^ what is this low wage - growth trap of japan and how it could take place in India? [Chapter 2, survey vol 1 pg 77]
@Mishan @Qoqo @Kapiushon may be economics optional ppl can help. so tagging!
^ what is this low wage - growth trap of japan and how it could take place in India? [Chapter 2, survey vol 1 pg 77]
Very low unemployment levels in japan coupled with labour shortage means that wage levels are stagnant, since firms cannot layoff the workers they are forced to pay minimum wages. also Japan is facing defaltion and they cannot grow without a certain level of inflation which requires disposable income or higher wages, this has formed a cycle of low wages and lower level of growth...This is what i can make from few articles online.
https://www.ft.com/content/0eaf2672-3eb9-11e7-9d56-25f963e998b2
found another good article;
Got the point. Thanks bro. But i still wonder, how this can also be the case in India as well! Given india's demographic dividend, supply bottlenecks ensure there is some inflation always, and also we are far from full employment case unlike japan! Also Min wages also not compulsory across all sectors, the one given is also is considerably low! India that's why is more of a stagflation kind of case.. isn't it?
^ what is this low wage - growth trap of japan and how it could take place in India? [Chapter 2, survey vol 1 pg 77]
Low wage-growth trap is talked about in the context of growing economies.
The idea is wage-growth in a growing economy must match the growth rate. The mismatch is captured by the idea of low wage-growth trap. The economy grows, but the wages stagnate.
Case of Japan
In the post WWII era, the Japanese economy began to work upon the reconstruction. With a low base effect, the manufacturing sector boomed. The wage rise was significant till the Brettonwoods system existed.(1971)
Under Brettonwoods, since the dollar was benchmark for Yen, Yen performed great with respect to dollar and appreciated. But, the collapse of Brettonwoods was necessitated by high inflationary trends in the dollar. Once the Brettonwoods collapsed, Yen depreciated. In Japan, the businesses kept anticipating the same intensity of growth as in the Brettonwoods era- meaning high growth of wages were expected. That didn't happen as the consumption slumped.
The fruits of "good old Brettonwoods days" tempted the businesses and households to stall investment decisions in the anticipation of future growth. This further deteriorated the economy.
Long story short, now the Japanese economy is seeing negative interest rates. That means bank lending is minimal to zero. Society is ageing that creates the problem of workforce. So, it's a deadly low-wage growth trap.
Case of India
The case of India is different. When we opened up in 1991, the emphasis on service sector meant the manufacturing sector remained impoverished. The wage mismatch in India stems from the "jobless growth". Service sector has not been able to absorb much workforce and the manufacturing sector has not been able to provide wages. This double whammy has laid the foundation for low wage-growth trap in India. Real wage stagnation has long been a reality in the Indian manufacturing sector- thanks to informalisation and contractualisation of labour + other related problems.
Why is it being talked about now?
The Survey highlights the problem in the aftermath ofcorona pandemic. India faces risk of falling into a low wage-growth trap due to following reasons-
- Businesses are risk-averse now
- High-paying jobs were scarce in an already slowing economy. Now, they will be non-existent!
- Structural factors still persist- poor employability. Demographic dividend will remain a utopia.
In this situation, the government has the key to unlock the economy. The low-wage growth trap can only be prevented with a measured expansionary fiscal policy that-
- Promotes business
- Boost consumption that in turn, supports business
- Improve employability of labour
- Makes effort towards formalisation of economy.
- Crowd in private investment.
If not, businesses will hold their cards. So, would the households. Government must generate the positive sentiment that all is well and we are back and running. Japan is a good case study. I'm glad that the Survey recognises this trend and projects a double digit growth. The Budget must build upon it boldly.
**superlike**
thanks a lot sir. opened my mind completely. What an explanation. too good! :)
