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Title: Price and Wage Setting Behaviour of Firms in Industrial Estates of Khyber Pakhtunkhwa, Pakistan
Authors: Iqbal, Nadeem
Keywords: Social Sciences
Issue Date: 2020
Publisher: University of Peshawar, Peshawar.
Abstract: Price and wage setting behaviour is a crucial issue in the economic literature, especially for the knowledge of monetary policy transmission mechanism. The present study analyzes the price and wage setting behaviour of firms from Industrial estates of Khyber Pakhtunkhwa, using survey-based data. The survey is conducted in the year 2017 in four major industrial estates of Khyber Pakhtunkhwa, namely, Hayatabad, Nowshera, Gadoon and Hattar Industrial Estates. A sample of 342 firms is selected through stratified random sampling and respondents are the managers of the firms. Price setting behavior is measured through frequency of price change, length of price contract and importance of demand and cost shocks for price change. The wage setting variable is measured through frequency of wage change. To estimate the effects of determinants of price change/rigidity, models are estimated through ordinary least squares technique in case of frequency of price change as dependent variable while binary logistic technique is used in all other cases. It is found that 70% of the firms have more than five competitors. Most of the firms have only regular customers or a combination of both regular and occasional customers. 60.8% of the firms set the price of their main product, so most of firms operate in imperfectly competitive market structure. 70.8% firms involve in price discrimination, in which 50% of the firms adopt first degree price discrimination. Most of the firms use current information (44%) or a combination of all information (40%) for price-setting of their product, which means that the firms practice is not aligned with traditional Philips curve rather it is consistent with hybrid Philips curve. 26% of the firms in our sample follow time-dependent pricing policy, 21% of the firms follow state-dependent rule and 52.6% firms use a combination of both time and state-dependent pricing policies, i.e. they practice mixed strategy. A relatively high proportion of firms change prices at the change of new calendar year with most of the firms changing prices at the start of fiscal year or calendar year. The most important factors for price stickiness are implicit and explicit price contracts, and minimum price volatility and less uncertainty. Imperfect competitive market structure of firms, number of regular customers, backward-looking behavior, and credibility of central bank and size of the firm are important determinants of price rigidity. While economic literacy and information set regarding expected inflation make the prices flexible. Firms‘ likelihood of price increase higher than that to price decrease in response to both demand and supply shocks. Furthermore, supply-side factors lead to higher frequency of price change than demand-side factors do. The cost of raw material and cost of energy are the most important causes of price change, both for the price increase and decrease. Demand and cost shocks are important determinants of price change for imperfectly competitive firms, backward-looking firms, firms run by managers having more information about economic conditions, while credibility of central bank is important determinant of price change in case of demand shocks only. Size of firms and information set regarding expected inflation do not have any effect. Most of the firms change wage rate once in a year both for permanent workers and daily wagers. Majority of the firms follow time-dependent wage policy. Half of the firms, which are following time-dependent wage policy, change the wage rate at the end or start of the fiscal year. Most of the firms are not found to index wages for permanent workers and daily wagers. Moreover, the percentage of firms not involved in wage indexation is higher for daily workers than for permanent worker. Labor productivity, employment level in the economy, government regulations, taxes, demand for the product, and inflation are important factors of wage change but the most important factor is the labour productivity and least important is pressure from the labour union. Imperfect competition and size of the firms are the important determinants of wage flexibility, because they increase the frequency of wage change, while wage indexation, information set of expected inflation and fringe benefits provided to workers are the important determinants of wage rigidity, because these factors decrease the probability of a firm to change the wage rate. Owing to weak traditional channel of monetary policy, it is important for monetary policy of Pakistan to focus on other channels of monetary transmission mechanism, like asset price channel, balance sheet channel or credit channel; credibility of central bank has to be established to stabilize prices; pre-emptive measures should be taken on the part of central bank to counter supply shocks; wage cuts at the times of recession be avoided; and disinflationary policies be carefully designed as sacrifice ratio, albeit moderate, is not zero.
Gov't Doc #: 19859
Appears in Collections:PhD Thesis of All Public / Private Sector Universities / DAIs.

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