Navigating Risks in Bangladesh's Garment Industry: Analyzing the Effects of Rising Costs of Labor on Firm Profitability

Abstract

Ready-made Garments (RMG), the largest and most significant industry in Bangladesh, contributing to its gross domestic product (GDP), is gradually losing its growth potential and competitiveness due to rising labor and raw material costs. These two factors pose the foremost critical threat to the RMG industry in Bangladesh. This study examines the asymmetric impact of wage shocks on the profitability of the RMG sector in Bangladesh, considering the industry's dynamic challenges, including increasing labor and raw material costs. A panel nonlinear autoregressive distributed lag model is employed to analyze this impact. The study uses the Hausman test to choose between the pool mean group (PMG) and the mean group (MG) models, determining the most appropriate analysis model. Furthermore, to address the issue of cross-sectional dependency, this study applies GMM, CCEMG, and DKSE approaches as robustness tests. The findings reveal both short- and long-run asymmetries in the impact of wage shocks on firms' profit margins. In the short run, positive wage shocks negatively affect gross profit, while in the long run, positive wage shocks help firm to generate more profit by improving productivity. Conversely, negative wage shocks positively influence gross profit both in the short run and long run, indicating increased profitability over time. Additionally, the findings indicate that both raw material and capital costs negatively impact firm profitability. This study contributes to understanding the nuanced dynamics of wage shocks and their effects on the profitability of the RMG sector in Bangladesh. Identifying short- and long-run impacts offers valuable insights for policymakers and industry stakeholders.