With India?s relatively less well-off earning more in the recent past, the gap between the nation?s poor and rich appears to have narrowed. An interesting question is?would this still hold true if we deflate their nominal wage by a price index derived from the typical products they consume? The fact is?perhaps contrary to expectations?the real wage gap also appears to have declined sharply. Now, is this good news for inflation and economic growth? Perhaps not. This first article of a two-part series presents tentative evidence on wage inequality in India over the recent past. The follow-up article would address the linkages between inequality and inflation.
Nominal disposable income of an average Indian rose rapidly over the past three years. According to the Central Statistical Organisation (CSO), disposable income per person at current prices grew by an average of nearly 16% between 2008-09 and 2010-11 from 11.5% average growth in the previous three years. However, the average growth rate masks the unequal wage gains for India?s different income classes and the implications of these gains for inequality and inflation. Most of the above average wage growth came from permanent income transfers from the government of India, by way of social security schemes for rural households or salary revisions for public sector employees. Wage gains were relatively low for private sector employees, especially for skilled workers during the two years of economic crisis, namely 2008-09 and 2009-10.
To illustrate how the increase in wages has varied across individuals, consider five typical profiles of an average Indian, listed in ascending order in terms of wages earned:
Class 1: An uneducated and unskilled person in rural India, working under NREG scheme, who falls in the minimum wage category
Class 2: A person with basic education engaged in low-skilled services, such as a cleaner or housekeeping staff in the private or public sector
Class 3: A person with school education working in a relatively skilled occupation, such as a driver or electrician
Class 4: A person with a relevant graduate degree, employed in the public sector
Class 5: A person with a professional graduate degree with a specific skill such as a young software engineer or a management graduate or a financial sector specialist.
Evidence suggest that nominal wage of the first category has gone up by at least 50% since 2007-08. For example, wages of an NREGA employee in Andhra Pradesh and Bihar increased from around R80 per day in 2007-08 to R120 in January 2011. In some states, the wage increase was even higher. In West Bengal, wages rose from around R70 to R130 per day. The NREGA covers, as per 2004-05 data of poverty estimates, around 75% of India?s poor and provides at least 100 days of guaranteed employment per rural household.
Similarly, the gross salary of an entry-level public sector employee in the junior officer grade (class 4, as defined in the listing above) appears to have nearly doubled after the implementation of the Sixth Pay Commission recommendations, which raised the wages of nearly 19% of the population in India that works in the public sector (excluding self-employed), as per the report on employment and unemployment survey 2009-10. Anecdotal evidence also suggests that individuals in class 2 and 3 above also earned significantly more over the past two years. In sharp contrast, according to Crisil research, the salaries of the highest wage earners, who fall in category 5 above (proxied by a software engineer), increased by around 12%. Thus, owing to the differences in nominal wage growth, wage inequality has narrowed between these groups since 2007-08, with the gap between class 4 and 5 reducing sharply.
Given that individuals in class 4 and 5 spend more on non-food consumption, they are more vulnerable to increases in price of consumer durables, services and asset prices. In contrast, the relatively poor spend a greater proportion of their income on food-products; food inflation would therefore hit them the hardest. To illustrate how widely inflation rate varied across product categories: food inflation, based on the wholesale price index, surged to almost 25% over the two year period up to 2009-10, whereas non-food prices rose by a mere 7%. If adjustment is made for improvement in quality of goods and services, non-food inflation is likely to be even lower during this period.
The National Sample Survey (NSS) data on consumption pattern across households of different income segments indicate that food items account for nearly 60% of consumption basket for a typical NREGA worker. In contrast, food items are likely to account for only around 15% of the consumption basket for a software engineer. Given the wide difference in inflation rates across product categories, coupled with a varying proportion of income that middle- and lower-income groups spend on distinct product categories, has wage inequality narrowed in recent years?
The way to address this question is to devise an appropriate inflation index that measures purchasing power of various income categories based on the products they consume and apply that index to determine their real wage. For instance, if we apply an appropriate inflation index, with a greater weight on food products, to adjust the nominal wage of the relatively poor, real wage growth would be much less than that arrived at by using a common inflation index such as the WPI.
Once this adjustment is made, more than half the wage growth for minimum wage earners evaporates because of high food inflation. In spite of this, their inflation-adjusted wage has increased by around 23% since 2007-08. While the largest real wage gains accrue to public sector employees, or category 4 workers, the real wage of the upper middle-income group or class 5 stagnated over this period. In sum, wage inequality across groups, measured on the basis of consumption-specific inflation rate, also appears to have narrowed in the recent past.
It must be emphasised that the analysis of wage inequality is based on individuals. Drawing inferences about household inequality based on this is difficult, given the differences in household characteristics for different income groups. Upper middle-income groups are likely to have not only more people working per household, but also be more educated and, hence, in better-paying jobs. They are also likely to have fewer children. Also, commenting on income and wealth inequality based purely on trends in wages is difficult, given the lack of data on income category-wise savings rate and income flow from the savings of upper incomes class. Nonetheless, at the individual level both nominal and real wage inequality in India appear to have narrowed in the recent past.
The author is senior economist at Crisil. Views are personal
