Over the past decade Bangladesh has emerged as one of the fastest growing economies in the world. In addition, the country has displayed political and macroeconomic performance, along with robust geopolitical support. These are promising factors for the country. With a growing economy, Bangladesh has a big challenge of scaling-up an inclusive development agenda.

A core challenge is dealing with the labour market efficiently while creating decent jobs with an increasing participation from young people. A critical analysis of Bangladesh, the now acclaimed ‘New Asian Tiger,’ shows that the country still needs an instrumental push to be as vibrant as other Asian Tigers over the next two decades. What would a ‘New Tiger’ in the region look like if young people struggle to get good jobs.

Bangladesh has a youth bulge, from which many are out of the labour force. This has meant that real wages for the working population have been falling. More importantly, a large section of young people are not in education, employment, and training (NEET). As a young ‘New Tiger’ nation, these challenges of the labour market will only grow unless they are properly addressed.

Policy challenges of the labour market

Among labour market constraints in Bangladesh, two areas require urgent policy interventions. First, jobs for young people. Second, the negative growth rate of real wages. Before looking closer, it is important to revisit the major labour market indicators to understand the context behind these issues.

Bangladesh’s latest mid-term development plan, the 8th Five Year Plan, outlines the key labour market challenges and the ex-ante policy measures. The Plan essentially incorporates the agenda for labour market interventions over the next five years, 2022-2026.

Almost half of the working age population in Bangladesh are not looking for jobs. Hence, from an evaluation perspective, they are essentially inactive workers. This scenario is distressing because these inactive workers are mostly discouraged workers. They are unnoticed during studies on unemployment within the labour market unemployment. For instance, an unemployment rate of 4.2%, found in the Government of Bangladesh’s latest job-sector survey, the Labour Force Survey 2016-2017, indicates a vibrant labour market scenario. It is indeed better than many other developed countries in tackling unemployment.

The ‘inactives’

If Bangladesh’s policymakers and development stakeholders want to understand the pulse of the labour market, then an indicator like the unemployment rate may seem a good starting point. According to it, the country is doing great and unemployment is a non-issue. In fact, 3-5% unemployment rate in any economy is natural, meaning that there will always be some form of unemployment. For example, economists term some unemployment as ‘frictional’ or ‘seasonal.’ These forms of unemployment accounts for workers who switch jobs or wait for the right season to work. Agriculture workers waiting for harvesting time are the iconic example of seasonal unemployment. If nuances are not accounted for, unemployment may essentially seem absent in Bangladesh.

Notwithstanding the book definition of unemployment, almost 46 million Bangladeshis are not actively searching for jobs. This is because they are either ‘inactive’ or there is no opportunity in the economy. They are not captured as jobless in the unemployment rate because are not actively searching for jobs. This ‘inactiveness’, however, signals a weakness in the labour market.

Evidence from several developing countries suggest that a major reason for an ‘inactive’ working age population is the lack of long-term jobs. It may also be due to a human factor: when people are discouraged from a tiresome job-search process, they fall into a long-term unemployment trap.  Other explanations are more crucial: skills mismatches and low returns to education. This is a youth issue that is particularly important for Bangladesh.

NEET threat

Skills mismatch or low returns of education leads the youth into NEET, an abbreviation for youth not in employment, education or training. More than 12 million young people are NEET. Youth in NEET after some point stop searching for jobs, which makes them ‘inactive’ in the labour market.

Youth in NEET is the reason why creating good jobs is the central policy discussion in most developing countries including Bangladesh.

Youth in NEET is the reason why creating good jobs is the central policy discussion in most developing countries including Bangladesh. The agenda for expanding decent Fourth Industrial Revolution (4IR) and high-tech area jobs is more pressing than ever. For Bangladesh, its labour force will grow at a rate of 2.2% annually, which can quickly inflate the NEET group if enough jobs are not produced.

Therefore, the country needs to focus on youth-centred job creation. However, often firms do not prefer inexperienced young people and barely invest in training young employees. A greeting like this leaves young people with nowhere to go. Coupled with NEET knocking on their doors, they become more likely to get involved in criminal activities.

Reimagining the job sector

Bangladesh’s labour market institutions (LMIs) can play a pivotal role to improve labour market conditions.[1] Re-formulating the active labour market programmes, which are targeted schemes to keep workers employed, can help Bangladesh to get rid of a jobless-growth risk. Skills enhancement schemes and training programmes such as technical and vocational education and training (TVET) reform project, and different skills enhancement schemes in Bangladesh only deal with the supply side issues. They are essentially providing training without examining the demand by recruiters. To reduce the skill mismatch, demand side needs to be prioritised. Employers should invest in training young people as per industry needs.

The pressing issue for Bangladesh is the negative growth rate of real wages in the working population. According to the ILO’s Global Wage Report 2020-21, Bangladesh experiences a negative growth rate of -5.9% annually in real wages, meaning wages adjusted for inflation. It is the lowest among the 22 Asia Pacific countries. Cambodia, Vietnam, China, Myanmar and India – all global competitors of Bangladesh in trade – have on the other hand seen growing real wages. This declining real wage phenomenon coupled with joblessness in Bangladesh’s economy threatens to derail some of its national developmental targets, including the SDGs.

Real wages situation

To further investigate the real wage rate, the author constructed an index for real wage rates from different labour datasets published by Bangladesh’s centralised data collection agency, the Bangladesh Bureau of Statistics.[2] According to the datasets, there was a decreasing trend from 2010 until 2016, though it finally started improving after 2020.

This means that the real wages of Bangladeshi workers have not increased during the period of strong economic growth in the 2010s. Despite this issue, Bangladesh’s productivity growth rate is at 5.8% annually, almost equal to China’s 6%. This shows that the country’s workers are producing at commendable pace. They are truly utilising the capacity, capital and technology within the country. However, divergence of real wage and productivity growth leads to several socio-economic consequences such as brain drain and poverty. Eventually it will also affect competitiveness, and thus the economy.

Why minimum wage?

For Bangladesh, what policy measures can tackle the threat of declining real wages? Useful labour market tools such as a sound minimum wage policy may seem like the right step. However, implementing a minimum wage policy is a complex issue for developing countries as there can be negative effects for benchmarking minimum wages. Studies from comparator economies, such as Brazil, Colombia and Indonesia, have found negative consequences in increasing the minimum wage.

Ultimately, it is important for Bangladesh to simply focus on creating youth employment, increasing labour market participation and improving the quality of jobs. These metrics are most likely to increase the real wage of workers. Zooming out, Bangladesh faces a dual set of challenges: transformation from a developing to an advanced economy; technological transformation in 4IR and the constraints imposed by covid-19. At the core of all these challenges is workers.

 

[1] LMIs are a combination of law, practices, policies and conventions that determine the employment contracts, unemployment benefits, social protections and collective bargaining.

[2] Calculated from combining wage rate index (WRI), consumer prices index (CPI) and inflation rate.

 

Photo ©️ Mahmud Hossain Opu

 

Nazmul Avi Hossain is Senior Programme Officer at the International Labour Organization (ILO). He is a labour economist. He was a consultant at Microsave Consulting. He has consulted on projects with the European Union, UkAid, the United States Agency for International Development, the United Nations Development Programme, ILO and CARE. He specialises in private sector development, skills and financial inclusion. He pursued his graduate studies in Labour Economics at the University of Turin.