Home / Opinion / Online-views /  Higher productivity equals higher wages? Not for the Indian industrial worker

Industrial workers on the shop floor have got a raw deal through the economic boom of the past three decades. Their real wages have grown far less than the growth in productivity. That flies in the face of the traditional economic assumption that the two move in tandem.

The share of wages in the net value added by industries has also fallen while the share of profits has climbed. A similar trend has become a hot-button political issue in several rich countries. French economist Thomas Piketty has already made waves with his arguments against the growing share of capital income across the world.

As the Annual Survey of Industries data released this month shows, real worker wages have been stagnant in the three decades to 2013 while real productivity has increased at an annual average rate of 7%.

Real wage growth has languished at an average annual rate of 1% between 1983 and 2013, lagging real productivity improvement. Now, a large part of this high growth in productivity has come from increasing mechanization of industries. However, with increasing mechanization, workers are required to upgrade their skills, which should translate into higher wages. Clearly, this has not happened.

Within this 30-year period, real wages increased moderately between 1983 and 1996 and then declined between 1996 and 2007. Growth in productivity outpaced wage growth throughout this period. Since 2007, growth rates of productivity and wages have achieved parity at around 2%, though this is still a short-term trend.

There are two plausible reasons behind the moderate growth till 1996. One, labour unions were still very strong and two, industries were considerably less capital-intensive. Thus, the decade-long slump in real wages post-1996 could very well have been due to overenthusiastic capacity expansion. Growth in output failed to keep up with capacity expansion which might have led to the slump in wages. This period is also clearly marked by sharp fall in employment of workers.

When industry finally roared back to growth in 2002-03, there was no positive impact on real wages which continued to fall for the next four years. Clearly, higher profits didn’t translate into higher wages. Increasing mechanization might have helped keep profits high while pushing wages down.

Indeed, over the past 30 years, worker wages have seen their share falling in the net value added of industries even as the share of profits has sharply increased.

The share of profits peaked in 2007-08, and has since reduced. This could be the temporary outcome of falling profits owing to India’s manufacturing sector running into trouble.

In contrast, the share of wages has crept up slowly since 2007. This coincides with the time when real wages also started rising. A host of factors might be responsible - One, there was increasing shift of labour towards the massive boom in construction sector. Two, NREGA and the exodus of women from labour force helped push up rural wages, which could have aided industrial wages too. The share of wages in net value added could also have risen owing to their ‘sticky’ nature compared to the volatility of profits in the post boom era.

That said, the long term trend points to a drop in share of wages and is primarily attributable to two reasons. One, there has not only been more mechanisation of existing industries, new industries which have come up such as petrochemicals and metals are naturally more capital intensive, points out Jayan Jose Thomas, associate professor, humanities and social sciences at IIT Delhi. Moreover, there has been a shift of labour-intensive industries such as jute to the informal sector, which had compressed wages in the formal sector.

Two, the bargaining power of trade unions has drastically reduced not only owing to higher mechanisation, but also because of the huge influx of contract labour who typically work for lower wages. This situation is nowhere clearer than in West Bengal, renowned for its worker-friendly background. State-level data here shows that the wage share has plummeted in the past 15 years. The originally high share could have been the result of strong trade unions and greater presence of labour-intensive industries. It is unlikely that the sharp drop happened due to a shift to capital-intensive industries since the state has hardly seen fresh investments, which means it is ultimately the weakening of trade unions that has been responsible for the falling share of wages in industry value added.

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