Trend in real wages

Identification of the trend in real wages of different types of workers is perhaps the best way to determine the conditions in a labor market. The key question is if the level of the demand for labour is high enough to ensure that the increase in nominal wages exceeds the rate of inflation, leading thereby to a rise in real wages?

The Labour Force Surveys are carried out periodically by the Pakistan Bureau of Statistic (PBS). The last such survey of which the results have been published is of 2017-18. Information on wages started becoming available from this Survey from 2008-09 onwards.

The average wage of workers was reported at Rs 7,635 per month in 2008-09. The skill premium between the highest and lowest category of worker in terms of the endowment of human capital was 350 percent. By 2012-13, the nominal wage had increased by 59 percent. The cumulative rise in the consumer price index was 49 percent. Therefore, real wages showed an increase annually during these four years to just over 2 percent.

The trend in the level of real wages improved from 2012-13 to 2017-18. Over the five-year period, nominal wages on average increased cumulatively by 55 percent. The rate of inflation was relatively low during these years and the resulting annual rate of increase in real wages was relatively high at over 4 percent per annum. This was a reflection of the decline in the unemployment rate to 5.8 percent in 2017-18.

Therefore, the period from 2008-29 to 2017-18 has been relatively good for employed workers. They have seen an average annual increase in real wages of over 3 percent. This must have contributed to an improvement in living conditions, especially at the lower end of the skill distribution of workers.

The basic question is what have been the trends in the labor market after 2017-18? Economic conditions have visibly deteriorated with a precipitate fall in the growth rate of the GDP and a quantum jump in the rate of inflation. In the presence of these negative developments, what happened to real wages?

There is fortunately a practice of data collection by the PBS on a weekly basis of daily wages of five types of workers in fifteen cities of Pakistan. The statistics on wages are included in the Annexure to the publication weekly on the Sensitive Price Index. It is surprising that PBS does not present any analysis of the trends in wages.

The five types of workers covered are carpenter, mason, plumber, electrician and laborer respectively. Therefore, two types of workers are included in the weekly wage surveys, viz., unskilled workers and skilled workers with an intermediate level of skills. The fifteen cities include seven in Punjab, four in Sindh and two each in Khyber-Pakhtunkhwa and Balochistan.

The information on wages has been analyzed for the last week of October of each year from 2017 to 2020. The skill premium on average between these two categories of workers is close to 40 percent. It has remained, more or less, unchanged over the last three years. The price index used for determination of the real wage is varied. For the relatively skilled the consumer price index in the second quintile of the income distribution is used while for the unskilled laborer it is the price index in the first quintile.

The findings on the trend in real wages are very revealing. Nominal wages have continued to increase throughout the three years. However, the smallest increase has been registered last year. It has ranged from 1 percent for plumbers to a maximum of 11 percent in the case of electricians. The latter is probably an indicator of worsening of the electricity network to and within households leading to increasing demand for the services of electricians.

The rate of increase in the consumer price index was the smallest from 2017 to 2018 and the largest from 2018 to 2019. Consequently, this large variation is likely to play an important role in influencing the path of real wages.

The resulting magnitudes of the annual rate of change in real wages indicate, first, that there was a positive increase for all five type of workers from 1.7 percent in the case of electricians to 10 percent for carpenters, during the period from October 2017 to 2018. This was to be expected given the relative buoyancy of the economy with the GDP growth rising to above 5 percent.

At the other extreme, real wages have been falling after October 2018. Between October 2018 and October 2019, the rate of decline has ranged from 0.9 percent to 8.2 percent. Similarly, there has been a drop from October 2019 to October 2020, with the biggest fall in the case of plumbers of almost 8 percent. Cumulatively, over the two year period after October 2018, real wages have fallen by 6 percent in the case of electricians to 12 percent for carpenters. There is no doubt that labor market conditions have severely deteriorated in the last two years.

Examination of the level of wages in the fifteen cities reveals no systematic pattern. The level is somewhat higher in the larger metropolitan cities, although the wage rate is low by over 15 percent in Lahore and Faisalabad. Also, the rate of change in nominal wages varies significantly among cities. For example, last year the largest increase is recorded in Khyber-Pakhtunkhwa and the lowest in Sindh.

There are numerous implications of the sharply declining trend of real wages in the last two years. The workers covered relate mostly to the construction sector. It appears that the perceptions of a boom in construction activity since March 20, following the offering of fiscal incentives, are exaggerated. Construction activity has not risen enough to raise the demand for construction workers sufficiently to lead to a rise in real wages. In particular, construction projects are apparently not stimulating significant labour absorption in the metropolitan cities of Karachi and Lahore.

The large decline in real wages during the last two years clearly implies that living conditions of workers have significantly deteriorated. The underlying unemployment rate has probably more than doubled form below 6 percent in 2018 to above 12 percent in 2020. The large displacement of the working population after Covid-19 appears to be persisting.

Falling, the PBS is requested to upgrade the weekly survey of wages by including more categories of workers beyond the construction and housing sector. This should be accompanied by a report on wage trends on a monthly basis. The Government will have to concentrate on improving employment opportunities and living conditions of workers in the country through different programs and initiatives.

(The writer is Professor Emeritus at BNU and former Federal Minister).

Copyright Business Recorder, 2020