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MOSL: Fuel or Engines (Economy)-Do labor costs have downward rigidity in India’s manufacturing sector?

​Fuel or Engines (Economy): Do labor costs have downward rigidity in India’s manufacturing sector? Stagnant wages since liberalization highly misleading

“Fuel or Engines” is our new monthly product, in which we intend to expand our consumption v/s investment theme. This is an extension to our ‘India 2020’ report released in June 2016.

Economic theory suggests that the growth in employee compensation (including wages and non-wage earnings) should be based on the growth in productivity of the employee. An analysis of the data under annual survey of industries (ASI) shows that while productivity has increased at an average of ~5% in the post-liberalization period, real wage per worker has been broadly stagnant in the past 25 years. While this makes for a catchy headline, it is highly misleading. Firstly, notwithstanding stagnant wages, real compensation to employees (CoE) grew at an average of 1.7% per annum due to better growth in non-wage earnings (NWE). And secondly, employee costs are perceived differently by employees and employers. What matters more is the employers’ perception, according to which real CoE has grown at an average of 3.2% since FY91 – almost double the growth from the employees’ perspective but still lower than productivity growth. Since the global slowdown, however, real CoE – from the employers’ perspective – has grown faster than productivity, hinting at downward rigidity in nominal CoE growth. If so, lower inflation from FY16 raises the real burden of employees for employers, potentially acting as a deterrent to hire more.