Labour Market Institutions, Real Wages and Macroeconomic Outcomes

Labour institutions influence the outcome of macro policies. We postulate that, for India, nominal wages rise with average labour productivity and with the price of food, and discuss the macroeconomic consequences. As inflation is caused by sectoral supply constraints and productivity mismatches, a cut in demand need not work, and even if it does, it imposes a large cost. Stimulatory macro policies can actually lower the rate of inflation, and raise real wages, even in the face of a supply shock if they are designed so as not to hurt the productivity increase that is a part of development. A rise in agricultural productivity turns out to be the best way to lower inflation, and allow target real wages and growth in industrial output to be achieved. Greater openness offers a way to follow such policies even in the short-term by using imports to enhance food availability following an agricultural shock. Stylised facts and simulations with a macrodynamic model provide evidence in support of such wage behaviour. A preliminary examination of Indian labour market institutions also supports the latter and suggests that better ways to improve labour's position are better education and training facilities, and infrastructure.