1.1 Overview

The study attempts to determine the relationship between inflation, real wages and labor productivity. Inflation is an increase in the average level of prices of goods and services in an economy over a period of time, not a change in any specific price. When the general price level rises; each unit of currency buys fewer goods and services. Output is the amount of goods and services by a firm, industry, or country. For output variable the index of value added is used. Nominal wages are the Average Annual Earning in Perennial Industries. Real wages are the wages that have been adjusted for inflation. Real wages are obtained by deflating the nominal wage index by the consumer price index (CPI).

1.2 Problem Statement

The objective of the study is to find out the impact of Inflation & Real wages on Labor Productivity.

1.3 Hypotheses

H1. There is an Impact of Inflation on Labor productivity

H2. There is an Impact of time on Labor productivity

H3. There is an Impact of Real wages on Labor productivity

H4. There is an Impact of time on Real wages.

1.4 Outline of the study

The scope of this research was to find out the impact of inflation and real wage on labor productivity.

The data was collected from state bank of Pakistan and through various websites.

CHAPTER 2:

LITERATURE REWIEW

Malik and Ahmed, (2001) studied that Information on income levels was essential in evaluating the living standards and conditions of work and life of the employees. Since nominal income failed to explain the purchasing power of employees, real income was considered as a major indicator of employee’s purchasing power and was used as proxy for employee’s level of income. Any variation in the real wage rate had a significant impact on poverty and the distribution of income. When used in relation with other economic variables, for instance employment or output they were valuable indicators in the analysis of business cycles.

The aim of the adjustment program was to increase national income or output in such a way that it resulted in fair distribution of wealth. That was, the two objectives of enhanced growth and reduced poverty were being followed through more efficient use of resources and policy instruments like exchange rates adjustment, monetary and fiscal policies, and banking sector reforms to improve cash-flow position (Irfan, 2008).

The relationship between real wages and output was intricate and also inconclusive. Regardless of the truth, which method of estimation was used or which deflator was used for the real earnings the results remained the same. Only different time periods (for the manufacturing sector) have changed the cyclical nature of the real earnings. For the manufacturing sector the real earnings had turned out to be counter-cyclical. While for agriculture, transport and communication, construction and the overall economy real earnings is pro-cyclical, i.e., real earnings tend to increase with economic growth and increases in real earnings rate tend to reduce poverty. It’s the other way round in the manufacturing sector. It’s important to mention here that the measure of nominal earnings used for manufacturing was different from the measure used for other sectors and the overall economy (Irfan, 2008).