Wages-Costs Ratio in Indian Manufacturing Industries · A study of the wages-costs ratio in...

T H E E C O N O M I C W E E K L Y June 16, 1962

A study of the wages-costs ratio in manufacturing industries during the period 1947-57 casts doubt on the cost-push potential of wage increases in the manufacturing sector. Wages were only a minor element of total manufacturing costs, being on average about 16 per cent.

Thus even moderate wage increases need not necessarily increase costs, for such increases may be coun­terbalanced by economies in other costs.

This conclusion is confirmed by other indicators also, A study of the changes in money wages and wholesale prices during 1947-57 indicates that the effect of wage changes on wholesale prices was almost negligible.

W A G E S are i m p o r t a n t to the eco-nomy not on ly as cons t i tu t ing

an impor t an t par t of the total effec­tive demand of the communi ty , bu t also as a crucial clement of the total manufac tu r ing costs. In this respect a study of the relat ive importance of wages as compared w i t h the total manufac tur ing coats is l ikely to be rewarding . It is proposed here to study this relat ionship for the manu­fac tu r ing sector in Ind ia . However, the m a i n tool of analysis for this pur­pose, the wages-costs ra t io , has not received i ts due recognit ion f r o m economists. Hence, before examin ing the relevant data on wages and costs, we shall first t ry to indicate the significance of the wages-costs ra t io , for analyt ical and po l icy-making purposes. We shall also consider the m a i n factors inf luencing the ra t io so as to be able to proper ly interpret the recent changes in the ra t io in the manufac tu r ing sector of I n d i a .

A study of the wages-costs ra t io is l ike ly to be ve ry f r u i t f u l in g i v i n g some clue to the wages-price relat ionship in the indus t ry or the sector concerned. I f the ra t io is small, i nd ica t ing the poss ibi l i ty of inter-cost adjustments to keep the total costs unchanged, a moderate dose of wage increase wou ld hard ly affect the product pr ice. However, i f for the indus t ry concerned, the wages-costs r a t io is h i g h , the p roduc t pr ice is l ike ly to be very much sen­si t ive to wage changes. Accord ing ly , a study of the wages-costs r a t io in the strategic industries or sectors of the economy may throw consider­able l i g h t on the cost-push in f l a t ion ­ary potent ial i t ies of wage changes. Thus , a l though the study of wages-costs r a t i o may no t g ive a complete account of the in f la t ionary impac t of wage changes (since the demand-p u l l impac t has to be studied w i t h other tools) , as an a i d in exp lo r ing

the cost-push potential i t ies, i t is very impor t an t .

A proper understanding of the t rend of the wages-costs r a t io is very i m p o r t a n t fo r collective bar­ga in ing purposes as wel l . For for­mula t ing his wage-policy, a respon­sible trade unionist should have definite i n fo rma t ion on the exis t ing wages-costs ra t io and the l i ke ly ef­fect of a change in the ra t io on the product-pr ice of the indus t ry con­cerned. I f the exis t ing wages-costs ra t io is rather large, he should ex­pect stiff resistance to his wage-demand f rom the employers. On the other hand, a small wages-costs ra­t io should encourage the enlightened employers to explore possibilities of accommodating the wage-demand, by mak ing necessary adjustments in other elements of the total costs, w h i c h are relat ively far more i m p o r t ­ant wages.

The Concept

The procedure fo r calculat ing the wages-costs rat io is rather simple. The antecedent consists of what may be described as total labour charges to the employers (i e, basic wages plus other allowances, f r inge benefits and any other expenses — e g, social insurance contr ibut ions by employers, recrui tment expenses, etc, — which may be incidental to the employment of a given work­force) . Th i s is jus t i f ied since as an element of total manufac tur ing costs, the employers are interested not in the basic wages as such, but in the total expenses incur red for employ­i n g the workforce . The consequent consists of the total manufac tur ing costs, i e , the sum of total labour charges (or "wages" to use the te rm i'n a broad sense) p lus the value of materials and fuels consumed in the process of p roduc t ion and deprecia­t i o n . I n symbols, i f labour-charges

of the ra t io wou ld always be posi­t ive bu t less than un i ty , unless M and D become zero (wh ich is i m ­possible in an indust ry) . ,

The fo rmula is helpful fo r in ter ­p re t i ng the changes in wages-costs r a t io proper ly . In the absence of p roper apprecia t ion of the composi-t i o n of the denominator , any rise in the wages-costs r a t io may be w r o n g ­ly in terpreted as an improvement of the workers" earnings, wh i l e ac­tual ly the ra t io may often rise due to a decrease in M or D, other things remain ing the same, S i m i l a r l y a ful l i n the ra t io need not neces­sari ly mean deteriorat ion in the workers ' cond i t ion . The rise or f a l l in L, however, is expected to in f lu ­ence the changes in the ra t io d i rect -l y , unless such changes are counter­balanced by changes in M or D in the opposite d i rec t ion , w h i c h may be possible when the change in L i tself is marg ina l and the value of the ra t io is rather small i nd i ca t ing thereby the relat ive insignificance of labour-charges hi total costs of p roduct ion .

Decline in Wages-Costs Ratio The wages-costs; ra t io in 29 manu­

fac tu r ing industries covered by the Census of I n d i a n Manufactures (C M I) since independence shows cer ta in interest ing features as re­vealed in Tab le 1. (See next page.)

The overall average of the wages-costs r a t i o for 1947-1957 was .163. The average for the pre-Plan period (1947-50') was 174. F r o m the be­g inn ing of p lann ing , however, i t indicated a d o w n w a r d t rend. Thus for 1951-1955, the per iod w h i c h ap­proximate ly covers the First Plan.

955

Subratesh Ghosh

Wages-Costs Ratio in Indian Manufacturing Industries

June 16. 1962 T H E E C O N O M I C W E E K L Y

956

T H E E C O N O M I C W E E K L Y June 16, 1962

the average r a t i o stood at .159, whereas in the fo l lowing two years the average declined fur ther to ,149.

Source : Calculated from Summary Tables, for the years 1947-55 in the Report of the Census of Indian Manu­factures, 1955, Report of the Census of Indian Manufactures 1956 and Report of the Census of Indian Manufactures, 1957.

Th i s shows that d u r i n g the per iod under consideration, wages consti­tu ted a rather minor element in the to ta l manufac tur ing costs. In per­centage terms, i t was highest in 1947, being 18.56 per cent of the total costs and lowest in 1951, being 14 per cent only . Thus a l though Ind i a is a count ry w i t h an overall manpower surplus, her major indus-tries are not h i g h l y labour intensive. In fact in recent years, capi tal i n ­tensity of I n d i a n manufac tur ing industries covered by C M I has been increasing. Th i s is revealed in Tab le 2 w h i c h shows the value of f ixed capi ta l invested per worker in 29 major industries covered by C M I ,

Source : Calculated from the C M I Reports, 1955, 1956, 3957.

F r o m Table 2 we find tha t whi le in the pre-Plan pe r iod (1947- '50) the average amount of capi tal i n ­vested per worker was Rs 1428.01, in 1951-1955, the average increased to Rs 2181 .61 . In the fo l lowing two years (1956- '57) , i t increased fur ­ther and went up to Rs 2975,98. The fact tha t d u r i n g the same pe­r i o d , the average wages-costs r a t i o

was coming down, whereas the aver­age fixed capi ta l invested per worker was going up , may be considered as causally related. Th i s m a y be shown by s tudying the rates of changesi in different elements in f lu ­encing the wages-costs ra t io . D u r i n g 1947-57 the labour charges (i e, wages plus value of other benefits) increased by about 85 per cent, but the increase in other elements of costs was greater — the rate of i n ­crease of depreciat ion being about 195 per cent and the increase in value of materials and fuels con­sumed being about 140 per cent. Thus the general tendency of wages-costs ra t io to decline d u r i n g the pe r iod should be taken to be main ly due to greater u t i l i za t ion of f ixed capi ta l and mater ia l inputs , since there was too associated decline in wages (bu t actually some increase) and the price-index of indus t r ia l raw materials actual ly registered a sl ight decline d u r i n g some of the years under consideration (1950-5 6 ) . ( D u r i n g 1950-'56, raw materials price-i t idex declined by about 8 per cen t ) .

Negligible Impact on Prices The study of the wages-costs ra t io

d u r i n g the per iod under considera­t i o n fu r the r throws doubt on the cost-push potential i t ies of wage changes in the manufac tu r ing sec­tor. In fact, wages being on aver­age about 16.3 per cent of the to ta l costs and remain ing always less than 20 per cent, may be consi­dered a m i n o r element of the total manufac tur ing costs. Thus even moderate increases in wages need not necessarily increase costs, for such increases may be counter­balanced by in t roduc ing economies in mater ia l or fuel costs or by i m ­p r o v i n g the factor efficiency. This conclusion is also confirmed by other indicators as wel l . In fact, d u r i n g 1947-1957, a study of the changes in money wages and whole­sale prices indicates that the effect of wage changes on the wholesale prices has not been considerable. Th i s is brought out by Table 3 which shows the indices of money-earnings of factory workers and the whole­sale prices.

The correlat ion coefficient be­tween the index of money earnings and the index of wholesale prices comes only to .09. Th i s shows very weak corre la t ion between the

Source : "Indian Labour Statistics, 1960", issued by the Labour Bureau, Government of India, p 174.

two indices. On the other hand, i f the changes i n money-earnings o f factory workers were necessarily associated w i t h changes in wholesale prices via the i r impac t on the to ta l manufac tu r ing costs to any s igni­ficant extent , the value of the correlation coefficient should have been fa r greater and would normal ly approach u n i t y . The absence of such strong cor re la t ion between the t w o indices shows that d u r i n g the per iod under consideration wage changes were ha rd ly responsible f o r the changes in wholesale prices. Th i s relat ive lack of response of prices to wages-changes appears to be ma in ly due to the low wages-costs ra t io in the manufac tur ing sector, since had the ra t io been considerably higher wage-changes must have reflected themselves to a greater extent in changes in wholesale prices.

9 5 7 .

June 16, 1962 T H E E C O N O M I C W E E K L Y

958