A win-win solution for stakeholders in tea industry
Pareto Efficiency is an important concept in economics. It occurs
when all win-win opportunities have been fully pursued. In societies and
in organisations there are numerous opportunities to make changes that
leave no one worse off and improve the lot of at least some (win-win for
short). But due to oversight, or lack of analysis these go unrecognised.
It is the task of economists to discover such opportunities and
recommend them. There are several such opportunities for the tea
industry. This article focuses on just one: changing the incentive
structure in wages of plantation workers.
Collective agreement and two wages
The current wage-rate and incentive structure for estate workers is
primarily the result of the collective agreement between the Employers'
Federation and the plantation trade unions, following the privatisation
of the plantation sector in 1996.
This agreement is renewable once every two years.
After each new collective agreement is signed, news headlines inform
us that estate worker incomes have increased by a significant sum.
However, the reality is more blurred. Estate workers have two wages.
The theoretical wage - which captures the news headlines, and the
basic wage, which is what most receive. At present, the theoretical wage
is Rs. 515 a day. The basic wage is Rs. 410 (theoretical wage is 25%
higher).
Mutually destructive conditions
At first glance, the criterion for receiving the theoretical wage
seems reasonable: an attendance of at least 75% in the month. The small
print, however, says that it is 75% of the workdays actually offered. As
it turns out, estate workers are offered rather a lot of workdays every
month.
Results of a survey conducted in 2011 are provided in the book 'Red
Colour of Tea'. The surveys were conducted across 300 households and
included 776 plantation workers. Their results indicated that on average
25 to 26 days are offered.

Therefore, the 75% criterion requires at least 19 days of work a
month, with no paid leave. Most non-planation employees are offered an
average of about 20 days of work a month (261 actual weekdays minus 27
holidays, some of which may fall on weekends).
The normal workforce also has a right to paid leave of at least 21
days a year - making the average days worked a month about 18.
Therefore, what is termed as 75% attendance is in fact more demanding
than a 100% attendance for most of the normal workforce.
The cost of falling below 19 days, by even one day, in any given
month, is the reduction of about 25% of the whole month's wages. As it
turns out, this is not just cruel it is also foolish. The incentive
structure is badly designed and works not only against the workers but
the plantation companies as well. The feedback from plantation companies
is that there is a serious shortage of labour, and lack of attendance is
an increasingly acute problem. It is hoped that this wage structure
would encourage more days of work. But what is happening seems to be the
opposite.
The basic wage rate at Rs. 410 basic is so low that a worker who
expects only that is likely to skip work for trivial reasons and
certainly when better daily-paid opportunities arise outside the
plantations. Many of the women workers may not be able to work weekends
(due in part to home and child commitments).
Then, the current structure implies that falling ill for even a
couple of days early in the month will condemn the worker to the low
basic rate for the whole month.
Thus, the incentive to appear at work evaporates. This can help
explain why surveys show that, a few years ago, only one percent of the
estate workers received a wage of over 9,500 a month. In short, this
structure of the attendance incentive may be acting more as a
disincentive to work rather than as an incentive to work.
Most estate sector workers suffer from low levels of literacy and
education. It is unlikely that workers themselves will diligently be
calculating on a daily basis the probability of being able to achieve
the attendance requirement each month. They are more likely to form an
expectation about their wages based on past experience.
Once they fail to meet the requirements for a few months, they could
begin to believe that a sufficient income cannot be attained through
working in the plantation (or that the uncertainty in monthly wage is
too great). As a result, an external job, even while paying less than
the theoretical plantation wage, could offer a greater sense of income
security.
Designing a solution
A win-win solution for employers and trade unions is to amend the
wage structure to better align the incentives and outcomes for workers
and plantation companies.
From 2001-2011, the basic wage has increased from Rs. 101 to Rs. 380
(increase of 277%). However, the hard-to-attain theoretical wage has
grown much more significantly from Rs. 111 to Rs. 515 (increase of 374%)
over the same period. This is precisely the wrong approach.
The figure is drawn to an exponential vertical scale, so that the
visual representation of the 'gap' is that of the percentage difference
rather than the numerical difference, between the theoretical and
nominal wage. There is a huge increase in the gap since the collective
agreements began in 2002. (The gap was widest in the period 2007-2008).
It is the basic wage, not the theoretical wage that needs to be
competitive and increased aggressively to remove the incentive for
workers being absent or seeking external employment. Incorporating an
attendance incentive that is only paid for days worked in excess of a
normal attendance (the over-time model of wage setting, which governs
others sectors such as the apparel industry) will then serve to
encourage that extra effort and attendance.
Proper economic modelling can design a wage structure that increases
attendance and improves workers' incomes without increasing the expected
daily cost of labour for the plantation companies. This is the hallmark
of a win-win solution. The collective agreement has been in negotiation
for 10 years, it may be time for economists to get involved. |