Stabilisation, the real wage, employment and welfare : the case of Zambia's formal sector employees

• Main Author: Chiwele, Dennis Kaputo
• Published: University of Sussex 1993
• Subjects: 330; Economics & economic theory
• Online Access: http://ethos.bl.uk/OrderDetails.do?uin=uk.bl.ethos.358175

According to orthodox theory, a key objective of stabilisation policies is to raise the relative price of tradeables to that of nontradeables. This should lead to a relative expansion of tradeables production. The factors of production that would benefit most are those intensively utilised in the expanding (tradeables) sector. Where nontradeables are more labour intensive, the real consumption wage will fall with the implementation of stabilisation policies. This prediction is tested in this thesis within the context of Zambia's effort to adjust its economy in the 1980s. Applying a Stolper-Samuelson-Rybczynski (SSR) model, it is concluded that stabilisation policies did indeed result in the fall of the real wage. This finding is in line with the experience of other countries, suggesting that real wages were more flexible than would be justified by concerns of orthodox theorists. However, it is shown that the responsiveness of employment to variations in the real product wage was statistically insignificant. Furthermore, despite the fact that the real product wage of tradeables relative to nontradeables moved in the desired direction, the expected relative rise in tradeables employment failed to occur. This demonstrates the ract that getting the prices right may not always be a sufficient condition for labour reallocation. The rapid fall in the real consumption wage made it difficult for an average formal sector household to meet its nutritional needs. These households could be classified as poor by the end of the 1980s. Workers responded by moonlighting, engaging in corrupt practices and allowing their households to increase their labour participation. The adverse effects associated with such survival strategies demonstrate the limit to which a government could rely on real wage flexibility in macroeconomic adjustment.