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The real wage trap in the labour market of Bangladesh

 Mohammad Nazmul Avi Hossain | Sunday, 25 April 2021


Covid-19 distorted the labour market outcomes in countries in several ways followed by many other macroeconomic indicators. Employment rate, job loss, unemployment including permanent and transitory status have been the major indicators to investigate in order to measure the impact in labour market. Millions of jobs and working hours were lost due to policy tools such as the lockdown/shutdown of economic activities around the world as well as in Bangladesh. One straightforward way of looking into the labour market impediments is of course the number of jobs lost and increased unemployment. The other crucial indicator to dive deeper into is investigating the wage rates of the employed people. The fragility of the labour market increases manifold if we identify the decreasing wage rate trends coupled with the joblessness. Unfortunately, that has been the case for Bangladesh as it is experiencing jobless economic growth concurrently with decreasing real wage rate. 

Now, while analysing the wage data it is important to consider real wage for its ability to better estimate the economic implication adjusting for the purchasing power of money an employee receives as wage. In easy words, real wage reflects the purchasing power that the wage has in a market for a wage earner considering the inflation and consumer price index. Therefore, from a wage rate index (WRI), we have an update on every quarter, that may reflect an increasing trend in wage rate as it is calculated in nominal terms but that does not necessarily mean the wages are increasing. From the BBS dataset of wage rate index (WRI), consumer prices index (CPI) and inflation rate, it is possible to construct an index for real wage rate.  The trend of the real wage rate index is calculated and presented below:

The figure depicts that from the base year 2010-2011 = 100, the real wage index has been in the decreasing and downward trend until 2016. Even after 2016 until 2020, it is in the decreased trend. For 2021, we only had one data point for January that is the reason the real wage index in 2020-2021 looks to reach an equal level as the base index, 100 of 2010-11. This downward trend and consistent below base year trend of real wage imply that the real wage of Bangladeshi workers has not increased even during the period of robust and sustained economic growth especially in the first half of the last decade. This amplifies the concern regarding real wage for Bangladesh by exhibiting a decreasing/nonincreasing real wage trend in the business as usual economy (without the impact of COVID-19).

To bolster my argument in nominal wage measures, it is possible to compare the wage rate index and inflation rate trend from the BBS data. The following is the trend:

It appears that inflation rate was higher than the WRI if the point-to-point growth rate is considered in 2014-15. Even if the WRI has increased compared to the inflation rate from the following year (2015-16) and maintained a steady growth of more than 6 per cent each year until 2019-20, the inflation rate has also maintained a steady growth of over 5.5 per cent every year until 2019-20. This indicates that a worker does not experience real change in terms of her purchasing power as the steady growth of WRI is coupled with steady or even increasing growth of the inflation rate. In easy words, my wage is steadily increasing but as the inflation rate is also in stable increasing trends, I cannot gain more utility from my increased nominal wage.

Now, if we compare the real wage rate scenario of Bangladesh with Asia pacific countries, it appeared in the ILO Global Wage report 2020/21 that Bangladesh has been experiencing an annual decline rate of 5.9 per cent annually in real wage with the lowest one among the 22 Asia Pacific countries during last decade. Only Sri Lanka is close to Bangladesh with a 4.5 per cent decline annually in real wage rate in the last decade.

Source: Author constructed from the ILO Global wage report 2020/21

Figure 3 reflects that Cambodia, Vietnam, China, Myanmar and India who are global competitors of Bangladesh in trade have been demonstrating an increasing and robust real wage annual growth rate with respect to their annual productivity growth rate. However, even with the negative and lowest annual real wage growth rate Bangladesh's annual productivity growth rate is 5.8 per cent that is almost equal to China's 6 per cent annual productivity growth rate. What is the economic implication of this? Productivity, in economics, measures output per unit of input, such as labour, capital or any other resource - and is typically calculated for the economy as a whole, as a ratio of gross domestic product (GDP) to hours worked. An increasing labour productivity growth comes from an increase of capital available to each worker, the education and experience of the workforce, and improvements in technology also known as multi-factor productivity growth. Therefore, the Bangladesh data exhibit that the country's workers are producing at an accelerating pace utilising the capital, labour and technological composition optimally hence resulting in a high annual productivity growth rate. Nevertheless, the workers are experiencing declining real wage that puts them into a vulnerable position socio-economically. An increase in working poor, lack of decent work, and labour market distortions are the results of this declining real wage rate despite increasing productivity growth rate in the country. The dominance of informality in the economy, shortage of decent jobs, and absence of strong labour market are mainly responsible for this declining trend of real wage rate.

What should be the policy responses to overcome this real wage trap in Bangladesh? I strongly recommend two major policy responses to be exercised critically and enforced optimally. First, it is high time for Bangladesh to set minimum wage beyond the garment industry and set the minimum wage above the international poverty line in PPP of 1.9 USD/day. Second, creating jobs and especially formal jobs in manufacturing and industries that will offer scopes to workers to avail decent jobs with better wage rates. 

 

Mohammad Nazmul Avi Hossain is a Development Professional working for International Labour Organization, and Ph.D. researcher Universite  Libre De Bruxelles.  [email protected]