Why in the News?

According to PLFS reports, employment in India is increasing, but the real wages of salaried workers have remained unchanged since 2019.

What are the key reasons behind the stagnation of real wages for salaried workers in India since 2019?

• Inflation Outpacing Wage Growth: Rising consumer prices (CPI) have eroded the purchasing power of salaries despite nominal wage increases. For example, Real wages for salaried workers in India were 1.7% lower in the June 2024 quarter compared to the June 2019 quarter (PLFS data).
• Excess Labour Supply and Declining Returns to Education: An oversupply of qualified workers has reduced the premium for higher education, limiting salary growth. For example, the share of self-employed workers increased from 53.5% in 2019-20 to 58.4% in 2023-24, indicating a shift from salaried roles due to a lack of opportunities.
• Depressed Private Sector Investment: Reduced corporate investment leads to slower job creation and wage stagnation. For example, India’s private sector investment-to-GDP ratio declined from 28% in 2011-12 to 21.1% in 2022-23 (Reserve Bank of India).
• Policy Shocks (Demonetisation and GST Impact): Economic disruptions from demonetisation (2016) and GST (2017) weakened small and medium enterprises (SMEs), affecting formal employment. For example, Formal employment fell, and salaried employment as a share of total workers dropped from 22.9% in 2019-20 to 21.7% in 2023-24 (PLFS data).
• Shift Toward Informal and Contractual Work: Companies increasingly rely on temporary and gig workers, offering lower pay and fewer benefits. For example, Casual labour wages increased by 12.3% (real terms) between 2019 and 2024, while salaried wages stagnated, reflecting a rise in informal work.

Why is the increase in wages for casual labour not considered a net positive for the economy?

• Lower Productivity Contribution: Casual labour typically involves low-skilled, irregular work with limited productivity gains. While wages may rise, the overall economic output does not grow proportionately.
  • For example, the agriculture sector, which employs a large share of casual labour, contributed only 16% to India’s GDP in 2023-24 despite employing over 45% of the workforce (Economic Survey 2023-24).
• Informal Nature of Work: Casual jobs lack social security, health benefits, and job stability, leading to long-term economic insecurity despite wage increases.
  •  In India, 93% of the workforce remains in the informal sector with minimal social protection, contributing to economic vulnerability (ILO report, 2023).
• Wage-Price Spiral Risk: Rising wages in low-skilled sectors can increase the cost of goods and services, driving inflation without improving living standards.
  • For instance, wage increases for casual farm labour contribute to higher food prices, intensifying retail inflation (CPI rose by 7.44% in July 2024, RBI).
• Limited Skill Development and Upward Mobility: Casual work offers fewer opportunities for training or career advancement, trapping workers in low-wage cycles despite nominal wage growth.
  •  The Periodic Labour Force Survey (2023-24) shows that only 2.4% of India’s workforce received formal vocational training, limiting skill-based upward mobility.
• Depressed Consumption and Savings Rates: Casual labourers typically earn subsistence-level wages, leaving little room for savings or significant consumption, which hampers long-term economic growth.
  • Household savings as a share of GDP declined from 23.6% in 2011-12 to 18.1% in 2022-23, reflecting weak wage-driven consumption (RBI report).

How have policy decisions like demonetization and the implementation of GST affected wage growth and employment patterns? 

• Disruption of Informal and Small-Scale Enterprises: Both demonetisation and GST disrupted cash-dependent small and medium enterprises (SMEs), leading to job losses and reduced wage growth in the informal sector. Example: The share of salaried workers declined from 22.9% in 2019-20 to 21.7% in 2023-24 (PLFS data), indicating a shift away from formal employment.
• Shift Toward Informal and Gig Work: Policy shocks accelerated the transition from stable salaried jobs to informal, gig-based, and self-employed work, which generally offers lower pay and fewer benefits. Example: The share of self-employed workers increased from 53.5% in 2019-20 to 58.4% in 2023-24, reflecting a rise in informal employment (PLFS data).
• Slower Wage Growth and Employment Stagnation: Compliance burdens from GST and cash shortages from demonetisation constrained business operations, leading to slower wage increases across sectors. Example: Real wages for salaried workers were 1.7% lower in June 2024 compared to June 2019 (PLFS data), indicating stagnant wage growth despite economic recovery.

Way forward: 

• Enhance Formal Employment and Skill Development: Promote labour-intensive sectors and incentivize formal job creation through targeted tax benefits and reduced compliance burdens.
• Strengthen Social Security and Wage Policies: Implement comprehensive social protection schemes for informal workers to ensure income stability and healthcare benefits.

Mains PYQ:

Q Besides the welfare schemes, India needs deft management of inflation and unemployment to serve the poor and the underprivileged sections of the society. Discuss. (UPSC IAS/2022)

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