The Effect of Wages and Inflation on the Labor Productivity in Selected Developing Countries

اقتصاد و توسعه منطقه ای

Article 6, Volume 30, Issue 25, June 2022, Pages 180-214   

Document Type: Original Article

DOI: 10.22067/erd.2023.81678.1176

Authors

akram hasannejsad¹; mahdi moradi^{* 2}; Sima eskandari³

¹Ph.D. Candidate, Department of Economics, Miyaneh Branch, Islamic Azad University, Miyaneh, Iran

²Assistant Professor, Department of Economics, Payame Noor University, Po Box 19395-3697, Tehran, Iran

³Assistant Professor, Department of Economics, Miyaneh Branch, Islamic Azad University, Miyaneh, Iran

Abstract

 
1- INTRODUCTION
In today's competitive world, productivity as a philosophy and a vision based on the strategy of improving operations is the most important goal of leading organizations and is a necessity for economic growth and improving the living and welfare of a country. The amount and rate of productivity growth in each country has a significant impact on the trend of macroeconomic variables at the global level. Many factors affect productivity, among which, the role of wages and inflation can be very important.
 
2- THEORETICAL FRAMEWORK
In the inflationary state, a misunderstanding is created in relation to the levels of relative prices in societies; therefore, in such a situation, an atmosphere of uncertainty dominates the economy of countries and production costs increase due to inflation, and this can affect the wages paid by the employer to the workforce. As a result of the increase in prices and the disproportion of salary increase with inflation, the real income of the labor force decreases and the labor force cannot cover all its expenses. Therefore, in an inflationary state, we will witness things such as a decrease in the health of the workforce, a decrease in the level of education of the workforce, a decrease in the motivation of the workforce, and the creation of a class gap; therefore, labor productivity can gradually decrease.
 
3- METHODOLOGY
The aim of this study is to determine the effect of wages and inflation on labor productivity by using Markov switching econometric technique in 15 selected developing countries (Iran, Brazil, Egypt, Indonesia, Jordan, Mauritius, Mongolia, Philippines, Thailand, Colombia, India, Kazakhstan, Mexico, Peru and South Africa) during the period 2006 to 2017. In this paper, the indicators of foreign direct investment, human capital, business environment, corruption control, and trade liberalization were considered as control variables in the model.
Markov switching econometric technique was used to estimate the effects of variables. Also, for more detailed investigations, the causal relationship between inflation and wages and labor productivity was investigated by using the Granger method.
 
 
4- RESULTS & DISCUSSION
The results of the estimations indicated the negative effect of inflation on labor productivity in both regimes (boom and recession). This result was consistent with the results of most domestic and foreign studies, but it is somewhat contradictory to Aiheanacho's (2017) study. The impact of wages on labor productivity was positive in both regimes (boom and recession), which indicates the confirmation of efficiency wage theories. In connection with control variables, human capital variables, trade liberalization and business climate had a positive effect on labor productivity in both the first and second regimes. In confirming the positive relationship of the business environment on productivity, it can be acknowledged that the business environment is a political, institutional and behavioral environment that affects the efficiency and risks associated with economic activities and investment. It provides the basis for more production, so production per worker also increases, which means increased labor productivity.
 
5- CONCLUSIONS & SUGGESTIONS
The results show that there is a negative and significant relationship between inflation and labor productivity in the studied countries. Therefore, governments should through reducing interference in the economy and compliance with the monetary rule and management of liquidity growth rate and creating grounds for economic stability, deal with the risk and uncertainty resulting from inflation.
Also, according to the results, there is a positive and significant relationship in both the first and second regimes, between labor wages and labor productivity, so it is necessary to adjust the wage laws based on the real value of labor (productivity) to strengthen the merit system and improve productivity. It is also necessary to adopt policies according to the theory of the value of the final product. So that the increase in wages without the destructive effects of inflation caused by cost pressure, leads to an increase in productivity. For this purpose, the labor law and wage payment mechanism should be amended. The findings of the research show that there is a positive and significant relationship between the business environment and the productivity of the labor force in both boom and recession regimes, so it is suggested that sustainable and coherent planning in order to improve and expansion of the infrastructure of the business space in the investigated communities. Therefore, it seems necessary for governments to think of measures that lead to productive investments in the business space.
The results show that the effect of wages on labor productivity is positive in both regimes (boom and recession). In relation to the control variables, the variables of human capital, trade liberalization and business climate have a positive effect on labor productivity in both regimes (boom and recession). But regarding the variables of foreign direct investment and corruption control, we observe a positive relationship in the first regime (prosperity) and a negative relationship in the second regime (recession). Also, for more detailed studies, the causal relationship between inflation and wages with labor productivity has been investigated by using the Granger method, which indicates a two-way causal relationship between the investigated variables.

Keywords

Wages; Inflation; Labor Productivity; Markov-switching

References

 

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