The ready-made garment (RMG) sector that began its journey in the 1980s has emerged the biggest part of our manufacturing industry. Now, it employs more than 4.5 million workers, mainly women from low income families. But the main problem that still remains unresolved to a large extent is the wage structure for workers, who are mainly labourers doing blue-collar jobs. We experienced unrest, vandalism and strike in this sector over the workers' minimum wage demand. But is the minimum wage the best solution? If we visit economic theories, we see a rational individual acts in the best interest of his or her own. Adam Smith chose to call it 'self-love'. This passion of a man drives him to gather wealth for ensuring a comfortable today and a better future. The owners of the garments factories and the workers are no exception. However, the self-interest is not a bad thing until it affects others' legitimate rights. So an owner's inclination for making more profit by reducing the expenses is as simple as it is. On the contrary, the workers want better wages to meet their basic needs. Hence, to solve the conflict of interest and the wage problem, we need to address the problem from both the owners' and workers' perspectives.
What if we introduce performance-based pay or any profit-sharing plan? Economist Martin L. Weitzman, a professor of Harvard Kennedy School, came up with a beautiful but simple equation: Y=MX+C, where Y denotes the total earnings of a worker, M is the reward rate, X is the variable and C is the fixed wage. In our country, C is high, though many people may disagree, and there is no reward for performance. That means the MX is missing. Our goal is to ensure betterment of the workers by not harming the owners' interest either. So, we can reduce C and introduce some variables and rates, based on which the workers will be paid for their performance. The benefits for workers should have its lower and upper limits. A standard could be set in this connection based on agreements between workers and owners. This has various advantages. Once the standard is set, the workers will be more motivated to put up the best performance and this will lead to a higher earning (Y) than before (when C was higher and fixed). Weitzman did research on fixed versus profit sharing wages and their effect on unemployment. He has argued that when firms offer profit sharing wages, that means employees receive higher wages when a company is doing well, firms have the lower rates of unemployment and do better during any recession. If the economy experiences any downturn, the owners have nothing to be worried about, because if firms earn no profit, then they do not need to pay on performance, since the source of MX is the profit but the owners must continue to pay the fixed wages which is not difficult now, because C is now lower. If C is a big figure, a slowdown of an economy can destroy the firms, leading to higher unemployment and unstableness in a country. That's how MX could work as a shock absorbent factor for the firms.
It is easy to understand that if MX is higher, then Y will be higher as well. So the workers will be satisfied and they will cooperate with the owners. Unrest, vandalism and strike will never be there. This will result in a stable industry. Nevertheless, accounting experts see something different in Weitzman's theory and call the above logics legitimate but a layman's notion. They argue that a higher MX will reduce the monitoring costs. When C is higher and fixed, the workers tend to shirk. So, firms need supervisers, foremen, surveillance and other similar things, but performance-related pay (PRP) can reduce this cost and improve the workers' efficiency. Economists view it from a wider perspective. They believe if the money is in the pockets of owners, who are already well off, they will spend it for luxury. They will travel overseas, buy apartments, ornaments, latest techno devices and thus money will be drained out to foreign countries. But more money in the workers' hands will have a more positive impact on the economy. They will meet their basic needs by this money. They will buy food stuffs, clothes and many other things. So, the demand for those products will be higher and it will help enhance their production and supply resulting in a higher purchasing power of the lower class people. This will also help create more jobs and have a positive impact on gross domestic product (GDP).
Now the question is: Can Bangladesh can apply this theory at this juncture? The answer is 'yes but gradually'. The trouble with its implementation is we have a large workforce. But workers are often disorganised and unskilled. So, owners and investors will not be willing to accept Weitzman's theory right now. But the government should persuade the investors to set up factories by providing lucrative tax benefits. The profit sharing with employees is regulated by the government under the Companies Profit Act, 1968 (amended in 1989). The existing act is fine but the government can impose such profit sharing plans on big firms through gazette notification time to time on the basis of mutual agreements. To do this, owners must shun the hardcore capitalistic mindset and the government should shun the extreme fondness for the wealthy owners and, most importantly, they should overcome the narrow partisan interest for the sake of building a better society.
What if we introduce performance-based pay or any profit-sharing plan? Economist Martin L. Weitzman, a professor of Harvard Kennedy School, came up with a beautiful but simple equation: Y=MX+C, where Y denotes the total earnings of a worker, M is the reward rate, X is the variable and C is the fixed wage. In our country, C is high, though many people may disagree, and there is no reward for performance. That means the MX is missing. Our goal is to ensure betterment of the workers by not harming the owners' interest either. So, we can reduce C and introduce some variables and rates, based on which the workers will be paid for their performance. The benefits for workers should have its lower and upper limits. A standard could be set in this connection based on agreements between workers and owners. This has various advantages. Once the standard is set, the workers will be more motivated to put up the best performance and this will lead to a higher earning (Y) than before (when C was higher and fixed). Weitzman did research on fixed versus profit sharing wages and their effect on unemployment. He has argued that when firms offer profit sharing wages, that means employees receive higher wages when a company is doing well, firms have the lower rates of unemployment and do better during any recession. If the economy experiences any downturn, the owners have nothing to be worried about, because if firms earn no profit, then they do not need to pay on performance, since the source of MX is the profit but the owners must continue to pay the fixed wages which is not difficult now, because C is now lower. If C is a big figure, a slowdown of an economy can destroy the firms, leading to higher unemployment and unstableness in a country. That's how MX could work as a shock absorbent factor for the firms.
It is easy to understand that if MX is higher, then Y will be higher as well. So the workers will be satisfied and they will cooperate with the owners. Unrest, vandalism and strike will never be there. This will result in a stable industry. Nevertheless, accounting experts see something different in Weitzman's theory and call the above logics legitimate but a layman's notion. They argue that a higher MX will reduce the monitoring costs. When C is higher and fixed, the workers tend to shirk. So, firms need supervisers, foremen, surveillance and other similar things, but performance-related pay (PRP) can reduce this cost and improve the workers' efficiency. Economists view it from a wider perspective. They believe if the money is in the pockets of owners, who are already well off, they will spend it for luxury. They will travel overseas, buy apartments, ornaments, latest techno devices and thus money will be drained out to foreign countries. But more money in the workers' hands will have a more positive impact on the economy. They will meet their basic needs by this money. They will buy food stuffs, clothes and many other things. So, the demand for those products will be higher and it will help enhance their production and supply resulting in a higher purchasing power of the lower class people. This will also help create more jobs and have a positive impact on gross domestic product (GDP).
Now the question is: Can Bangladesh can apply this theory at this juncture? The answer is 'yes but gradually'. The trouble with its implementation is we have a large workforce. But workers are often disorganised and unskilled. So, owners and investors will not be willing to accept Weitzman's theory right now. But the government should persuade the investors to set up factories by providing lucrative tax benefits. The profit sharing with employees is regulated by the government under the Companies Profit Act, 1968 (amended in 1989). The existing act is fine but the government can impose such profit sharing plans on big firms through gazette notification time to time on the basis of mutual agreements. To do this, owners must shun the hardcore capitalistic mindset and the government should shun the extreme fondness for the wealthy owners and, most importantly, they should overcome the narrow partisan interest for the sake of building a better society.
This article was published in The Financial Express, May 29, 2014
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