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BW Businessworld

Wages Versus Jobs

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In government records at least, the awkwardly named MGNREGA has been a success. In this financial year alone it has given 1.35 billion days of work to 39 million people, over a half of them women. Only 238,000 of the 6.6 million projects it has undertaken have been completed. But if we accept that its primary objective is to give jobs and that creating any material assets is only subsidiary, then its lack of achievement is nothing to be concerned about. The ministry of rural development has recruited a number of research institutions to monitor its performance. Of their 13 reports due for 2009-10, which ended 9 months ago, only two have been received. But in the coming years, they will be received, and we will eventually be able to get a view, perhaps even an objective view, of the working of this scheme.
In the meanwhile, a controversy has erupted over the programme. It is over what wages should be paid. Some would say that all those who are given employment should get the statutory minimum wage. Some others would say that the wage should be raised every year as the cost of living increases. Some would go so far as to say that the wage should be the same all over the country.

The demand for statutory minimum wage is perfectly reasonable. This is supposed to be the wage that every employer in the country is forced by law to pay. It makes no sense to say that the law should apply to everyone except the government which has made the law. Everyone would agree that the government should obey its own laws. But it does not follow that it should obey this law. There is an alternative: that it should repeal this law. For a minimum wage can only reduce employment.

An employer will not give jobs unless the worker produces at least enough to cover his wages. The higher the wage to be paid, the lower the number of jobs that would be offered. So the government must make up its mind about what it wants, more jobs or higher wages. If it thinks that employment is the major need, it should have no statutory minimum wage.

Whether the wage should be raised every year as prices go up depends on how much they go up. If they go up a per cent or two, they may not much affect the workers' standard of living. And if they go up in some years and down in others, no one would be much bothered. But if they go up year after year, very soon the purchasing power of wages will be a fraction of what it was. Fewer and fewer workers will take temporary jobs on government works, and a time will come when they attract no workers at all. The government would be tempted to conclude that it has solved the unemployment problem; but it will only have stopped giving jobs at a reasonable wage. So the government must make up its mind on whether it is a chronic generator of inflation. If it were to go by its performance, it must admit to being a chronic inflator.

Inflation in the cost of living had been close to 5 per cent a year in the early years of this millennium. After the UPA government came to power, it began to rise; now it is hovering around 10 per cent. The government shows occasional concern about inflation. Last June, the finance minister said that inflation would come down to 5 per cent by this March. In December he raised the figure to 6 per cent. As March approaches and food inflation rises beyond the present 18 per cent, he will no doubt promise to bring it down by June or later. In the meanwhile, he has asked his income tax officers and finance ministers of states to start raiding traders. He underestimates the power of bribes.

He has a powerful weapon against inflation in his hands, namely the coming budget. He could raise taxes or reduce government expenditure, and reduce the aggregate demand pressure thereby. But if he goes by expert advice, he will not. For his chief economic advisor, Kaushik Basu, told the students of his old school in Calcutta that the inflation is not due to excess demand. So he will advise his minister to continue on the reckless path of excess expenditure that he has been following in the last few years. And Montek Singh Ahluwalia, who advises the Prime Minister, says that inflation is due to prosperity.

Consumers will feel that the rising prices make them less prosperous. Since general elections are years away, there is no respite in the offing for the public from the deputy chairman, the finance minister or his advisor. But if inflation brings down the purchasing power of wages and boosts profits, it may prolong high growth and increase employment — outside MGNREGA, that is.

(This story was published in Businessworld Issue Dated 24-01-2011)