Economic growth, employment and wage

M A Taslim

Macroeconomic performance of the economy of Bangladesh has been the subject of much disagreement over the last few years. In terms of Bangladesh Bureau of Statistics (BBS) data, it has done rather well during this time. Indeed its national accounts numbers have catapulted the country to the league of the best performing countries of the world. There are not many countries that have grown consistently at more than 6 percent for the last six years in a row.

However, this record has become controversial because of the alleged inconsistency of growth numbers with other data. Several economists have raised concerns that the high frequency data on credit, export, import, government revenue, actual budget spending, remittances, etc., as well as BBS annual data on private investment, are not consistent with the growth rate. It may be noticed that the high frequency data on the group of variables mentioned above, which are generally believed to be reasonably accurate, are provided by government organisations other than BBS. All these variables should relate strongly with GDP, but the predicted relationship was not discerned, leading to worries that the BBS national accounts data could be subject to some upward bias.

This paper does not wish to repeat what is already known and widely discussed. Instead, it draws attention to the trend of another important variable that is yet to find a place in the discourse on the subject. This is the wage rates of ordinary workers for which fairly detailed data are provided by BBS.

Economic theory states that the real wage of the labourers is determined by the interplay of supply and demand forces in a free market. The labour market of Bangladesh is not known to have significant distortions. Workers are reasonably free to offer their labour services to anyone, and they are free to move anywhere, and they do often move, in search of suitable employment. The employers are numerous and no one has a large share of the market. There is also no evidence of employers’ cartel to reduce the wage.

Hence, it seems reasonable to assume that the real wages of labourers will be determined by the interaction of supply of, and demand for, labour. In such an environment, real wage will tend to rise whenever demand for labour exceeds supply, and fall when supply exceeds demand.

table 

BBS has done a major study to re-estimate sectoral nominal wage indices with 2010-11 as the base year, which are shown in the table below. Aggregate data on sectoral real wage indices, derived by deflating nominal wage data of BBS by the national Consumer Price Index (average), are also shown in the table. It shows that the real wage indices in all sectors have declined. It must then be concluded that the labour market of the country has suffered from an excess supply situation over these years.

This could have happened if either the supply of labour increased relatively more than the demand, or the demand for labour actually declined during this period. The latter seems quite unlikely with the economy growing at more than 6 percent per year.

Economically, Bangladesh’s active population has increased by about 1 million per year in the recent past (BBS). About 0.5 million workers found placement in the external labour market. Hence, the economy needed to create at least 0.5 million new jobs on a net basis to employ the new entrants (on a gross basis the requirement for new jobs could be larger if existing jobs were extinguished). If new jobs were created at a rate lower than this rate, the labour market would develop an excess supply situation and real wages would fall. Hence, the observed decline in the real wages of workers during the last few years, if BBS data are reasonably accurate, could be attributed to a failure of the economy to create a sufficient number of additional gainful jobs to employ the new entrants as well as those displaced by structural changes.

There could be at least two reasons why a sufficient number of new jobs might not have been created even though the economic growth rate was very impressive. First, the economy might have undergone technological or structural changes, which made it increasingly more capital intensive during this period such that not much labour was needed to increase production.

If this were the case, the economy of Bangladesh would be exhibiting a trend that has already been manifested in some countries. An emphasis on technological innovations or industries that rely more on machines than men for production may have reduced the demand for labour such that economic growth did not help in sufficiently raising the demand for labour giving rise to the syndrome of ‘jobless growth’. If the Bangladesh economy is also trending in that direction, it does not bode well for employment.

The recent spate of high growth has been viewed as ‘gainless’ (Financial Express, 27 January 2017) because ordinary workers did not get the fruits of the growth achieved by the sweat of their brows. If in addition it is also ‘jobless’, they will be hit really hard. A large number of them will suffer from either unemployment or underemployment for a prolonged period of time, and many will be condemned to work at lower wages in the informal labour market. The falling trend of real wages is indicative of such outcomes. The indifference of the government toward human capital development over a long period has worsened the plight of the ordinary workers. A revision of the growth strategy is urgently called for in this scenario.

The second possible reason is that the GDP growth rate of BBS might have overstated the actual rate considerably. Those who believe in the Law of Parsimony (Occam’s Razor) are likely to favour this explanation. If the economy were really growing at higher than 6 percent there should have been, other things remaining the same, a significant increase in the demand for labour, and this would have mopped up the incremental supply of labour leading to an increase in the real wages. Since the real wages have fallen for four years in a row, this obviously was not the case. Hence the suspicion arises that BBS has overestimated the growth rate.

The suspicion is strengthened by the fact that the movements of the high frequency variables mentioned above are not inconsistent with falling real wages. In this situation greater efforts to accelerate the real growth rate would be the correct strategy. Of course, a combination of both these possibilities could have also resulted in the same falling trend of real wages.

Source: bdnews24

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