X. Zhang, S. Rashid (presenting) K. Ahmad, and A. Ahmed

Escalation of Real Wage: Is it the

Beginning of Structural

Transformation?

Workshop on

Evidence-Based Policy Options

For Food And Nutrition Security

in Bangladesh

1 October 2014, Dhaka

Plan of presentation

• Theory of wage determination (in plane English)• Message from earlier studies• Key results

– Rising real wages– Convergence of agricultural and non-agricultural

wages– Alternative explanations of rising wages– Rising wages and poverty

• Policy implications (selected)

Theory wage determination (1)

In plain English:

Wage is Less Than or Equal to the value an additional worker add to a farm / firm

The theory works when markets are completive

But the theory does not work when there is large unemployment (unlimited supply or labor)

BECAUSE:

If there’s unlimited supply of labor, why doesn’t unemployed worker bid down wages (offers to work at lower wage) bringing them to a ridiculously low level?

PL

FW

Alternative wage theories

I. Subsistence wage theory

Market price of labor would always tend toward the minimum required

for subsistence (Ricardo, Lassalle, and others).

II. Efficiency wage theory

General Concept: Employers may find it worthwhile to pay their

employees higher wage in order to increase their productivity /

efficiency.

Nutrition Based Efficiency Theory:

Since productivity depends on consumption, it is in the interest of the employers to pay a wage that ensures minimum calorie requirement of the workers so that they can work effectively.

1. Urban sector has a higher wage rates than the rural sector

2. Urban (non-agriculture) grows and needs more workers

3. Rural workers moves, but since it has large supply of labor, wage does not change.

4. But there comes a point (Lewis’s Turning Point), rural wages escalate.

5. Urban (non-ag) and rural wages begin to converge

Alternative wage theories

WE ARGUE THAT A NUMBER OF SIGNS SUGGEST THAT BANGLADESH HAS REACHED LEWIS’S TURNING POINT

RESULTS

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320

Rea

l w

age

in D

ec 2

010 T

ak

a

Figure 2.a--Urban and rural real wage at

December 2010 Price (Deflated by general CPI)

Urban_Wage Rural_Average

1. Real wages began to rise in the mid 2000s

2. Rural wages start rising at a faster rate from early 2008

3. Urban wage escalated too, but rural wage started converging

Key Results: Time Series

1. Real wages increased in both lean and peak season

2. Real wages or working women increased faster.

3. Seasonal variation in wages is no longer as dramatic

Key Results: Gender Dimension (1)

71.276.3

71.13

112.57

84.7292.25 84.87

141.03

101.49109.6 105.52

154.16

128.57 134.01

133.66

193.55

0

20

40

60

80

100

120

140

160

180

200

1995 2000 2005 2010

Dai

ly W

ge

Rat

e (i

n 2

010 T

aka)

Female-Lean Femal-Peak Male-Lean Male-Peak

Key Results: Gender Dimension (2)

-15

-10

-5

0

5

10

Growth rate 1995-2000 (%)

Growth rate 2000-2005 (%)

Growth rate 2005-2010 (%)

Growth rate 2000-2010 (%)

Trends in male-female wage ratio, 2000-10

Growth in male/female wage ratio Peak season

Growth in male/female wage ratio Lean Season

Male-Female wage gaps are declining

Skeptic’s view about rising wages

These trends are artificially created by:

1. These trends reflects the increase in labor productivity

2. Large injection of cash through employment programs

3. Very large social safety net programs

4. Expansion of microfinance for the promotion of Small and Medium Enterprises (SMEs)

Skeptic’s view about wage escalation (2)

1.68

1.70

1.72

1.74

1.76

1.78

1.80

1.82

1.84

Log of ag value added

per worker

1. Similarly, employment programs are just too small to drive the wage escalation.

2. Per capita MFI loan is $36. Assuming a 10% net return, this means a net income form MFI investment is only $3.6 or about .44% of per capita income

HIES Survey Years

Safety-net transfers as % total HH income

National Rural Urban

2000 0.42 0.52 0.06

2005 0.47 0.58 0.14

2010 0.34 0.44 0.09

Source: Authors’ calculations based on the HIES Rounds: 2000, 2005, and 2010.

*Agricultural and non-farm wages include both daily wage of casual workers and daily wage equivalent

of the salaried workers

Income components*From 2000 to 2010

Rural Urban Total

Actual % change in poverty (Head count) -29.7 -38.8 -33.5

Agricultural daily wages -8.6 -7.6 -12.2

Nonfarm daily wages -5.1 -1.7 -8.3

Manufacturing wage income -0.4 5.9 -3.5

Remittances -11.4 -12.7 -14.9

Safety net transfers -29.7 -38.8 -33.5

Wage escalation and poverty reduction

The counterfactual: what would have been the poverty rates had wages not increased

Policy discussion

If we are convinced that our results do indicate a beginning of transformation, we can probably spend a whole day talking about the various angles of policies and strategies

But I shall raise only four policy issues:

1. FDI and manufacturing sector growth

2. Agricultural technology

3. Employment Generation Programs

4. Managing the structural transformation

Policy discussion (2)

Cheap labor has been the main attractor of Foreign Direct Investment (FDI) to Bangladesh. Therefore, rising real wages declining flow of FDI. This mean, the following picture will change unless labor productivity is enhanced:

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

0

200

400

600

800

1000

1200

Ga

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mp

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t (i

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)

Net

FD

I in

flo

w (

in m

illi

on

US

$) FDI net inflow (million US$)

Policy discussion (3)

1. Agriculture today is not the same as what it was in the 1980s; and agriculture in 2030 will not be the same as it is today.

2. Today labor costs accounts for about 40 % of the total costs of paddy production. Moreover, rural population is growing at much slower rates that overall population growth.

3. Therefore, rising real wage higher costs agricultural production higher costs of food and everything else associated with it.

4. The country’s agriculture will need modernization. Any policies to this end would require a balance between mechanization and protecting rising wages.

Policy discussion (4)

1. If real wages are increasing, what justifies having employment guarantee program?

2. While this is an obvious policy question, we have not done any analysis to answer this question.

Policy discussion (5)

IF THE ECONOMY IS IN THE PROCESS OF STRUCTURAL TRANSFORMATION,

1. The process of transformation needs to be better understood and managed.

2. Some of the issues will go beyond agriculture and food policy issues, but many sub-sectoral issues within agriculture will remain important. (e.g., agro-industries, VC modernization).

3. South Korea, Taiwan, and Malaysia are some of useful examples from Asia.

4. Addressing these challenges, in my view, will pay high dividends in the future.

THANK YOU