Wednesday, April 4, 2012

What happens when real wage growth outpaces labor productivity growth?

Well, it suppress employment creation. Klein assesses the South African labor market and employment creation in this paper, whose abstract is copied below.

The paper looks at the dynamics of employment in South Africa and examines the factors that contributed to the job-shedding observed during the recent financial crisis. The paper finds that the rapid growth of the real wage, which outpaced the labor productivity growth in most sectors, played an important role in suppressing employment creation. The paper also finds that while there is a co-integrating link between the real wage and labor productivity, the deviations from equilibrium are persistent and thus contribute to a weak link between real wage growth and labor productivity growth in the short term. This finding is also supported by a cross-country analysis, which shows that in South Africa the link between the real wage and labor productivity is substantially weaker than in other emerging markets, even after controlling for labor market tightness indicators.

May be the unruly trade unions in Nepal should have a look at the findings of this paper.