The Deep Crisis in the Informal Sector Is Still Keeping the Lid on Real Wages

Real wages are among the most important economic indicators. If the country’s gross domestic product (GDP) is rising fast but there is no substantial increase in real wages, something is clearly wrong with the pattern of growth. That is precisely what seems to be happening in the Indian economy today, judging from recent data released by the Labour Bureau and the National Sample Survey Office (NSSO). Both sources point to a virtual stagnation of real wages in the last 10 years or so.

Real wages refer to money wages adjusted for inflation, i.e., divided by a suitable price index. They measure the purchasing power of a day’s work for casual labourers. Naturally, they vary between occupations and locations.

India’s Labour Bureau collects monthly information on daily wages from a fixed sample of 600 villages spread over 66 regions spanning the entire country – this is the Wage Rates in Rural India (WRRI) series. This series focuses on occupation-specific money wages for 25 agricultural and non-agricultural occupations, e.g. ploughing, sowing, harvesting, carpentry, plumbing, beedi-making and so on. It also includes some generic categories, notably ‘general agricultural labourers’, ‘non-agricultural labourers’ and ‘construction workers’. We focus here on these three categories.

Annual state-wise and all-India wage figures are calculated by the Labour Bureau as unweighted averages over the relevant months and villages. These annual money wages can readily be divided by the Consumer Price Index for Agricultural Labourers (CPI-AL) to estimate real wages. All-India figures can also be calculated as population-weighted averages of state figures, but this makes little difference.

In earlier work, we showed that WRRI data point to an alarming stagnation of real wages in rural areas from around 2014 onwards, in contrast with rapid growth in the preceding seven years or so. The latest WRRI data, for 2023-24, suggest that this stagnation pattern continues. The point is illustrated in Figure 1. 

Figure 1: Real Wages at 2014-15 Prices

No sophisticated econometrics are required to see that the annual growth rate of real wages over the last ten years is close to zero at the all-India level. For the record, estimates are presented in Table 1. It is only for agricultural labour that a semblance of growth can be observed, at a dismal rate of around 1% per year. 

Table 1: Annual Growth Rates of Real Wages, 2014-15 to 2023-24 (%)

Source: Calculated by semi-log regression of real wages on time, from WRRI data deflated by CPI-AL. Figures are rounded to the first decimal.

Further evidence of interest has recently emerged from the Annual Survey of Unincorporated Sector Enterprises (ASUSE), conducted by the NSSO in 2021-22 and 2022-23. Two earlier NSSO surveys of unincorporated enterprises are available, for 2010-11 and 2015-16 respectively. All four surveys focus on non-agricultural unincorporated enterprises, excluding construction. The NSSO notes possible comparability issues for the 2021-22 survey, partly conducted during the COVID-19 crisis, but the other surveys appear to be comparable for our purposes.

They all include estimates of annual ’emoluments per hired worker’, based on the same methodology. These emoluments include social security benefits, but these are likely to be small in the informal sector, so that emoluments can be taken as roughly synonymous with money wages. The corresponding real wages are more or less the same whether we use the CPI-AL as a price index, or the Consumer Price Index for Industrial Workers, or the former for rural areas and the latter for urban areas. To keep things simple, we stick to the CPI-AL. The corresponding annual growth rates, before and after 2015-16, are presented in Table 2.

Table 2: Annual Growth Rates of Real ‘Emoluments per Hired Worker’ (%)

Source: Estimated from NSSO survey data at the relevant end-points. Real emoluments are calculated by deflating money emoluments, available from ASUSE and earlier NSSO surveys of unincorporated enterprises, using the CPI-AL.

A striking pattern emerges: real wages were growing fast before 2015-16, but came to a virtual standstill after that. The contrast is particularly sharp in rural areas, where the annual growth rate of emoluments per hired worker was close to 7% between 2010-11 and 2015-16, but nearly zero between 2015-16 and 2022-23. This pattern is consistent with WRRI data.

The growth rates in the second period are driven down to some extent by a puzzling decline in real wages between 2021-22 and 2022-23. Incidentally, Periodic Labour Force Surveys (PLFS) also suggest a dip in real wages in 2022-23. But even if we ignore that dip and truncate the second period at 2021-22 (ignoring the possible comparability issues mentioned earlier), the growth rate of real wages in that period would be less than 2% – much lower than in the first period.

Also read: The Latest ASUSE Reports Show How Deep in Trouble the Informal Sector Is

In absolute terms, the ASUSE surveys suggest that average emoluments per hired worker varied between Rs 116,000 per year in the manufacturing sector and Rs 135,000 per year in “other services” in 2022-23. That’s roughly Rs 10,000 per month – a pittance. In rural areas, real wages are even lower.

These findings may seem to contradict independent evidence of a sustained decline in poverty in the last twenty years. In fact, there is no contradiction. Even if occupation-specific wages are stagnating in real terms, per-capita expenditure may rise over time if workers gradually move towards better-paid occupations (or states with higher wages, for migrant workers), or if workforce participation rates increase. According to the population projections of the National Commission on Population, the share of the working-age population (say, 15-59 years) in the total population has been rising steadily in the last 20 years. This would contribute to poverty decline even if real wages are stagnating. The same projections, however, suggest that this “demographic dividend” is about to come to an end.

The stagnation of real wages points to a deep crisis in the informal sector. It is doubtful that there are many other examples of an economy growing at 6-7% per year for 10 years without much increase in real wages.

The informal sector experienced three successive shocks during this period: demonetisation, hectic rollout of the Goods and Services Tax (GST), and the COVID-19 crisis. Agriculture was comparatively spared in each case, and the corporate sector did quite well through some of these crises at least.

As Viral Acharya has shown, the concentration of power among top-five private firms was declining between 2010 and 2015, but then rose sharply from around 2015-16 onwards. It is quite possible that rising market concentration, along with other effects of these successive shocks, had an adverse impact on employment generation in the informal sector. This hypothesis is consistent with a recent analysis of ASUSE data by P.C. Mohanan and Amitabh Kundu.

Whatever its roots, the stagnation of real wages in the informal sector is a serious failure of the Indian economy. It deserves far more attention than it has received so far. This failure is also an indictment of economic policies that seem to pay very little attention to the interests of informal-sector workers.

Arindam Das works at the Foundation for Agrarian Studies, Bengaluru. Jean Drèze is Visiting Professor at the Department of Economics, Ranchi University.