There’s a strike or two taking place in Bangladesh over wages for garment workers. The workers wanting more money of course, the employers not really desiring to give it to them. Ho hum, how surprising.
The thing is though, by the standards of this time and that place those garment workers aren’t badly paid. In fact, they’re rather well paid by those standards, even as they’re badly paid by our standards or of richer places more generally. At which point we’ve a fundamental misunderstanding of how wage setting works.
The biggest influence on what you’re going to get paid in any one single job is how much will you be paid in another job equally available to you? No, not what the job is “worth”, nor what some foreigner thinks it ought to pay.
Consider – there are barbers in Chennai, there are barbers in Chicago. They each do much the same job, cut men’s hair and ask them if they’d like anything for the weekend. The one in Chicago will be making perhaps ten times, possibly twenty, the one in Chennai.
Same job, same technology, same productivity, same output, one makes very much more than the other?
Because the alternative jobs are different. Our man in Chicago can go shoot beer runners in Feb 14th. Sure, a risky occupation but one that pays well. Our laddie in Chennai has the alternative of running a char stand at the station. Not such a lucrative means of deploying his labour. Given the difference in the returns to alternative employments they get different wages for doing the same thing.
Cue our Bangladeshi strikers:
Bangladesh strikes: thousands of garment workers clash with police over poor pay
Dozens of factories have closed after more than a week of protests in which one person has died
OK. Seeing conflict is always sad but OK, it’s happening.
Minimum wages for the lowest-paid garment workers rose by a little over 50% this month to 8,000 taka ($95) a month. But mid-level tailors said their rise was paltry and failed to reflect the rising costs of living, especially in housing.
It isn’t much, no. But it’s actually pretty good for that place and this time. A rickshaw driver might be getting 2,000 Tk a month. A high school teacher 9,000 plus free accommodation in the state sector, 18,000 in the private. Entry level minimum wages in the factories for someone just in off the fields of 8,000 aren’t that bad. That’s before training, overtime, benefits.
But despite their role in transforming the impoverished nation into a major manufacturing hub, garment workers remain some of the lowest paid in the world.
Well, yes, because most garment production is in places that are richer. Take it away Professor Krugman:
– Wages are determined in a national labor market: The basic Ricardian model envisages a single factor, labor, which can move freely between industries. When one tries to talk about trade with laymen, however, one at least sometimes realizes that they do not think about things that way at all. They think about steelworkers, textile workers, and so on; there is no such thing as a national labor market. It does not occur to them that the wages earned in one industry are largely determined by the wages similar workers are earning in other industries. This has several consequences. First, unless it is carefully explained, the standard demonstration of the gains from trade in a Ricardian model — workers can earn more by moving into the industries in which you have a comparative advantage — simply fails to register with lay intellectuals. Their picture is of aircraft workers gaining and textile workers losing, and the idea that it is useful even for the sake of argument to imagine that workers can move from one industry to the other is foreign to them. Second, the link between productivity and wages is thoroughly misunderstood. Non-economists typically think that wages should reflect productivity at the level of the individual company. So if Xerox manages to increase its productivity 20 percent, it should raise the wages it pays by the same amount; if overall manufacturing productivity has risen 30 percent, the real wages of manufacturing workers should have risen 30 percent, even if service productivity has been stagnant; if this doesn’t happen, it is a sign that something has gone wrong. In other words, my criticism of Michael Lind would baffle many non-economists.
Associated with this problem is the misunderstanding of what international trade should do to wage rates. It is a fact that some Bangladeshi apparel factories manage to achieve labor productivity close to half those of comparable installations in the United States, although overall Bangladeshi manufacturing productivity is probably only about 5 percent of the US level. Non-economists find it extremely disturbing and puzzling that wages in those productive factories are only 10 percent of US standards.
Finally, and most importantly, it is not obvious to non-economists that wages are endogenous. Someone like Goldsmith looks at Vietnam and asks, “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).
As Professor Krugman is far too polite to put it, wages in Bangladeshi garment factories are low because the rest of the Bangladeshi economy has crap productivity. Pity of course, but there it is.