Four Reasons For Wage BoomSince the escalation of the global financial crisis a wage boom has engulfed

the Indian macroeconomic environment. This apparent wage boom has been consistent during the last three years and it has been primarily been due to the following four factors. Rapid GDP Growth NREGA The Employment Guarantee Scheme Inflation Rise in Global Commodity Prices

Indias GDP has been growing every year as it has been able to sustain a steady growth rate of 8-9% in the last 5years. Even during the global economic meltdown it was able to grow at a rate not lower than 6.5%. For the FY11-12 it is expected that the Indian GDP will able to grow at an impressive rate of 9%. During the last three years the labor forces have not grown proportionally with the GDP, which in-turn has created a labor shortage. Due to this disproportion and excess in allocation of funds available for Labor, the wage rates have risen very sharply. Another contributing factor to wage boom is the Mahatma Gandhi National Rural Employment Guarantee Act. According to the RBI report called Macroeconomic and Monetary Development the NREGA has been instrumental in the increase of wages in the last 3 years. Inflation has also been a driving force in escalating wage rates in the recent past. According to RBI Faster increase in wages vis--vis inflation poses the risk of wage-price spiral, particularly for food inflation, as the revision in MSPs take into account wage cost escalation. The fourth and one of the most important contributing factors to make an impact on the wage rate is the increase in global commodity prices, especially crude and gold. Along with two of the most significant commodities in the world agricultural commodity prices have also escalated to sky high level, which has caused increase in profitability in the agricultural industry which in-turn resulted in higher farm wages. Economist Sir William Arthur Lewis came up with the, Economic Development with Unlimited Supplies of Labor in 1954. In this work Lewis combined an analysis of the historical experience of developed countries with the central ideas of the classical economists to produce a broad picture of the development process. In his story a capitalist sector develops by taking labor from a non-capitalist backward subsistence sector. At an early stage of development, there would be unlimited supplies of labor from the subsistence economy which means that the capitalist sector can expand without the need to raise wages. However in the early years of 21st century it is seen that there comes a point when the GDP growth absorbs the reserve laborers which causes the wages to rise sharply. The same situation has occurred in India as wage increase cannot be contained anymore. Wages have increased in many sectors not just in the agricultural industry alone. Although farmers and construction contractors still complain about the shortage of labor forces. Apart from these four prime factors responsible for the sharp rise in the labor wages during the course of last three years, consistent rise in the wages have also added to the multiplication in its rate in various forms. One giant among those is the sharp and consistent fall in the participation of females to the whole labor force across all regions. Actually what

has happened due to this consistent rise in wage is that it has economically lifted the status of the households which has led to families restricting the females from participating in to the labor force due to status issues. The wage differential between male and female labor fell 4% in rural areas and 7% in urban areas. Two prime reasons behind this are: One, young females are shifting from employment to higher education. Two, as incomes and female education improve, families pull females out of the workforce for status reasons. The working age is defined as 15-60 years, but as demand for higher education rises, the proportion of students aged 15-25 rises. This aids skill creation, but reduces worker participation, and so offsets the demographic dividend created by falling fertility. Questions: 1. Is NRGEA really responsible for the rise in wage rates? 2. Why has there been a lower level of employment generation in the last 5 years in the farming industry? 3. Has the increase in wage rates triggered the high levels of inflation in the recent past?