A number of rich people from the rich world gathered to insist that RMG sector minimum wages of Tk8,000 a month are not enough. To which one answer is well, what's that got to do with you?
OK, so the people doing the saying were the likes of the head of the EU delegation to Bangladesh, Holland's Charge d'Affaires and so on. You know, important people who’ve never had to meet a wage bill in their lives and those who are unlikely to have ever had to deal with actual economies or economics. These are the people who issue passports trying to insist upon how an economy should be planned. Not an adventure that is likely to have much success if the truth be told.
OK, OK, perhaps I should be just a little less vituperative, but this is the sort of ignorance that really is annoying. For it's ignoring the most basic thing we already know about what determines wages.
Wages are not determined by the employer of the labour. They're determined by all of the other employers in the economy.
Or, to put this more formally, wages are not determined by the productivity of the labour itself, but by the average level of productivity in the economy as a whole.
Even Paul Krugman himself stated it, specifically and deliberately about the Bangladeshi RMG factories. In his (entirely marvellous) essay “Ricardo's Difficult Idea,” he writes, “it is a fact that some Bangladeshi apparel factories manage to achieve labour productivity close to half those of comparable installations in the United States, although overall Bangladeshi manufacturing productivity is probably only about 5% of the US level.” And, “wages are determined in a national labour market.”
This is in the most famous essay on the subject of the last 50 years. Agreed, the essay is now 30 years old, but that does mean that even passport officers should have heard of it by now.
The point that Krugman is making (and don't forget his Nobel is for international trade studies) is that wages are not determined by the factory, or the employer. They're set by the average level of wages in the economy.
Perhaps necessary to slightly unpick that. The wages you get offered in any job are not those that are determined by the job you are applying for. They are decided by the best wages you can get elsewhere. That is, what anyone else is willing to offer you to work in a shop, drive a rickshaw, work at Walton, is what will determine the wages in the RMG factories.
Think on it -- the barber cutting hair uses the same tools, comb and scissors, as one in England. That barber in Dhaka gets paid less than the one in Dudley. As Ha Joon Chang (another economist) has pointed out, the bus driver in Sweden gets paid very much more than one in Dhaka -- and having seen Dhaka traffic, has an easier job to do too.
Why? Because all wages in Dhaka are lower. The reason for that is because the productivity of labour in Bangladesh is lower. The average cash income from employing a person in Bangladesh is lower than the cash return of employing someone in a rich country. That's it, that's all. The wages you can earn elsewhere determine the wages you can earn in your current job.
There's an important point to this. Which is that we are not going to increase RMG wages by pontificating at meetings. What we've got to do is increase the productivity of all labour in Bangladesh and then wages will naturally rise.
As Krugman points out, “what would happen if people who work for such low wages manage to achieve Western productivity?” The economist's answer is, “if they achieve Western productivity, they will be paid Western wages” -- as has in fact happened in Japan. But to the non-economist this conclusion is neither natural nor plausible. (And he is likely to offer those Bangladeshi factories as a counterexample, missing the distinction between factory-level and national-level productivity).
Or as we can put it, when Bangladesh is rich then everyone will get high wages. For these are the same statement, if everyone's getting high wages then the country is rich, this is what it actually means.
Rich world diplomats making speeches isn't the way this is going to happen. Getting out there and making things people want to buy is.
By the way, one of the ways we can prove all of this contention about wages is very simple indeed. The EU's head of delegation to Bangladesh, The Dutch Charge, etc, they're being paid European wages to be here. Why? Because they could work in Europe. However productive they are at issuing passports, they get paid rich world wages simply because that's what rich world means, high wages. Despite all us Europeans being entirely happy to pay them Tk8,000 a month. If they're lucky -- and perhaps I should indeed be this vituperative.
Tim Worstall is a senior fellow at the Adam Smith Institute in London.
