Raising Bangladesh’s minimum wage faster will lower unemployment and raise productivity, exports and profits

by Roy Ngerng

Bangladesh is currently discussing raising the minimum wage for the garment sector.

In the first part on this topic, we saw how raising the minimum wage faster can expand Bangladesh’s economy.

In this part, we look at how doing so can lower unemployment and raise productivity, exports and profits.

Faster minimum wage growth leads to lower unemployment and higher productivity

Historically, when the minimum wage in Bangladesh’s garment sector was raised in 2006, 2010 and 2013, unemployment saw large declines (left chart below). The right chart uses a 10-year rolling average to show a clearer trend. (The unemployment rate is charted on an inverted axis for easier comparison.)

Data source: Minimum wage, Unemployment Rate

The World Bank similarly found that among South Asia’s apparel industry, “a one per cent increase in expected wages … could raise the probability of women entering the labour force by 18.9%”.

Higher minimum wage motivates workers to reenter the workforce to earn higher wages, which leads to higher consumer confidence and consumption, and in turn allow businesses to expand and hire more.

Historically, Bangladesh’s minimum wage growth also coincided with higher labour productivity growth (left chart below). The right chart shows productivity rising as minimum wage rises.

Data source: Minimum wage, labour productivity per hour worked

Among garment manufacturing countries, countries with higher minimum wages have productivity levels. Bangladesh pays the lowest minimum wages in Eurasia, and has the lowest productivity

Faster minimum wage growth also leads to faster productivity growth.

The Baltic countries grew their minimum wages fastest (as seen in part 1), and their productivity has risen fastest (see yellow lines below). This is followed by the Eastern European countries (blue lines) and East Asian countries (green lines).

Bangladesh’s minimum wage and productivity grew the slowest.

China used to have lower labour productivity than Bangladesh, but after its minimum wage started rising rapidly from 2004 (as shown in part 1), its productivity also rose faster.

Business Fights Poverty (BFP), the University of Cambridge Institute for Sustainability Leadership (CISL) and Shift found that workers who earn higher wages become more motivated, well-rested and take fewer sick days, thus making fewer mistakes.

They are less distracted by personal financial concerns and need not take on a second job, thus having better concentration and focus. Higher wages therefore lead to higher-quality labour with higher skills, and thereby drive innovation and open up new markets.

Among Vietnamese and Cambodian garment factories, businesses found that the higher productivity and higher gains brought about by higher wages “more than compensates for their added cost”.

On the other hand, a study of Thailand’s garment factories found that when workers realise that the financial gains resulting from their productivity is not shared with them, they lose motivation and productivity declines.

The quit rate also rises, contributing to higher costs for recruitment and training.

Indeed, when international brands and retailers assessed the competitiveness of suppliers, countries that pay higher wages are rated as providing better quality, value-add, innovation and efficiency in their production.

China and Vietnam are thus regarded as “more critical sourcing bases” and Bangladesh is seen as less competitive.

Data source: Textiles and clothing in Asian graduating LDCs: Challenges and options

Higher minimum wage leads to higher exports and profits

The Bangladesh Garment Manufacturers and Exporters Association (BGMEA) has set a US$100 billion garment export target by 2030.

Higher wages can help achieve that. Comparing countries with similar population sizes in the left chart below, Thailand and Vietnam pay higher minimum wages and their exports have risen to six times that of Bangladesh. Romania’s population is a tenth that of Bangladesh, but its exports have grown to over twice that of Bangladesh.

On a per capita basis in the right chart, countries with the highest wages (see yellow lines in the chart below) also have the highest exports, followed by those which pay lower wages (blue and green lines). Bangladesh’s minimum wage and per capita exports are the lowest (red line).

Data source: Exports

In terms of garment exports per garment worker, countries which pay higher minimum wages also export more. Again, Bangladesh is the lowest.

Data source: Textile exports, employment in garment manufacturing. Note: The garment exports per garment worker are obtained by dividing the textile exports by employment in garment manufacturing.

Bangladesh’s low exports is also due to its low technological complexity. Countries with higher minimum wages have higher technological complexity, or the ability to produce diverse and innovative technologies.

Bangladesh’s low wages make it difficult to create new technological innovations and open up new markets, thereby limiting Bangladesh’s export potential.

Data source: Technology complexity

Bangladesh’s low minimum wage leads to low domestic consumption and exports, and thus low profits. The Baltics have the highest minimum wages and profits; Kenya’s minimum wage and profits are the lowest. Bangladesh’s economy is at the level of Kenya (as seen in Part 1), and so are its profits.

In Vietnam’s factories, it was found that every 1% increase in wages leads to a 0.6% increase in profits.

The idea that suppressing minimum wage can lead to higher profits is thus misguided.

Data source: Profits (1, 2). Note: Data for some countries is not available.

Higher minimum wage leads to higher productivity and innovation, and therefore higher-value goods and exports, and profits.

Alessandro Caiani, Alberto Russo and Mauro Gallegati explained that it does so by “creating a more favourable macroeconomic environment, which encourages further innovations, stimulates investment, and sustains economic growth”.

On the contrary, low wages lead to lower-value output and factories being exploited alongside workers.

The University of Aberdeen and Transform Trade found that international brands have been pressurising Bangladesh’s factories to reduce their prices. International brands earn higher revenue and sales, but Bangladesh’s factories are paid declining prices.

Centre for Policy Dialogue (CPD) Distinguished Fellow Mustafizur Rahman explained that “buyers are currently paying lower prices to the manufacturers because they are also paying less to the workers”.

Higher minimum wage therefore benefits not only workers, but businesses and the economy.

Bangladesh therefore needs to heed trade unions’ call for a minimum wage of Tk23,000.

This would enable workers to spend to meet all their basic needs, and enable businesses to earn optimally, and to grow domestic profits and the economy faster.