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Psychology, Cyclicality or Social Programmes
Analysing the wage rise for Indian rural unskilled male labourers and its effect on inflation, this study tests theoretical priors derived from concepts of fair wages using a state-level panel, correlation of inflation peaks, and sectoral changes in employment, wages, and productivity. Food price inflation and the fiscal deficit are consistently significant in dynamic panel regressions, with the effect of the first three times larger. More than the spread of employment insurance, overreaction to high food prices raised wages. Productivity increased in agriculture but less than in other sectors. The results support psychological causal factors alongside cyclical ones.
An earlier version of this paper was presented at the IGIDR–Cornell– IFPRI conference on the Mahatma Gandhi National Rural Employment Guarantee Scheme. We thank the conference participants and an anonymous referee of this journal for useful comments and Reshma Aguiar for excellent secretarial assistance.
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