Wages and Productivity in Indian Public Enterprises : A Causality Analysis

It is generally believed that the compensation of workers employed in the organised sector in general and public sector in particular is not necessarily linked to their economic contribution in the productive process. It is accepted that most the enterprises belonging to the organised sector follow efficiency wage criterion to achieve their organisational goals. In the public sector enterprises, it is widely believed that the relationship between wages and their productivity get eroded; as the workers are better organised and enjoy a higher proportion of non-wage component in their compensation packages. The advantage is earned because of their capacity to earn rent as a consequence of lobbying for better compensation packages. Thus in organised sector; wage rate (w) is higher than what it would have been in neo-classical market clearing model. The link between wages and productivity is established through two routes-marginal productivity theory and efficiency wage theory but in different directions. To find the inter-relationship between wages and productivity, public sector enterprises have been selected for the period 1974-75 to 1995-96,because of the growing concern about their inefficiencies. Granger and Akaike tests of causality have been used to find the causality between wages and labour productivity. The empirical analysis finds a feedback relationship between the two asserting that wages causes productivity and productivity causes wages