Wage Determination a Labor Surplus Economy: The Case of India.

This paper is a contribution to the growing body of empirical literature challenging basic assumptions and policy conclusions regarding industrial wage determination in the Lewis-Fei-Ranis model of economic development in labor surplus economies. We shall show that in India wages in modern industry are some four times higher than the earnings of agricultural laborers, rather than the 30 percent or so hypothesized by W. A. Lewis as necessary to attract labor to the modern sector and to compensate for the higher urban cost of living. More important, we shall show that the earnings differential, expressed in real terms, has been rising at an average annual rate of 1.5 percent from 1949 to 1965. Available evidence points to rising real wages in industry as an investment in higher productivity for the employer, not a wasteful deduction from the investable surplus forced upon industry by government and unions. [ABSTRACT FROM AUTHOR]