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Business News/ Markets / Mark To Market/  While employment rises, wave of wage moderation a big threat to consumption
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While employment rises, wave of wage moderation a big threat to consumption

Economists believe that while migrants may return to their urban jobs, wage rates are unlikely to rise
  • Moderation in wages would mean lower consumption, which would circle back to lower demand and lower revenues
  • Migrants who went home from urban centres have been getting work under the government’s employment guarantee scheme. But as an SBI research note on 10 June pointed out, the scheme is not linked to the minimum wages Act, and therefore wages tend to be low. Real wages have been moderating for 5 years now, according to HSBC. (PTI)Premium
    Migrants who went home from urban centres have been getting work under the government’s employment guarantee scheme. But as an SBI research note on 10 June pointed out, the scheme is not linked to the minimum wages Act, and therefore wages tend to be low. Real wages have been moderating for 5 years now, according to HSBC. (PTI)

    India’s looming economic recovery from the pandemic-induced recession this year could be long-drawn—and the biggest sign of this is wages.

    Urban wage rates have been hit by the lockdowns, while rural wages may see an uptick, albeit temporarily. The moving factor in wages is the exodus of migrants to their homes from urban centres, and their expected return as the economy begins to unlock.

    Graphic: Satish Kumar/Mint
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    Graphic: Satish Kumar/Mint

    Economists believe that while migrants may return to their urban jobs, wage rates are unlikely to rise. In fact, wages may get renegotiated downwards. Moreover, since the lockdown, several companies have announced cuts in staff remunerations. In sectors hit hard by the lockdown, the revival in remunerations may be slow. This is because companies would continue to see lower revenues.

    About 27,000 companies, representing 12 trillion in wages, are vulnerable in terms of low revenues, according to an analysis by Crisil Ltd. “Recovery would be slow. In fact, we could take three years to recover fully," said Ashu Suyash, chief executive officer at the rating agency said in a virtual conclave hosted by State Bank of India (SBI) ast week.

    Moderation in wages would mean lower consumption, which would circle back to lower demand and lower revenues. This vicious cycle could set off a second round of labour market weakness.

    “If this second round of labour market weakness does materialize for India, it could be led by a lack of urban job opportunities, since sectors like restaurants and accommodation are more prevalent in urban India. This may show up in the form of higher overall unemployment (jobs being lost) or higher rural employment (jobs moving to rural India), both of which could weigh on wage growth," economists at HSBC Securities and Capital Markets (India) Pvt. Ltd wrote in a note.

    Migrants who went back home have been getting work under the government’s employment guarantee scheme. But as an SBI research note on 10 June pointed out, the scheme is not linked to the Minimum Wages Act, and therefore wages tend to be low. To be sure, real wages have been moderating for five years now, according to HSBC.

    The wage warning comes even as the unemployment rate has dropped in June to levels seen before the pandemic, providing some relief.

    This uptick has been led by a rise in urban employment rates, a reflection of the migrants coming back as cities eased restrictions by various degrees.

    A moderation in wages would mean that Indians won’t increase their consumption beyond the essentials in a big way immediately, even though most states have allowed non-essential goods and services to be made available. That means that the consumption engine would likely be stuck in first gear longer than anticipated.

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    Published: 13 Jul 2020, 06:23 PM IST
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