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Who got the benefits of growth?

Raghav Gaiha & Katsushi Imai | January 22, 2009

The debate on the income distributional effects of globalisation rages unabated. A fresh salvo has been fired by the International Labour Organization in a new study: Global Wage Report 2008/09.

It addresses three key questions: What have been the trends in the level and distribution of wages around the world since 1995? How have these trends been affected by economic growth and globalisation? What have been the roles of minimum wages and collective bargaining? As approximately half of the global labour force works for a wage, these are timely and important questions.

Much of the analysis is coherent and persuasive but there are also assertions with gloomy but ideological overtones. Moreover, while the aggregation of rural and urban markets is analytically less challenging, it is also less rewarding in terms of policy insights.

Let us first summarise the main findings.

Striking a gloomy note, it emphasises that wage earners have not benefited much in an apparently favourable economic context. Between 2001 and 2007, inflation was low and the global economy grew at 4 per cent per year in real terms. Real wages, however, grew at an annual rate of 1.9 per cent during this period.

An additional 1 per cent of growth of GDP per capita was associated with 0.75 per cent increase in annual growth of wages. More worrying is the further weakening of the wage elasticity in recent years. This is intriguing, given the rapid integration of markets, characterised by the increasing movement of people, goods, services and capital.

A related finding is the decline in the share of wages in GDP. For every additional one per cent of annual growth of GDP, there was a 0.05 per cent decrease in the wage share. Also, wage share declined faster in countries with greater openness to foreign trade, principally because wage demands are restrained by the fear of losing jobs to imports.

A third significant finding is increase in wage inequality. In many cases this was a consequence of top decile wages rising faster than the median (or the fifth decile) wage while in others the bottom decile wage rate fell. The wage gap between male and female workers narrowed slightly in recent years but remained high.

Although the empirical analysis is weak and the results are ambiguous, an emphatic endorsement is given to collective bargaining and enforcement of minimum wages. A case is also made for revitalising labour market institutions.

Finally, looking towards the future, a grimmer scenario is painted as global growth forecast is down to 3.9 per cent for 2008 and to 3.0 per cent for 2009. The real wage growth may slump to 0.1 per cent in developed countries and 1.7 per cent worldwide in 2009. Social tension and conflict may intensify as negative growth and highly volatile food prices erode real wages of low-wage and poorer households.

How does rural India's recent experience fit into this bleak and pessimistic account? Although analysis of the 50th and 61st rounds of the NSS household data for the period 1993-2004 is far from reassuring, it suggests small gains to labour households and unchanged inequality in consumption expenditure distribution.

Average per capita expenditure of agricultural and other labour households grew annually at less than 1 per cent, while that of the aggregate sample grew at the more rapid rate of 1.70 per cent.

A graphical illustration is given above. As the cumulative expenditure distribution of agricultural labour households in 2004 lies just below that in 1993 over a wide range of per capita expenditure (or exhibits first order stochastic dominance over this range), it follows that a small improvement in their living standards occurred during 1993-2004.

Besides, there was no evidence of growing inequality. In fact, there were small or negligible reductions. For example, the ratio of per capita expenditure of the top decile to that of the bottom decile of agricultural labour households fell slightly (from 2.75 to 2.50).

Nor was there any evidence of a widening of disparity between the expenditure of the bottom decile and that of the median (or the fifth decile). Or, more precisely, the expenditure ratio fell slightly from 1.59 in 1993 to 1.53 in 2004.

Also, the ratio of expenditure of the top decile to that of the fifth decile changed little (from 1.73 to 1.63). A similar pattern is observed among 'other labour' households. In the aggregate sample too, the inequality reduced slightly. While the disparity was more pronounced between the top and the bottom deciles (about 3.22 in 1993), it reduced (to about 3 in 2004).

As this was a period of liberalisation and there were spells of growth acceleration, it is intriguing that the gains to labour households were so small. That labour militancy is subdued by the fear of losing jobs to imports is plausible. But it must be set against higher productivity in agriculture spurred by trade liberalisation, an aspect that the ILO report overlooks [For details, see R Gaiha and K Imai (2008) "Agricultural Growth, Employment and Wage Rates in Developing Countries" in G Kochendorfer and B Pleskovic (eds.) Agriculture and Development, Washington DC: World Bank].

Given rural labour market imperfections (e.g., collusive wage-setting), it would be na�ve to argue that higher productivity translates into higher wages. But, in light of India's experience, it would be perhaps equally na�ve, if not mistaken, to draw an overly pessimistic conclusion.

The ILO study endorses collective bargaining and strict enforcement of minimum wages with the caveat that their potential welfare enhancement in rural areas is likely to be low. Instead guaranteed employment along the lines of the National Rural Employment Guarantee Act (NREGA) may contribute more to the bargaining power of rural labourers if only it is targeted better on the poorest and pervasive corruption in its implementation is curtailed (through, for example, more frequent and extensive recourse to the Right to Information).

In conclusion, concerns about wage earning households not benefiting as much as other segments of the rural population in a favourable economic environment are not misplaced. What does seem misplaced is the pessimism about the impact of globalisation.

Raghav Gaiha is a Professor of Public Policy at Faculty of Management Studies, University of Delhi; and Katsushi Imai is a Lecturer in Economics, University of Manchester



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