QUESTION: Is it correct to justify a high wage structure in an economy?
ANSWER: For the following reasons, I don't believe it is totally appropriate to defend uniformly high
pay structures in an economy:
• In the near term, higher salaries could improve consumer demand, but they might also drive up
costs for firms, which could lead to a decline in employment and investment. The overall result
is unclear.
• Workers with more negotiating power benefit disproportionately from higher earnings. Low-
wage workers might not benefit from rising costs or more automation; in fact, they might suffer
harm. A more sophisticated policy is required. A number of variables, including innovation,
human capital, and technology, affect productivity growth. Productivity increases are not
always ensured by just raising salaries.
• Export competitiveness may be weakened by higher unit labour costs resulting from widespread
pay rises. Particularly for industries vulnerable to trade, this needs to be considered.
• There are several firms in the economy, and increasing salaries do not always result in increased
demand. In an economy, the effects of distribution among enterprises, people, and sectors are
intricate. Pressures for inflation may materialise if pay growth outpaces productivity growth.
In the absence of meaningful income growth, this might cause economic unrest.
• Targeted strategies to raise income for lower-income groups with a high marginal propensity to
consume may be desirable instead of an economy-wide rise. Pay raises that are linked to
advances in productivity in certain industries are also more compatible. Most likely, the form
and context of pay adjustments will determine the effect on growth.
