Have real wages of workers started to fall?

It is by now well-known that the economic crisis that resulted from the Covid-19 pandemic has severely affected the employment and labour situation – globally as well as in Bangladesh. Millions of jobs were lost during the shutdown period, many of which did not return even when economic activities resumed.

Moreover, as full economic recovery is still some way off, the labour market remains weak.

Loss of jobs and a rise in unemployment are not the only ways in which labour markets adjust to an economic downturn. Another important adjustment mechanism is the fall in real wages of workers. The operation of the forces of demand for and supply of labour can lead to a decline in the real wages of workers.

Real wages are critical for the lives of many of the poor whose sole income-generating asset is their labour. And in that context, it needs to be noted at the outset that it is not just the amount of money that one gets as wages, the price of goods and services that the worker has to buy are also important. The term "real wage" is used to capture the purchasing power of the money one gets as wages. 

Data on the index of money wage of unskilled workers and consumer price index (CPI) are available on the website of the Bangladesh Bureau of Statistics (BBS), using which it is possible to construct the index of real wages of such workers. We have done this for wages as a whole as well as for broad sectors, viz., agriculture, industry and services (Figure 1).

After stagnating (or rising slowly) for a long period during the 1980s and 1990s, real wages rose substantially after 2005-06. But the primary impetus of that rise – especially in agriculture - came from the sharp rise in the prices of food grains in 2008 in the global market as well as in Bangladesh. And the rising trend could not be sustained after 2009-10.

Real wages fell between 2010-11 and 2014-15 for all workers as well as for workers in the three sectors mentioned above. This implies that real wages of workers in Bangladesh did not rise even during the period when economic growth was high and sustained (i.e., during the first half of the decade of 2010).

Starting from 2015-16, the declining trend was reversed in agriculture. For industry and services, recovery started in the following year. But the rise in real wages that took place after 2015-16 was basically helped by low inflation.

The rise in real wages continued in 2019-20 as well. But it needs to be noted that the indices for neither overall wages nor for agriculture and industry have yet reached the level of 2010-11. Only for services, the real wage index attained that level.

It might appear that the ongoing economic crisis has not yet had any adverse effect on real wages. But before coming to such a conclusion, one needs to note a couple of points. First, the data for 2019-20 includes only three months (April, May and June of 2020) of the crisis-affected time. Out of that, April and May were peak periods in agriculture when boro paddy harvest was going on. During such a period, wages in agriculture usually go up.

Second, data for "industry" aggregates data for construction and all manufacturing industries - including micro, small and cottage enterprises. It is in those sub-sectors that wages are more likely to have been affected by the economic crisis. Hence, before concluding that the wage route for labour market adjustment is not in operation, it would be important to (i) look at what happens during the rest of the year 2020, and (ii) examine what has been happening to wages in sub-sectors that are likely to be more vulnerable.

Fortunately, the BBS reports mentioned above provide data for the last three months of 2019-20 (i.e., April, May and June) and for sub-sectors like fishery, and construction for short periods. A few observations may be made on the basis of the data presented in the Figure 2).

General wage growth in April and May (2020) was barely above the inflation rate; but in June, it could not keep up with inflation – thus implying a decline in real wage rate as a whole.

Wage growths in construction and fishery declined sharply.

In May and June, growth of wages in major sectors, viz., agriculture, production industry and services was lower than in April.

One can thus conclude that not only jobs were lost, those who were lucky to be in their jobs are seeing their wages facing downward pressure. The labour market of the country is adjusting to the crisis through both quantity (amount of employment) and price (wage) routes.

The data presented above show that real wages as a whole as well as in the major sectors of the economy have shown a tendency to fluctuate rather than a maintaining a consistent trend. And yet, there are people who argue that real wages are rising and the labour market is facing a shortage of workers.

This is done particularly when there are seasonal spikes in the demand for labour in agriculture – a phenomenon that is typical of monsoon-based agriculture and has been seen for ages. This line of argument has gone to such an extent that the government has formulated a policy for promoting mechanisation in agriculture and has started subsidising the purchase of machinery for harvesting.

It may be noted in the above context that seasonal increases in the demand for agricultural labour have traditionally been met through the mechanism of regional migration of workers from areas of low demand to those of high demand. There are already reports in the media that due to the introduction of machinery for harvesting, there was a fall in the demand for labour and a downward pressure on wages during the most recent harvesting season.

There are also reports (anecdotal as well as research-based) that a process of reverse migration of workers from urban to rural areas has started in the wake of the economic crises caused by the Covid-19 pandemic. That is going to add to the supply of labour in the rural labour market and contribute to the downward pressure on wages.

As for consumer prices, although non-food inflation seems to have remained muted and is likely to remain so in the short run, the same cannot be said about prices of food grains. With the most recent boro harvest below the expected level and the possibility of the adverse effects of floods on aman harvests, prices of food grains will need to be watched and managed carefully. Unless that is done effectively, there may be further pressures on real wages.

What can be done on the policy front in addition to price management? Given the limited ability of the government to implement minimum wage policy and the current state of labour demand, a better policy may be to try to prop up demand for labour by expanding the government's employment generation programmes. While there are always opportunities for undertaking job creation schemes in infrastructure, with the damage to infrastructure caused by the recent floods, such opportunities must have increased in both rural and urban areas.

The author is an economist and a former special adviser for employment sector at International Labour Office, Geneva.