This document summarizes a presentation on rising real wages in Bangladesh and its implications. It finds that real wages have been escalating since the mid-2000s, with rural wages increasing at a faster rate from 2008 onward. Wages for women and in the agricultural sector have risen particularly quickly. This suggests Bangladesh may have reached a "turning point" where the supply of rural labor is constrained, causing wages to rise. Higher wages could help reduce poverty but also increase costs for businesses. The presentation discusses policy options to manage structural transformation, including boosting manufacturing productivity, modernizing agriculture, and reevaluating employment programs in light of rising wages.

1. Escalation of Real Wage: Is it the
Beginning of Structural
Transformation?
X. Zhang, S. Rashid (presenting)
K. Ahmad, and A. Ahmed
Workshop on
Evidence-Based Policy Options
For Food And Nutrition Security
in Bangladesh
1 October 2014, Dhaka

2. 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)

3. Theory wage determination (1)
F

W 
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?
P
L



4. 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.

5. Alternative wage theories
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
WE ARGUE THAT A NUMBER OF SIGNS SUGGEST THAT BANGLADESH HAS
REACHED LEWIS’S TURNING POINT

6. RESULTS

7. 320
300
280
260
240
220
200
180
160
140
120
100
Real wage in Dec 2010 Taka
Key Results: Time Series
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

8. Key Results: Gender Dimension (1)
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
71.2
76.3
71.13
112.57
84.72
92.25 84.87
141.03
101.49
109.6 105.52
154.16
128.57 134.01
133.66
193.55
200
180
160
140
120
100
80
60
40
20
0
1995 2000 2005 2010
Daily Wge Rate (in 2010 Taka)
Female-Lean Femal-Peak Male-Lean Male-Peak

9. Key Results: Gender Dimension (2)
10
5
0
-5
-10
-15
Trends in male-female wage ratio, 2000-10
Growth rate 1995-
2000 (%)
Growth rate 2000-
2005 (%)
Growth rate 2005-
2010 (%)
Growth rate 2000-
2010 (%)
Growth in male/female wage ratio Peak season
Growth in male/female wage ratio Lean Season
Male-Female wage gaps are declining

10. 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)

11. Skeptic’s view about wage escalation (2)
1.84
1.82
1.80
1.78
1.76
1.74
1.72
1.70
1.68
Log of ag value added
per worker
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
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

12. Wage escalation and poverty reduction
The counterfactual: what would have been the poverty rates
had wages not increased
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
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

13. 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

14. 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:
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
1200
1000
800
600
400
200
0
Garments employment (in million)
Net FDI inflow (in million US$)
FDI net inflow (million US$)

15. 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.

16. 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.

17. 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.

18. THANK YOU