Are wages paid more in agriculture than the productivity? equilibrium and divergence in India

Following the Walrasian framework, this paper has studied wage-setting in agricultural labor market during 1981 to 2012 in India. The theory suggests wage equals productivity when there is perfect competition in the labor market. Using a Cobb-Douglas framework, we derived marginal productivity series for agricultural laborers and compared these with wage rates. Results show that wages equal productivity for most of the years. Rather, after accounting for inflation, we observe wages to have lagged behind productivity until the mid-1990s, and followed a trend-reversal afterwards. In short, there has been a wage-productivity-gap during this period. We employed Johansen's cointegration to explore the long-run causality between this disequilibrium and relevant structural variables, and Vector Error Correction Model to estimate model parameters. Results show significant long-run association between wage-productivity-gap, inflation, agricultural prices and the speed of structural change. In short-run, agricultural prices and inflation influence the gap. Forecasts for the year 2022 suggest prices would rise more rapidly than inflation, hence a possibility of decline in the wage-productivity-gap in agriculture.