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Dynamics of Agricultural Wage and Rice Price in Bangladesh: a Re-examination

Shahidur Rashid
Markets and Structural Studies Division International Food Policy Research Institute 2033 K Street N.W. Washington, D.C. 20006

Abstract/ Executive Summary:

Like many other Asian countries, the causal relationship between agricultural productivity and the incidence of rural poverty has been a widely debated subject in Bangladesh. A number of studies argued that the real agricultural wage rate was declining during the period when the country had experienced overall agricultural growth. This paper contributes to this debate in two ways: i) it reexamines the methodological aspects of past studies and presents alternative estimates; and ii) analyzes dynamics of agricultural wage and rice price using the most recent data. Multivariate co-integration techniques are used to examine the long and short-run relationships among agricultural wage rate, rice price, urban wage rate, and other prices. The results show that agricultural wage and rice price maintained strong co-integrating relationships during the periods 1949/50— 1979/80, and the elasticities of agricultural wage rate with respect to rice price are substantially higher than what past studies had reported. Analyses of post-famine data (1976/77—1998/99) suggest that rice price, which was strongly cointegrated with agricultural wage rate until the early 80s, is no longer a significant determinant of wage formation in Bangladesh.

Keywords: Agricultural wage, Rice price, Bangladesh

Location:

Start Date:

End Date:

Program Area: Socio-economic and Policy

Commodity: Rice

Objectives:

This study undertakes two tasks: i) it re-examines the methodological aspects of past studies and ii) analyzes the wage-price dynamics using the most recent data.

Methodology:

We use two different sets of data for this study. To re-examine past studies, we use the data set reported in Palmer-Jones (1993), which contains data from 1949/50 through 1989/90. It is to be noted that the first thirty years of data in this data set are identical to the data used in Boyce and Ravallion (1991). For the purpose of analyzing dynamics of wages and prices during the post-famine period, we constructed four-time series variables—agricultural wages, urban wages, rice price, and cloth price index—using various publications of the Bangladesh Bureau of Statistics (BBS). Note that agricultural wage rates in Bangladesh vary depending on whether or not employers provide meals to their workers. We use district-wise wage rates of agricultural workers without meals. Daily average wage rates of unskilled construction workers in seven major cities (Dhaka, Chittagong, Narayangonj, Rajshahi, Khulna, Sylhet, and Rangpur) are taken as proxies for urban wage rates. This is different from the manufacturing wage rate used in the previous studies, which was an average wage rate of the unskilled workers in the manufacturing sectors such as the jute and textile industries. Since labor unions are significantly strong in the industrial sector in Bangladesh, wage rates of unskilled construction workers are more likely to better reflect urban wage than the average wages of the unskilled workers in the unionized manufacturing sectors. Rice price is the daily average of the district level prices of coarse rice, commonly consumed by the poor. Finally, the cloth price index is the merged cloth price index reported in the monthly statistical bulletin of the BBS. All variables are transformed into a natural logarithm and 1977/78 is taken as the base year. Our empirical analyses are based on cointegration techniques. The concept of cointegration states that if a long-run relationship exists among a set of nonstationary variables, then the deviation from the long-run equilibrium path should be bounded. In other words, the existence of a long-run relationship implies that cointegrated variables cannot wander too far away from each other. Formally, two non-stationary series t x and t y are said to be cointegrated if the following two conditions are satisfied: i) both series are integrated of the same order, and ii) a linear combination of t x and t y exists which is I(0) i.e., stationary. Therefore, the first step in cointegration analyses is to examine the order of integration (stationarity) of relevant variables (Banarjee et. al., 1993; Muscatelli and Hurn, 1992). Once the order of integration is determined, the next step is to determine whether the non-stationary variables form a co-integrating or long-run relationship among them. Engle and Granger (1987) demonstrate that for any set of I(1) variables, error correction and cointegration are equivalent representations. In other words, if an error correction model provides a sufficient depiction of the variables, then the variables must be cointegrated and vice versa. This provides the basis for using an error correction model in the cointegration framework for analyzing the dynamics of agricultural wage formation. Although Engle and Granger (1987) proposed a simple estimation technique, their methodology was subsequently criticized to have serious econometric shortcomings. The methodology presented in Johansen (1988) and Johansen and Juselius (1990) overcomes those shortcomings and provides ways to test parameter restrictions and other structural hypotheses in a cointegrated system. One of the striking features of this method is that since estimation is carried out in a multivariate VAR framework, it does not make any a priori assumption on endogenous or exogenous divisions of variables. It also enables the determination of whether more than one co-integrating relationship exists. The estimation of our model in this framework is described in section 4.2.

Source of Information: MSSD DISCUSSION PAPER NO. 44, International Food Policy Research Institute; 2033 K Street N.W.; Washington, D.C. 20006 Tel. (202) 862-5600 and Fax (202) 467-4439; http://www.cgiar.org/ifpri March 2002

Article Link (Online Journal):

Funding Source:

1.

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Total Budget (Tk.) :

Achievement/Findings:

The main objective of this study has been to examine the dynamics of agricultural wage formation in Bangladesh, paying close attention to its relationship with rice prices. Two specific tasks have been carried out. First, given the non-stationarity of all variables, data from past studies are re-examined in a multivariate co-integration framework. Second, to assess whether policy initiatives of the 80s and 90s reflected through changes in the dynamics of wages, similar analyses have also been carried out on the post-famine (1977/78- 1998/99) data. Our results are striking on both counts. By re-analyzing the data used in previous studies, this paper has demonstrated that previously drawn conclusions do not hold when the same models are estimated in a cointegration framework. In particular, contrary to previously drawn conclusions of alarming downward trends in agricultural wages relative to rice price, the results suggest that agricultural wage and rice price maintained a strong co-integrating relationship during the 1949/50-1988/89 period. The long-run elasticities of agricultural wage rate with respect to rice price are estimated to be 0.72 and 0.69 for Boyce-Ravallion (1991) and Palmer-Jones (1993) data sets, which are substantially higher than their estimates of 0.46 and 0.47 respectively. To further explore the degree of co-integration between agricultural wage rate and rice price, we carried out two structural hypotheses tests—one on the proportionality and the other on the stationary relationship between the two variables. Neither hypothesis could be rejected at a conventional level of significance for the 1949/50-1979/80 data. This suggests that, under our analytical framework, previous conclusions of a decline in real agricultural wage rate with respect to rice price cannot be supported by the data. For the 1949/50- 1988/89 data, however, the stationarity hypothesis was rejected, which can perhaps be explained by the higher growth of agricultural wages relative to rice prices during the 80s.

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