Friday, 2 August 2013

Would an Increase of Wages in Bangladesh Destroy Their Economy?

by Jaime Bravo

sweatshop, Bangladesh

 Since a lot of factories in Bangladesh were destroyed, many people wondered whether an increase of wages would destroy the (fragile) economy of Bangladesh. Many people are employed every day in the sweatshops, the factories where they are being turned to slaves by an economic paradigm that does not fit for them. As I argued in my last piece, they are poor but they are not stupid. In fact, since that happened, many people started saying that the benefits from the sweatshops are incredibly great because they provide of higher wages (considering that, if they do not work in factories (with increasing-returns) they will work in the agricultural sector (with constant-returns) and because they let them to save little by little so that they can provide their children with a better education and, in the long-term, with a better future. This is the theory. But the reality isn’t so sweet. Again, economists have something to say about this issue.

If we consider the basic model of Paul Krugman (see Stockholm series of conferences) there are two groups of people: those who work in a sector with increasing-returns and those who work in a sector with constant-returns. For Krugman, the people established in the sector with constant-returns (CRS) cannot move to the sector with increasing-returns (IRS) because they are “tied” to the land. One way to make those in the CRS move to the IRS could be by education. It means that, if, say, 2000 people had a better education, it could let them to move. This is easy in the theory, but there are a few things that should be considered. Firstly, we have to assume that there is a perfect mobility between sectors; workers had the potential to move from one sector to other. Secondly, we have to assume that there is full employment; imagine that there were no unemployed people in a country which means that a) everyone has the biggest information possible b) there is a perfect equilibrium between supply and demand and c) we are considering a model with perfect markets, which are based on not-imperfect information.

Considering the average wage of Bangladesh (45813 BDT) I create a simple-model where A are the unskilled workers, B are the skilled workers, e is the process of education where a random number of students are being schooled (the benefits of this process is an investment useful only in the long-term; in the short-term, the benefits of being schooled are not visible), I is the inflation, W1 are the wages increased in the Q1 of a random year (say, 2014 considering we are on 2013), W2 are the wages increased in the Q2 of a random year (the same than the other) , W3 and W4 are the Q3 and the Q4 respectively (same year):

a(e) = w1 + w2 + w3 + w4*
 (if an increase of demand of skilled workers if not  (dem. of unskilled) we could write
 a = w1 +w2 + w3 +w4  
and if there were no significant demand we could write:
a = w(-I
assuming a decrease of wages acompanied by the demand of goods)

The very-simple model is accompanied of inherent mistakes. First of all, some unskilled workers may not want to be educated or schooled. And every country needs unskilled workers. Second, even though a demand of goods may lead to an increase of wages it may not happen (say, there are too much skilled workers and there is not a big demand for the goods commercialized).  Third, if the economy ran out of unskilled workers they will require of labour-hand as soon as possible and for so they will need to hire. Fourth, if the demand of goods increases, the multinational could both hire more workers and increase the wages of the workers. The logic behind the supposed-increase of wages in Bangladesh is here because there are some people who want to increase the quality of the jobs. What really happens is that multinationals increase the number of workers per square meter and they do not increase wages, but decrease them sometimes. This kind of precarious work is what might destroy the economy of Bangladesh. Factories don’t last forever as a model of growth.

*I’ve considered that in each wage increase, the inflation is discounted from the net earnings.

A simple analysis and conclusions: what do we see from the last equation?

The equation presented is not really a big discovery: we have applied a model with wages to unskilled and skilled workers. As I explained, the model has a few (important) errors. What do we see from the equation is really relevant? We can see that there is an upcoming increase of wages but, as explained, it might not happen. This is the theory behind the model. Now, what would happen if the wages increased in Bangladesh?

If the Government raised the minimum wage (MW) there should be a perfect mobility between workers, because a high minimum-wage would be useless without real mobility between sectors. As explained, mobility depends on education (not always, because non-skilled workers could be move between sector without be educated); the more educated the workers, the more mobility they should have. This is why the first equation assumes that an increase in education of unskilled workers (a) would lead to an increase of the wages. But it only would happen if there is a big demand for skilled workers and there is a clear scarcity of them. In the second equation, we assume that there is a demand of unskilled workers and no-necessity of skilled ones. This is why the second equation assumes an increase of wages in unskilled workers: the country needs more labour-hand for labour-intensive industries due to, say, an upcoming investment for factories.  In the third equation, we assume that there is no increase of wages; they just remain the same with a discount from inflation. In this last equation we assume a possible decrease of wages accompanied by the demand of goods (means, if the demand of goods decrease, wages would decrease too, at least in theory).

The reason why some multinational firms do not increase the wages leading to an increase of the purchasing power is that their market is not in the developing countries but in the developed ones. The reason they [citizens] remain poor is that they don’t see an increase of their wages while the work-required-to-earn-it does.  There might be a poverty-trap with an S­-curve for them, but this needs more research, as Duflo and Banerjee points.


Please, if you have any enquiry about the data and the methodology used, feel free to contact me at jbravo [at] beneficiomarginal [dot] com


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