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OP-ED: Minimum wage and employment

  • Published at 07:10 pm October 21st, 2021
RMG apparel
The competition among entrepreneurs within countries has further made buyers indifferent to paying fair prices Mahmud Hossain Opu/Dhaka Tribune

The main results are in line with Card and Kruger’s findings that higher minimum wages result in higher formal employment, particularly female employment

Nobel laureate David Card, in collaboration with Alan Krueger, conducted a study in the early 1990s to examine the impact of an increase in minimum wages from $4.25 to $5.05 per hour on employment in 410 fast-food industries in New Jersey and Pennsylvania.

The findings of this seminal work suggest, contrary to the conventional economic theory, that the increase in minimum wage had not led to significant job losses in the industry.

Inspired by this work, and literature on western countries, I conducted similar research to examine this issue in the context of Bangladesh, which was published in Bangladesh Development Studies Vol. XLI, September 2018, No. 3 titled “Do Minimum Wages Reduce Employment? Some Empirical Evidence from Bangladesh.”  

The main results are in line with Card and Kruger’s findings that higher minimum wages result in higher formal employment, particularly female employment, in the RMG industry of Bangladesh.

Here is a short summary of my paper.

Labour market regulations are intended to improve workers’ welfare by protecting their rights but the general perception, in line with the conventional economic theory, is that such regulation could potentially create rigidity in the labour market and act as an obstacle for formal job creation thus resulting in further unemployment and poverty.

Hence, in order to increase flexibility and competitiveness in the labour market, dwindling of minimum wages and other regulations are often suggested (Heckman and Pages 2000).

The most debated regulation is the minimum wage policy which is advocated in many countries with the objective of establishing a wage floor for the low-wage workers who have less bargaining power in the labour market.

While competitive models predict that minimum wages would have a negative impact on formal employment, such models also assume that the effects of all other factors affecting employment are held constant.

Hence minimum wages should not be treated exogenous in empirical analysis and existing evidences on the disemployment effects of minimum wage increase (Nataraj, Perez Arce, Kumar and Srinivasan 2014, Neumark and Wascher 1992, 2007) necessitates further empirical investigation in order to inform policymakers to design and enforce suitable minimum wage policy for a country.

The minimum wage debate becomes more relevant for developing countries where labour markets are structurally different.

Most developing countries, including Bangladesh, have a large informal sector.

Neither formal nor informal workers receive unemployment benefits, implying that workers have less bargaining power.

Hence, it is not difficult for producers to replace formal workers with informal ones, when facing such regulation, implying that an increase in minimum wage may reduce employment in the formal sector but expand employment in the informal sector at the same time (Comola and de Mello, 2011).

Again, as labour laws are often weakly enforced in such a context, binding minimum wages may not have an impact on formal employment due to lack of compliance.

Understanding the overall effect of changes in minimum wages on employment will therefore depend on several factors such as the degree of competitiveness in the labour market, compliance of regulations, and formal informal labour nexus.

Finding suitable data

Finding suitable data is the biggest challenge for researchers working on Bangladesh issues.

I utilized the available administrative data from a list of RMG firms operating within the jurisdiction of the Bangladesh Export Processing Zones Authority (Bepza.)

The empirical analysis is done by estimating a basic model using a panel of 27 firms for the period 2000-2015.

Contrary to previous findings on developing countries, I have found positive effects of increasing minimum wages on formal employment in the RMG firms.

The results also suggest a significant increase in female employment resulting from the implementation of new (higher) minimum wages.

As the study uses panel data of formal employment within firms in more compliance with labour regulations, this can be considered as the first attempt to provide empirical evidence on employment effects of minimum wages in Bangladesh RMG industry.

The evidence of positive employment effects indicates that an increase in minimum wages might have improved welfare of the minimum wage workers in the industry.

The major policy implication is, therefore, to support the enforcement of minimum wage policy in Bangladesh and in similar countries.

However, regular revision of minimum wage is recommended to ensure fair and competitive wage.

 

The author is professor and interim chair of the Department of Economics and Social Sciences at Brac University

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