Some extensions and modifications of the proposed model of wage determination

The model proposed in Section 5.3 is based on some specific assumptions which are relevant for the female workers in the sample. Some of these assumptions may not hold in certain other circumstances. The suggested procedure for arriving at the equilibrium can be more useful if it can be modified to take into account situations where the assumptions do not hold. These modifications are now considered.

Uniformity of wage rate

Many studies consider the village labour market for unskilled work to be characterised by uniform wages rather than the variation in wage rates observed among the female workers. The process of wage determination suggested in Section 5.3 may be modified to postulate the existence of a uniform wage rate. Uniform wages will prevail if the workers do not offer to work below the equilibrium wage rate even if some of them have lower reservation wages. Nor do the employers make

an attempt to bargain to bring down wages to the level of reservation wages. However, it is not logical that they would not do so if it was profitable.

An alternative way to postulate a unifonn wage is to introduce modifications in the supply schedule for workers and labour days. If the workers have a uniform reservation wage, a maximum supply of workers (and days) will be forthcoming at the same reservation wage. This is possible for male workers whose altemative cost of time is given by altemative earnings opportunities which may be the wage rate in employment at the nearest town or market centre and will be the same for all unskilled workers. If considerations of status or housework are not relevant, then the characteristics of workers will not affect the reservation wage as was the case with the sample of female wage workers.

Figure 5.4 illustrates this situation.

Figure 5.4 The equilibrium wage rate and employment when workers have a uniform reservation wage

W a g e rate per day

W,

(a)

Wage rate per day

W LI L^^, Number 0 of workers (b) Dd Sd ! xQd ! L2 Number of days

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In figure 5.4(a), D ^ Q ^ shows the demand for workers, W j S ^ shows the supply of workers and O W j shows the uniform reservation wage at which O L ^ workers supply their labour. With a uniform reservation wage among workers, the equilibrium wage rate is the same as the reservation wage. In the figure O W j gives the equilibrium wage rate while O L j gives equilibrium employment. A comparison of demand for labour days and supply of labour days in Figure 5.4(b) shows that I ^ L ^ is the amount of unemployed days at wage rate O W j .

Wage variation on the basis of productivity differences

The analysis so far is based on the assumption that there are no productivity differences among the workers. This is not a crucial assumption for the analysis and with minor modifications, productivity differences between workers can be accommodated.

If workers are heterogeneous in terms of work capacity, their alternative earnings will also vary and the reservation wage of workers with higher productivity will be proportionately larger. Therefore, when wages paid are equal to the reservation wage of each worker, wages will vary depending on a worker's productivity.

When productivity differentials influence the reservation wage, personal characteristics of a worker which influence his/her productivity, will cause wage variation, even if the labour market is not cleared. Studies based on the competitive framework for wage determination found that a person's age, experience etc. are important factors in explaining wage variation in labour markets in India or Bangladesh. Since there was underemployment in these labour markets, it was argued that competitive analysis may not have been applied meaningfully. The above framework may provide an alternative rationale to justify the observed relationships which were important in male labour markets (Table 4.1).

Alternatively, instead of working through the formation of a reservation wage by a worker, a productivity differential may play a role in differentiating the wage rates of workers through the employers' strategy. Employers may bid up the wages of the workers whose work capacity is larger. Workers whose labour power per hour is higher, but who have the same reservation wage, would have cheaper labour power. These workers will be in demand by all employers and thus the employers bid up the price of labour hours from these workers.

It follows that the more productive workers may obtain more employment. If these workers do not raise their reservation wage (or the employers do not bid up their wage rate) up to the point of equality with the wage per unit of labour power with other workers, the more productive workers may obtain a lower wage rate per unit of labour power (but still receive a higher time rate). In that case they will be employed preferentially and this may raise their total earnings (depending on the relevant elasticities). This would imply that the workers with a higher time rate of wage (but lower wage per unit of labour power) obtain more employment. This contrasts to the situation in which the reservation wage is unrelated to factors influencing productivity (as in the case of female workers), so that workers with a lower reservation wage rate and thus a lower time wage obtain more employment.

Absolute shortage of demand

In the situation of very low productivity of labour in the traditional rural sectors, one could think of a situation that after a certain level, a reduction in the wage rate will not increase the demand for labour. This may be described as a situation of absolute shortage of demand.

This may occur in a small geographic region with limited resources and a small range of activities. The supervision cost may cause a special case of inflexibility of demand. If with a larger volume of employment, the supervision cost increases at more than a proportionate rate, the demand for labour may remain fixed after a

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certain level. This may occur due to the low morale, and thus low productivity, of low paid workers. In this case the wage-demand relationship is akin to the efficiency wage theory.

However, the increase in supervision cost may be due to other reasons and will not be functionally related to wage rates but to the actual number of workers who are employed. When more labour is employed, the workers need to be engaged in diverse types of activity like cleaning orchards, mending fences around kitchen gardens, land improvement etc. These are performed over a dispersed area and one employer cannot supervise all the workers. In the absence of supervisory labour, supervision is inadequate. A specific example may be that at periods of weeding a crop, there may still be scope to employ workers for the improvement of land which remained fallow in that season. This may not be practicable because one employer- supervisor cannot supervise both tasks.

In such cases employment will be fixed at a maximum level. The wage rate will be determined at the level which is just sufficient to achieve that supply.

Figure 5.5 describes this situation.

Wage rate per day

Figure 5.5 T h e equilibrium wage r a t e and employment when there is an absolute shortage of d e m a n d for workers w, P D D S L2 Number of workers

D D L j shows the demand for workers at various wage rates and SS shows the supply of workers at each vvage rate. Employment cannot be greater than OL j even if the reservation wage among the workers is close to zero. At O L j employment, wage rates will range between OS and O W j depending on whether employers can bargain to push wages down to the level of the reservation wages of workers or whether the workers can bargain to keep them as high as possible to generate the maximum amount of employment O L j .

An absolute shortage of demand is likely, especially in the female labour market, where women are employed only in a small proportion of jobs. The employers interviewed reported that an important reason for not employing women in low productive activities at low wage rates is the problem of supervision.

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Chapter 6

Determinants of employment among female wage workers

6.1 Distinction between a labour supply analysis and the determinants of