Wage policy and income distribution in developing countries

This generally negative attitude towards wage increases is supported by three different arguments: such pressure is held to be (a) futile, because for most of the labor force, and in the long run, market forces will dominate, (b) inequitable, because it benefits a relatively small "middle income" group rather than the mass of the poor, and (c) harmful, because it reduces employment by increasing capital-intensity in the modern sector, and slows growth by reducing savings. There is, of course, some inconsistency between the futility and the bad-effects arguments, but each may be valid in different situations. This paper is a review of the arguments and the evidence regarding the impact of wage policy on income distribution in LDC"s. Following this introduction, the impact of wage policy on income distribution is traced by examining policy formulation (Section II), policy implementation, particularly as it is constrained by market structures (Section III), and the direct impact of policy on the wage levels of target groups (Section IV).