the third quarter of the fiscal year 2012-13 (3QFY13), with annual increases being recorded at in the range of 20% y-o-y over the past two years. On the external account front, while a deteriorating current account deficit (CAD) is typically a feature of a country experiencing high growth, India’s CAD stood at an all-time high level of 6.7% of gross domestic product (GDP) in 3QFY13 even as the GDP growth rate fell to a low level of 4.5% y-o-y in the same quarter.
Given that the Indian economy seldom fits into the mould created by textbook economics or even by plain intuition, getting to the bottom of these anomalies typically yields a wealth of information. One such anomaly is that of large wage increases. Although India is arguably in the midst of the worst economic slowdown in a decade, wage growth for blue-collar workers been recorded at a staggering rate of greater than 15% compounded annual growth rate over the past two years (see accompanying chart). Be it wages earned by farm labour, unskilled rural labourers, construction workers or urban household help, why are blue-collar wages rising relentlessly in India?
Primary checks in states such as Maharashtra and Karnataka suggest that a reverse migration wave is driving the labour shortage in labour-user states. Labour contractors highlight that a combination of improved governance and a sharp pick-up in GDP growth in traditional labour-supplier states such as Bihar and Chhattisgarh has resulted in increased demand for labour in these states. This has triggered a decrease in labour availability in states such as Maharashtra, Karnataka and Punjab, which have historically relied on labour-supplier states for their requirements.
Whilst this partially explains the labour shortage in labour-user states, the plot thickens, as a comparison of wage growth across Indian states suggests that wage growth in labour-supplier states such as Bihar, too, has been high over the past two years and that even these states are suffering from a labour shortage
One labour contractor in Bihar, who hires unskilled workers for loading and unloading cement gunny bags, captures the underlying reason behind this succinctly. This second-generation contractor says: “A decade ago the workers we used to hire had never seen a textbook. Today several workers have been part of the formal education system for 4-5 years and aspire to educate their children for 10 years."
Thus, the demand for higher education in labour-supplier states is largely responsible for crimping labour supply growth. This is corroborated by literacy data, where the most profound increases in literacy ratios have taken place amongst the traditional labour-supplier states. For instance, while the all-India literacy ratio has increased by 9 percentage points between 2000-01 and 2010-11, the literacy ratio in Bihar, Jharkhand and Uttar Pradesh has risen by 17, 14 and 13 percentage points, respectively, over the same period.
Further, data suggests that women’s labour participation rates have declined, particularly since FY05, as a rising number of women are now choosing to pursue education. The fact that women’s literacy rates are rising at a faster rate than those of men corroborates this dynamic.
In the times ahead, we expect both the reverse-migration wave as well as the rising demand for education to persist. Alongside this, we expect high growth rates in labour-supplier states to continue given that ambitious regional leaders like Nitish Kumar of Bihar or Raman Singh of Chhattisgarh have built their careers based on the growth turnaround in these states. There is an additional factor at work. Since India has a youth literacy rate of 81%, less than the global average of 84% for lower middle-income countries, it is reasonable to expect the ongoing demand for higher education to continue in the foreseeable future.
The upshot of the persistence of these trends is that wage growth for blue-collar workers is likely to continue in high double-digits in the coming years. This, in turn, is likely to ensure that entry-level, aspirational, consumption will remain resilient. This new surge in consumption will include products such as soaps, detergents, light electrical goods, paints and branded pressure cookers. However, on the flip side, the increasing bargaining power of blue-collar workers is likely to mean that sectors such as automobiles, automobile ancillaries and capital goods that rely on labour for production will have to bear the brunt of rising labour costs.
Ritika Mankar Mukherjee is economist (institutional equities) at Ambit Capital.