Workers are the flavour of the season. A new book by French Economist Thomas Piketty — Capital in the 21st century — raises the spectre of declining labour share and extreme wealth inequalities, as in pre-World War I Europe. Closer home, Narendra Modi’s allusion to himself as ‘Mazdoor No 1’ and the Bajaj workers’ threatened strike has turned the spotlight on workers.

Bajaj workers at the Chakan plant have demanded the issuance of 500 shares at a discounted price of ₹10 per permanent worker and allocation of Corporate Social Responsibility (CSR) funds towards the education of employees’ children.

Can firm decisions on wage compensation systems and its CSR spend have larger ramifications on macro-economic outcomes?

Harvard economist Martin Weitzman, in his 1984 book, The Share Economy: Conquering Stagflation , attributed the problem of cyclical unemployment to wage inflexibility. This led to workers being laid off during periods of recession, contributing to a downward macroeconomic spiral.

Weitzman asserted that a profit-sharing based wage system, in place of the prevalent fixed systems, would mean reduced labour costs during periods of slack product demand (and hence business losses), preventing retrenchment of labour as well as stagflation. It wouldn’t do, however, if such agreements were put in place only by a few firms. The problem of stagflation could be avoided through a replacement of fixed wage systems by profit-sharing wage arrangements when all (or almost all) firms of a wage economy simultaneously converted to profit-sharing plans.

The Japanese bonus system of labour compensation merits a deeper look in this context for its role in stabilising Japanese unemployment at comparatively low levels in the pre-1990 era. Freeman and Weitzman (“Bonuses and Employment in Japan”, Journal of the Japanese and International Economies , 1987) have demonstrated that bonus systems have positive employment consequences, unlike a system of base wages, with its negative employment impact.

Outcomes of change Indian unemploymenthas been rising in the past two years. A simple shift in the type of wage compensation systems may spur labour productivity and employment, with accompanying positive effects on growth and demand.

The Companies Act 2013 (effective April 1, 2014) lays down the provisions for CSR by Indian companies. The emphasis is on external CSR — with a preference to be given to local areas and areas around which the company operates for conduct of its CSR activities. Company expenses on its own employees is precluded from CSR spend. However, active company involvement in the welfare of its workers and their families’ education and health would motivate employees, increase the credibility of the company’s CSR through employees acting as the endorsers of such activities, and spur productivity. The economic significance of a growing labour share through firm-level measures should not be overlooked. While individual firms may not have an incentive to change wage compensation systems or increase employee spend, the macroeconomic impact of such measures calls for greater government intervention.

The government may do more than simply regulate businesses to protect labour interests through antiquated labour laws or exhort businesses to fulfil societal obligations through external CSR norms. Such measures may provide temporary succour at best, or even be counterproductive, as is borne out by the preference of Indian firms for contractual labour. They cannot impact labour productivity and employment positively.

The government’s role

The government may provide strong social nudges in the form of tax breaks and/or preferential treatment to firms adopting different wage compensation systems and a holistic CSR. Such incentives may motivate businesses to reduce the growing income inequalities.

While trade unionism is not new in India, the demands of the Bajaj union appear to be. The demands gain significance in terms of their potential to affect larger macroeconomic goals. India’s current dismal growth performance necessitates a deeper understanding of the implications of labour productivity and labour compensation systems.

Can businesses be nudged into adopting measures to reduce the amplitude of business cycles, reduce inequalities and spur aggregate demand and growth? The over-reliance on traditional fiscal-monetary stimuli for achieving such outcomes will reduce.

The writer is a professor of economics at the SP Jain Institute of Management and Research, Mumbai. The views are personal

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