A recent report by India Ratings Agency says that in UP and Haryana real wages have been growing at a mere 0.1 per cent. The report might as well have said they are growing at 0 per cent or even actually been minus. No one would be any the wiser. I suspect the authors were just being polite.

The BJP governments of both States will protest shrilly. But their economists, if they have any, should tell them that this sort of slow wage growth had been foreseen and explained 70 years ago.

In international trade, said two long gone western economists, Hans Singer and Raul Prebisch, separately and independently, and at different times, said that terms of trade for commodity producing countries always turn adverse. Oil included, which wasn’t an exception till OPEC rebelled.

What this means, broadly speaking, is that commodity producers — read things that come from nature — sell cheap and buy dear from manufacturing countries. This leads to a steady and secular decline in their incomes. The phenomenon later came to be known as immiserisation, or unstoppable increase in poverty. It’s always been there but is manifesting itself grotesquely now.

From this it is perhaps possible to partly explain what’s been happening to wages in Haryana and UP and other such States. Having very little by way of industry, they are basically like commodity producing countries that sell to developed countries, in this case the more industrialised States. These non-industrial States enjoy adverse terms of trade when they sell to the more advanced states like the five States of the south plus Gujarat and Maharashtra.

Terms of trade

Between 1950 and 1970 there were further extensions of the terms of trade idea developed by Prebisch and Singer. These extensions stand on their own. It’s not necessary to describe them here. Suffice it to say that income disparities between regions are usually because one side suffers from adverse terms of trade.

So what are the States with low wage growth doing wrong? The standard explanation is the poor quality of skills of the people there because of the prolonged period of low investment in nutrition, health and education. These people are unemployable.

But these are not the only problems. Truth be told, given how large their populations are, even if just five per cent of them are properly skilled, it would be enough to absorb a lot of capital and investment. UP, for example, probably has 30 crore people now. Five per cent of that is 1.5 crore while according to the Annual Survey of Industries total factory employment in India is about 1.8 crore.

Is there enough capital flowing into UP to absorb so many skilled people? Also remember that UP and perhaps Haryana send a lot of skilled and semi-skilled workers to other States. There’s not enough investment to absorb them.

So the short point is not the paucity of skilled labour. It’s the paucity of capital. States that lure capital do better in terms of wage growth than States that don’t. That’s all there is to it.

Nor is this deficiency in attracting capital just a matter of bad tax policies and poor infrastructure development. Good tax policies and infrastructure are necessary, of course, but they aren’t sufficient.

Political factors

A lot of other factors influence the decisions about investment destinations. The most important of these is perhaps the structure of politics in the State that can discourage investment.

In general, States with two competing political parties do better than those with more of them. Look at the evidence and you will find that the States with a higher degree of manufacturing employment also usually have just two major political parties.

There are two notable large exceptions: Madhya Pradesh and Rajasthan which have a two party system but figure nowhere in the manufacturing rankings. But UP, Haryana, Bihar and Jharkhand and even West Bengal prove the point, which is that intense political competition bodes ill for investment in the State and therefore for the incomes of its inhabitants.

One of the worst manifestations of such political competition is the setting of unrealistic minimum wages. Haryana is a classic example. It has reasonably good infrastructure but the high minimum wage nullifies the attractiveness of that. This is true of UP and other such States also.

Or to put it differently, if the minimum wage, or base, is already high how will wage growth also be high in the absence of adequate investment?

This doesn’t mean that political competition is bad. Far from it.

But too much of it is most definitely bad because there is no mechanism to control political leaders when they get into a hyper competitive mode and badly distort the structure of economic incentives. The price is paid by the citizens as our income levels show.