Globalisation, minimum wages and measuring what it all means

I caught the tail end of Gruen Planet tonight and the discussion was framed around the tragic collapse of the Rana Plaza complex in Savar, Bangladesh. The complex was home to what is best known as sweatshop labour and was, at the time, manufacturing clothing and other garments for a variety of Western sources. A total of 1,129 people died as a result of the collapse and the associated working conditions.

The point was made that whilst blame is directed at companies (the argument being these abhorrent conditions are the result of corporate greed), none of the blame is directed at the consumer who has created this condition in the first place. That is, companies didn’t start looking for cheap labour and we said to ourselves, “oh, bonus! A bargain!” We wanted bargains and they sourced increasingly cheaper labour.

That’s probably a whole blog post in and of itself; that, and the view that it’s actually ok at the moment if the “third” world is paid low wages because you can’t build a middle class over night. What I did want to focus on was a point that participants touched on – how the minimum wage in Bangladesh is US$38/mo.

These kinds of figures – others include the standard metric for poverty of US$2 or less – carry substantial emotional weight for people in the West. The standard response of any individual, immediately, is “how barbaric, for I could not live on this little money each month!” This is likely true, but they’re actually not living on that per month.

Of the ways we measure wealth in a country is per capita GDP. This is a meaningless statistic in real terms, since it’s averaged out and therefore skewed by volumes at the top and bottom end. We could look at median income – a bell curve which shows the figure by which as many people earn more as earn less than this amount. Useful, but without context. In order to process these amounts (the $38/month amount) we need to reference an economic theory that, without realising it, you’ve used many times before: purchasing power parity (PPP).

The way PPP works is like this (and I’m going high level for expediencies sake): you create a hypothetical exchange rate between currencies that measures the value of constant goods and services so you can work out not just how many widgets of Currency X you can buy using widgets of Currency Y, but what things cost in Currency X vs Currency Y. The Economist has a table which tracks this know as their Big Mac Index – showing that in US$, a Big Mac might cost, say, $4 in the US but $2 in China, illustrating that the US$ can buy more goods and services in China than it can in the US.

We do this when we travel. We work out that we can buy a good that’s available in our country for less in another country, which is the same principal – goods cost more or less depending on where we are, irrespective of the cross rate or what the USD trades against our currency for.

This doesn’t imply that in actual fact, Bangladeshis are paid a princely sum for their minimum wage. I’m merely hoping people might try and work out what $38/mo will buy you in Bangaldesh, rather than saying “I couldn’t live off that amount.” No, you couldn’t – but the minimum monthly wage according to Fair Work Australia is $622.20 per week for full time adults. This works out at $2696.20 before tax per month. So, whilst living standards are going to be better here than in Bangladesh, the question is – if the minimum wage is designed to provide the minimum amount to workers to survive, does this $38/mo do this?

And I know people are genuinely distressed at the comparative wage gaps between the developed and developing world – my advice to you is to study your history and study your economics. Wages are rising in China because they started low, had comparative advantage in labour, and built industry around that. A middle class was born as a result and when we look at the typical inequality measurement – the GIni coefficient – we can see a move towards greater equality in the PRC. Bangladeshis will be, over time, better off as a result of what they’re going through now just like we are better off from going through it during the Industrial Revolution. If there was a way to ensure the creation of a middle class without this process, that worked, I’d be all ears. But given how successful Bangladesh is now in relative terms, I would argue it’s only a matter of time and sadly, significant human cost.

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