Understanding Poverty Reduction in Bangladesh: A Micro-Decomposition Approach

We quantify the contributions to poverty reduction observed in Bangladesh between 2000 and 2010. In contrast to methods that focus on aggregate summary statistics, the method adopted in this paper generates entire counterfactual distributions to account for the contributions of demographics, labor and non-labor incomes in explaining poverty reduction. We find that the most important contributor to poverty reduction was the growth in labor incomes, stemming from non-farm employment in the first half of the decade, and from farm employment during the second half of the decade. Labor income growth was driven by higher real wage premiums, pointing to productivity increases and an increase in the relative price of labor as the driving forces behind poverty reduction. Lower dependency rates and the benefits of a growing work force also helped to reduce poverty. Finally, non-labor income contributed to poverty reduction, albeit to a smaller extent, particularly in the form of international remittances. Going forward the main challenges will be to continue to provide jobs to a growing workforce and to ensure that new job creation is resilient to sudden changes in relative prices.