Bangladesh’s minimum wage needs to grow faster for its economy catch up with other countries

by Roy Ngerng

DHAKA, BANGLADESH： Bangladesh’s garment sector is discussing having its minimum wage raised.

Local trade unions and the IndustriALL global union are calling for the minimum wage to be raised to Tk23,000 (US$210), based on the minimum income needed for basic needs calculated by the Bangladesh Institute for Labour Studies.

Raising the minimum wage faster can benefit Bangladesh’s economy and enable it to catch up with other countries.

Bangladesh’s garment wages are the lowest in Eurasia

As compared with other major garment manufacturing countries, Bangladesh’s current minimum wage in the garment sector is very low. Poland and Romania’s minimum wages are nine to 11 times higher, China and Thailand’s are 4 times higher, and it is twice as high in Indonesia and Vietnam.

Data sources: Bangladesh; China; Thailand; Indonesia (1), (2); Vietnam (1, 2, 3); other countries

Bangladesh’s garment workers earn the lowest wages in Eurasia and one of the least adequate globally when compared to the income needed for a basic standard of living.

Pakistan’s minimum wage is adequate to cover 52% of workers’ living needs but Bangladesh’s is only adequate to cover 26%. Bangladesh’s cost of living is similar to that of Cambodia, Indonesia, Vietnam and Nicaragua, but its minimum wage is only half theirs.

Data source: WageIndicator

Bangladesh’s economy has fallen behind because of its stagnant minimum wage

Bangladesh’s minimum wage was not used to be this low relative to other countries. The Baltic and Eastern European countries used to have similar minimum wages as Bangladesh, but they then rapidly grew their wages (see top left chart below).

The European Central Bank explains that labour income and private consumption are key drivers of economic growth. In other words, higher minimum wage growth leads to higher household consumption expenditures and profits, and thus GDP growth, I’ve previously written.

As such, minimum wage grew the fastest among the Baltic countries, leading to their per capita wages (or compensation of employees), household consumption expenditures and GDP also growing the fastest (see yellow lines in charts below).

This is followed by the Eastern European countries in the blue lines, and the Southeast Asian countries in the green lines.

The Baltic and Eastern European countries wanted to develop quickly after leave Soviet’s orbit, thus adopted West Europe’s model of growth to restructure their economies, and raised their minimum wages rapidly.

Bangladesh is at the bottom of all the charts – its minimum wage grew the slowest and its economy thus stagnated.

Data sources: total wages (or compensation of employees) (1, 2), household consumption expenditure (1, 2, 3), GDP (per capita data is obtained by dividing the data by a country’s population)

Bangladesh’s growth is similar to Kenya’s. Its minimum wage is growing as slowly, leading to its per capita household consumption expenditure and GDP growing similarly.

Data source: Minimum wage (Bangladesh, Kenya). Note: The axes in these charts have been adjusted to be the same as the charts above, to show the contrast.

Bangladesh’s per capita wages in the early-1970s were on par with Indonesia (see left chart below). Their per capita GDP per were also similar (right chart below).

However, Indonesia benefited from the 1973 and 1979 oil crises, and used the higher oil revenues to raise government salaries faster, leading to overall minimum wages and thus GDP rising faster.

Bangladesh instead suppressed wage growth, leading to its economy being stagnant.

In the charts below, note how the ebbs and flows of GDP growth follow that of wage growth.

Up until the early-1990s, China and Vietnam’s per capita wages and GDP were also growing similarly as Bangladesh.

China then introduced its minimum wage in 1994, followed by new regulations in 2004 extending the minimum wage to self-employed and part-time workers, and raising it every two years. Both times, it led to its minimum wage, and thus household consumption expenditure and GDP expanding to surpass Bangladesh.

Vietnam amended its labour code in 2002 to require wages be agreed upon between employees and employers, and for foreign-invested enterprises to pay double the minimum wage than domestic ones. From 2003, Vietnam’s per capita wages, household consumption expenditure and GDP also rose rapidly and overtook Bangladesh.

See again how similar the ebbs and flows in the charts below look, indicating how GDP growth follows wage growth.

The chart below shows how China’s minimum wage jump from 1994 and 2004, and from 2003 in Vietnam

China further expanded its minimum wage in 2010 by as much as 33% to address rising labour disputes. Vietnam also expanded it in 2011 by equalising the minimum wage between foreign and domestic firms, leading to expansion in the latter by 14%.

Historically, large minimum wage growths also led to an expansion of Bangladesh’s total wages, profits and GDP. It happened when Bangladesh introduced the minimum wage in 1984 (see left chart below), and then in the mid-1990s and mid-2010s when the minimum wage was hiked (middle and right charts).

Note: The total profits are estimated by deducting the total wages from the GDP.

Bangladesh needs to raise the minimum wage faster to let its economy catch up with other countries

The call by Bangladesh’s trade unions to raise the minimum wage to Tk23,000 is therefore urgent, to grow Bangladesh’s economy faster.

Other countries are implementing rapid minimum wage rises. Lithuania, Poland, Romania, Latvia and Bulgaria have announced dramatic increases to their minimum wages in 2024, and Estonia and Thailand have announced multi-year plans to do so until 2027 (see dashed lines in the chart below).

Closer to Bangladesh, Thailand’s Pheu Thai-led government has promised to raise the minimum wage to 600 baht (Tk56,000) by 2027, or an increase of over Tk25,000. China plans to increase the incomes of low-income groups from 2021 to 2025.

Pakistan’s Istehkam-e-Paki­stan Party (IPP) said that if elected, it would increase Pakistan’s minimum wage by over 200% to Rs. 50,000, or to over Tk23,000. In July, Turkey raised its minimum wage by 168% from the start of last year to 13,414 liras, to over Tk80,000.

Even if raised to Tk23,000, Bangladesh’s minimum would still be low.

Bangladesh’s economy has been slow-growing because of its stagnant minimum wage.

Raising its minimum wage faster can enable Bangladesh’s economy to catch up with other countries it used to be on par with.

Faster minimum wage growth thus functions as an economic multiplier to expand domestic consumption and thereby profits and the economy.

In the next part of this article, we look at how faster minimum wage growth can lead to lower unemployment as well as higher labour productivity, innovation, exports and profits for Bangladesh’s economy.

Also read second part of Roy Ngerng’s analysis: Raising Bangladesh’s minimum wage faster will lower unemployment and raise productivity, exports and profits