|
This paper attempts to perceive the cointegration between labor productivity and money wage rates in the Indian industries (factory sector) during the period 1980-81 to 2004-05. The empirical results based on unit root tests, cointegration and error correction modeling exemplify that labor productivity and money wage rates are cointegrated showing the existence of long run equilibrium between them. The elasticity of labor productivity, with respect to money wage rate, is slightly more than unity in the long run revealing that the substitution possibilities of labor for capital in the Indian industries are more in the long run. As the substitution possibilities of labor for capital are more in the long run, the policy decision to enhance the money wage rate by 1% would improve the labor productivity, on average, by more than 1% in the Indian industries, all else remaining equal.
There is a link between labor productivity and wage rates in the industry. If labor productivity increases, the workers' contributions to revenue of the industry would also increase. This leads to increase in demand for labor. As wages are determined by supply and demand forces, an increase in demand implies increase in wages. Thus, there is a positive association between money wage and labor productivity. So far as the labor productivity and money wage rates in Indian industries are concerned, there are two issues which need to be empirically examined. The first issue is concerned with cointegration between labor productivity and money wage rate, while second is related to short run dynamics. The empirical content on these two issues would help to understand not only the responsiveness of labor productivity to changes in money wage, but also the degree of elasticity of substitution between labor and capital both in the short run and long run. Therefore, there is a need to generate empirical information on the cointegration relation between labor productivity and money wage rates in the Indian industries. There are a large number of empirical studies on elasticity of substitution between labor and capital (Gujarati, 1966; Diwan and Gujarati, 1968; Shankar, 1970; Sinha and Sawhney, 1970; Asif Banerji, 1975; Vijay and Vijay, 1977; Mehta, 1980; Umar Kazi, 1980; Isher Judge Ahulwalia, 1981; Swamy, 1984; Goldar, 1986; Upender, 1996; Sanjib et al., 1996; and Inderpal, 1997) in terms of responsiveness of labor productivity to changes in money wage rate in India, in which tests for stationarity of the individual time series variables, i.e., labor productivity and money wage rates, have not been performed.
As consistent statistical inference from the estimate of elasticity of labor productivity with respect to money wage rate, which is known as the elasticity of substitution depends by and large on the assumption of stationarity, it is reasonable to determine whether the time series of macro variables (labor productivity and money wage rates) are individually stationary or nonstationary. The present exercise is justified on the ground that till date not even a single study has examined the elasticity of labor productivity with respect to money wage rate, by performing Augmented Dicky-Fuller (ADF) and Phillips-Perron (PP) unit root tests, cointegration analysis (Engel and Granger, 1986) and error correction modeling. |
