Economic growth, employment and wage

M. A. Taslim | Published: April 22, 2017 21:00:30 | Updated: October 23, 2017 19:36:29

According to Bangladesh Bureau of Statistics (BBS) data the economy of Bangladesh has done rather well during the last several years. Indeed its national accounts numbers catapult 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 6.0 per cent 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 concern that the higher frequency data on credit, export, import, government revenue, actual budget spending, remittances, etc., as well as BBS annual data on 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 believed to be reasonably accurate, are provided by government organisations other than BBS. All these variables should relate strongly with gross domestic product (GDP), but the predicted relationship was not discerned leading to the concern that the BBS national accounts data could be subject to substantial 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 the 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, the real wage will tend to rise whenever the demand for labour exceeds the supply, and fall when the supply exceeds the demand. 
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. 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 be then 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 6.0 per cent per year.
Economically active population of Bangladesh has increased by about 1.0 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 the real wage 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 sufficient number of additional gainful jobs.
There could be at least two reasons why 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 structural changes and become 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 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 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). If in addition it is also 'jobless', the ordinary labourers will be hit hard. A large number of them would 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 indifference of the government toward human capital development has worsened the plight of the ordinary workers. A revision of the growth strategy is urgently called for in this case.
The second possible reason is that the GDP growth rate of BBS might have overstated the actual rate considerably. If the economy were really growing at higher than 6.0 per cent rate 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, it raises the suspicion 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, but inconsistent with a high growth rate. Greater efforts to accelerate the growth rate would be the correct strategy in this case.  Of course, a combination of both these possibilities could have also resulted in the same falling trend of real wages. 
M A Taslim is Professor of Economics, University of Dhaka.


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