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Bangladesh fighting wage arbitrage

"The 29th of July 2010 was an important day for roughly 3.5 million Bangladeshis. The Bangladesh Wage Board, after a series of protests from workers in the growing garment sector, agreed to double the minimum wage. Workers who were earning a monthly TK1,662.50(US$24) will now be earning TK3,000 a month.

"The TK3,000 promise is still far from the TK5,000 per month they've demanded, and is only a one-time increase rather than an annual reassessment... It seems violence in the city has actually increased, with workers smashing cars and blocking roads in response to the announcement.

"Currently, the clothing industry accounts for 80% of Bangladesh's exports. The number of garment exports from Bangladesh nearly doubled from 2004 to 2009, as workers in China demanded higher pay and pushed manufacturers to Bangladesh.

"While Bangladesh offers the cheapest labor costs in the world, it is otherwise unsuitable for garment production. In comparison to China, only 55% of citizens are literate, making difficult assembly processes impossible. Electricity is spotty and causes frequent blackouts. As a result, workers in Bangladesh are only one-fourth as productive as Chinese garment workers."

Implications:

"So in the fight for decent wages, many are asking: who will foot the bill? manufacturers have asked the government to support a wage increase through subsidies, tax cuts, and cash incentives. Retailers seem unwilling to face a cut in profits, and consumers are often reluctant to see higher prices in stores."

Economist G.D.A. MacDougall looked at the potential benefits and consequences of FDI and came to the conclusion that once companies gain too many incentives through price distortions to offset the cost of higher wages, the host country no longer receives any financial gains through the agreement. Bangladesh is in a hard spot as they negotiate higher minimum wages but want to ensure that companies aren't forced to move into areas offering cheaper labor, a practice called wage arbitrage.

It looks as though Bangladesh will need to improve the efficiency of their labor force, but as they, and the rest of the globe, continues to do so we will face permanent higher rates of unemployment. 10% unemployment in the US is perhaps the new norm and the standard level of 3 - 4% unemployment in a fully employed country may no longer be accurate.

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