A DYNAMIC ECONOMETRIC MODEL OF AGRICULTURAL WAGE DETERMINATION IN BANGLADESH
| DOI | http://doi.org/10.1111/j.1468-0084.1991.mp53004002.x |
| Date | 01 November 1991 |
| Author | James K. Boyce,Martin Ravallion |
| Published date | 01 November 1991 |
OXFORD BULLETIN OF ECONOMICS AND STATISTICS, 53,4(1991)
0305-9049 S3.00
A DYNAMIC ECONOMETRIC MODEL OF
AGRICULTURAL WAGE DETERMINATION IN
BANGLADESH
James K. Boyce and Martin Ravallion*
I. INTRODUCTION
The responsiveness of wages to prices and productivity is often an important
determinant of how the standard of living of the poor evolves over time.
Indeed, if the economy is characterized by low per capita incomes and the
concentration of land and capital ownership (leading the poor to depend
heavily on labour markets) the process of wage determination can literally be
a matter of life and death. Bangladesh is such an economy. With rising
landlessness in rural areas, increasing numbers of the poor are relying on
labour markets.
This paper investigates the dynamics of agricultural wage determination in
Bangladesh, looking closely at the influence of changes in relative prices and
productivity. The wage response to rice prices is of central concern. Rice is
both the country's main crop, typically accounting for over three-quarters of
gross cropped acreage, and the main food staple of the population, account-
ing for a similar proportion of aggregate calorie consumption (Boyce, 1987,
p. 115). Being employed in the production of the commodity which con-
stitutes their principal wage good, agricultural labourers are affected by
changes in rice prices in several opposing ways.
Labour markets in this setting appear to adjust slowly to price changes in
other markets. Nominal wage stickiness is observed even in rural labour
markets where unionization is uncommon. (This should not be too surprising,
for optimal self-enforcing wage contracts will entail sticky wages; see Thomas
and Worrall, 1988.) Thus the instantaneous response of nominal wages to a
price increase may be small, as was tragically demonstrated during the 1974
famine, precipitated by soaring rice prices (Ravallion, 1987). We can thus
expect an increase in nominal rice prices to result in at least a temporary (but
still important) decline in the food purchasing power of the agricultural
*For their comments on this paper our thanks go to John Beggs and Azizur Rahman Khan.
The views expressed here are those of the authors, and should not be associated with their
employers, or any affiliated organizations.
361
362 BULLETIN
wage.' However, the long-run effects of higher rice prices may be more
advantageous to agricultural labourers. For example, it can be argued that an
increase in the price of rice would increase output and hence the demand for
agricultural labour, thus boosting agricultural wages. Studies of the supply
response in the subcontinent have typically found fairly low aggregate price
elasticities, in the short run, though long-run elasticities are likely to be
higher.2
Both short-run wage stickiness and shifts in inter-sectoral terms of trade
may give rise to other indirect effects upon agricultural wages. These include
familiar general equilibrium effects such as the impact of changes in inter-
sectoral terms of trade and intra-rural income distribution upon employment
in non-agricultural sectors, and also broader effects upon what are often
taken to be exogenous constraints in general equilibrium analysis. For
example, a shift of inter-sectoral terms of trade in favour of agriculture may
be associated with an increase in the political power of rural surplus
producers, which in turn could affect the pace and direction of technological
change, the persistence of traditional ties of reciprocity between rural patrons
and clients, and the extent of monopsony power in rural labour markets.
Similarly, the distress caused by short-run declines in real agricultural wages
can lead to sales of land and other assets by the near-landless, changing the
distribution of initial endowments.
The following section discusses past research on these aspects of agricul-
tural wage determination in Bangladesh. Section III then offers a new
dynamic model of agricultural wage determination which avoids the
identified shortcomings of past work, and allows the various claims discussed
above to be tested. The model builds on Ravallion (1987, Ch. 5), though the
specification and data set used offer a better resolution of long-run effects.
Section IV offers some conclusions. A sequel to this paper examines the
study 's implications for understanding the welfare distributional effects of
changes in agriculture's terms of trade.3
Recent studies of poverty in rural India have reached similar conclusions regarding direct
foodgrain price effects, though the issue of labour market adjustment has been left begging. See
Saith (1981), and Dharm Narain's work discussed in the volume edited by Mellor and Desai
(1985). All of these studies have regressed poverty on nominal prices, thereby raising the
question of how other prices (especially nominal wage rates) have responded. See van de Walle
(1985) on the static effects of changes in real agricultural wage rates on rural poverty in India.
2See Binswanger's (1989) survey. Higher elasticities are often found in the short run for
individual crops, owing to the possibilities for acreage substitution. However, such inter-crop
shifts as do occur in Bangladesh are primarily between rice and jute (the country's primary
export crop) which is more labour-intensive than rice, so substitution in favour of rice will
mitigate gains in employment from higher rice prices.
See Ravallion (1990). On the distributional effects of changes in agriculture's terms of trade,
see Mitra (1977), Tyagi (1979), de Janvry and Subbarao (1986), and Sah and Stiglitz (1987).
Also see de Janvry and Sadoulet(1987) who have found that general equilibrium simulations of
the distributional effects of agricultural price policy reforms are highly sensitive to the assump-
tions made about agricultural wage determination.
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