IN economics land, labour, capital and organization are the factors of production. Correspondingly, national income is divided among rent, wages, interest and profits. There are different theories for determining the level of remunerations to these factors of production. There are three main theories for the determination of wages.

The first is the subsistence theory of wages. It simply states that labourers especially physical workers, are paid to the extent of consuming sufficient food and other necessities so that they can subsists without malnutrition, physical disease and frequent absence.

The theory enjoins that the workers must be paid adequately to remain physically fit and mentally alert and enjoy a healthy subsistence. Well-fed labour force is indispensable for enhancing productivity. This theory also led to the philosophy of basic needs in the literature of development economics.

The second is the marginal productivity theory of wages. Marginal is the favourite concept for economic theorists as all optima are reached when the marginal equate. It simply states that an employer keeps on hiring an additional worker as long as the product of the last employed is greater than his wages. When the product of the last employee is less than his wages then he will stop employing any further labour. In other words wages are determined by the marginal product of labour.

The third theory of wages is the market or the bargaining theory. It emphasizes that wages are determined by the conditions of demand and supply. If there is shortage of labour, the wages would be higher as employers would tempt scarce workers to join their units. Specially, when there are trade unions, the supply is restrained by the unions and the unionized labour always gets more than the market rate. However, in the last decade there has been job shedding stemming from computerization, globalization and mergers. Consequently, trade unions have become weak especially in the US. This has also led to a fall in wages as percentage of national income and corresponding rise in profits.

According to the Economist “In Japan the workers pay equalized 73 per cent of corporate earnings in 1998 and in 2004 the proportion has dropped to 64 per cent, There are similar trends all over the world. The corporate profits in Pakistan has been soaring with booming stock exchange but the share of wages has been declining and the benefits of surging corporate profits have not been passed on to the workers.

The deteriorating wage level needs to be protected in almost all countries of the world. There is a legislated minimum wages level in all the countries. Even in the capitalist US, the minimum wage is $5.15 per hour. It translates to $1100 per month. There is a similar legislation in Pakistan and the present government deserves credit for raising minimum wages twice during last four years.

In October 2001, the minimum wage was raised from Rs1,500 to Rs2,500 and in the last budget it was again hiked to Rs3,000 or a 20 per cent increase. The minimum wage in Pakistan and in other countries is for the unskilled labour.

With minimum wage as the base, the provincial governments correspondingly increase the wages for the semi-skilled, skilled, highly skilled and ministerial workers. However, the minimum wage for the highest skilled is Rs3,720. Hence, there is no significant difference between unskilled and highly skilled in our legislative framework whereas in the market the highly skilled is earning more than twice the level of the minimum wages for the unskilled. The government therefore needs to change the existing framework with a greater differential in different categories of labour and link the minimum wage level to the CPI and increase it in every budget.

Whereas, the government has increased the salary of its employees by 15 per cent and the minimum wage by 20 per cent the private sector has not followed suit. The government has legislative and other powers to persuade private sector for a parallel raise.

Nutritionist in Pakistan agrees that given our climate and eating habits, a Pakistani needs 2,350 calories daily in order to avoid malnutrition and remain physically fit. The experts in the Planning Commission have calculated that it requires Rs850 to buy edibles providing 2,350 calories. If a worker industrial or otherwise can not buy the required caloric intake, he cannot be healthy, efficient and productive.

An ILO study concluded that the way to worker productivity is through bellies. “The workers in the poor countries are too malnourished to do their jobs properly while their counterparts in the industrial nations are too fat. Poor meal programmes and poor nutrition underlie so many workplace issues; morale, safety, productivity and the long term health of the workers and nations. But few workers are happy with their meal arrangements. Too often food at work is seen as an afterthought or a hindrance by employers and is often a ‘missed opportunity’ to increase productivity and morale”.

A Pakistani household of six persons requires Rs5,100 for food only to avoid malnutrition. Neither the government nor the private sector can pay unskilled workers Rs8,000 so that they may be able to spend Rs5,100 on food only. The only practical method of improving workers productivity by avoiding malnutrition is to give wholesome meal at work.

Many factories do give subsidized or even free lunch but this is not enough to promote productivity. If the factories want their workers to be well nourished they must give the free breakfast and free lunch with the caloric intake of about 2,000, so that their workers are physically fit and mentally alert. This has enhanced importance in export industries because unless the real wages and electricity rates are internationally competitive we will be left behind in the global race. A well nourished person can always run faster than malnourished one.

The government on its end must pursue policies to contain food inflation which was 12.5 per cent during FY 2005. According to the World Economic Outlook September 2005, the inflation rate in India was 3.9 per cent, in China three per cent, Bangladesh 6.2 per cent and in Pakistan more than nine per cent. The food inflation rates in these four countries would also show the similar differences.

It is therefore not surprising that China, India and Bangladesh have gained more than Pakistan since the introduction of quota free regime in textiles from January 2005. Our exports have also been adversely affected by the fact that our exchange rate has remained stable with almost double digit inflation rate.

The real wages must never be allowed to slide as it will lead to an unproductive workforce. The private sector must follow the government with a corresponding increase in nominal wages and also provide free or subsidized breakfast and lunch.

The best policy for protection of real wages and promotion of worker productivity and enhancing exports is price stability which during year and quarter has been above eight per cent and should be brought down to below four per cent as in India and China.

The author is former Secretary Planning)