A second stance in the distortionary effect of public sector wage policy stresses the "ripple effect" of high public wages on the wage levels in formal sector private firms. The detailed analysis of the manufacturing wage structure in Section 4 showed that such a view of institutional effects on private sector wages is incorrect. We do not see a twotier labor market in which firms above a certain size have a higher plateau than firms below this size. Rather there is a continuous increase in wages-net of measurable skills - with firm size. It is thus much more likely that the higher wages observed in smallmedium and large firms compared to micro-enterprises is much more likely to be due to the combination of economic factors discussed in the analysis-a mixture of the inelasticity of supply of firm-specific skills, efficiency wage and higher productivity and profit sharing by large mechanized firms.

In our view the more important aspect of public sector wage policy has to do with the problems of fiscal policy which it poses. As long as the public sector wage bill remains a sizable part of government expenditure an increase in wage levels not compensated by reduction in employment will create strains in the budgetary balance and will defeat the most important instrument of increasing the growth rate of employment-viz. higher levels of public investment in agriculture. It is possible that a vicious circle is complete. Higher wages in the public sector might be necessary to increase efficiency without which productive public investment is not possible. But if the government is not willing and/or able to reduce public employment, and is further unable to alter the composition of expenditure to provide more finance for agriculture related public investment, a high wage public policy will merely fuel inflationary pressures reducing the real investment ratio even further. The only way out of this vicious circle, if it exists, is a larger infusion of foreign and private investment, supplemented by corrective monetary policy, than has been seen so far.

# 7.2 **An Agenda for Future Research**

The recent analytical work, including this paper, has set the stage for an in-depth inquiry into the dynamics of labor markets and poverty and their future prospects. The existing work clearly shows the need for us to understand the current trends in economic growth and their implications for employment generation and poverty reduction. We list a few such issues below for future research:

- We should be able to use the GLSS data sets to study both the distribution of earnings and the distribution of household incomes of public sector employees relative to other groups and the changes between 1987 and 1991. It might also be interesting to simulate the effects of the 1992 wage hike in the public sector on the distribution of earnings/income for 1991. The GLSS data set might be utilized to study the difference in earnings between the self-employed and the employees, and the change in the differential between 1987 and 1992.

- More detailed work on earnings inequality in selected socio-economic groups in urban and rural areas might be possible utilizing the GLSS for these years.

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