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Higher productivity must accompany any wage increases

by Marlon Madden
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A wage hike is not ideal at this time, but any such move should be commensurate with an increase in productivity.

This view was shared by international economist Marla Dukharan and Governor of the Central Bank of Barbados Cleviston Haynes, as they examined the topic How Can Caribbean Central Banks Fight Inflation?, during the Central Bank’s May edition of the Barbados Caribbean Economic Forum.

At the same time, Haynes has put forward the idea of having targeted but temporary measures to help provide an ease to those most vulnerable to the rising prices that are mostly in the areas of food and energy.

Haynes, who recently warned that a wage increase at this time would require Government to make cuts in other areas, said granting a wage increase to match inflation “was not a first best option for us”.

“Indeed, it creates the risk for a sort of wage price spiral because once the wages have risen then that is going to be followed by increased prices, and we certainly here in Barbados had that experience in the late 1970’s to early 1980s where we tried to match the price increases with the wages and all you had really was very high inflation until the early 80s and then it was able to taper off,” explained Haynes.

Haynes explained that about 40 per cent of the region’s imports were food and energy and therefore, any significant increase in those prices will “get fed into our economies” given the dependence on imports.

He agreed that those at the lower income levels were more impacted.

“In terms of how we address the impact of these prices on the average citizen is really to be able to find target measures that are perhaps time-bound because the food increases and the energy price increases are really likely to be transitory,” said Haynes.

“In other words, those who have seen oil prices overtime have seen that they are very volatile . . . so we run the danger of trying to have wage increases that are adapting to price levels, which are temporary in cycle and when these things change you have already embedded those wage increases and therefore they are more difficult to reverse. So you need, I think, transfers perhaps that are time-bound, so you may do it for a particular period of time to allow people to be able to adapt, but it is not a permanent feature of the Government’s expenditure or tax system,” he explained.

Dukharan agreed that the higher prices, while universal, was disproportionately affecting those at the lower income levels including pensioners, and regional governments should provide some relief in those cases.

However, she argued that if the route taken was that of an increase in wages that are commensurate with inflation then the level of productivity would have to increase since without this it would mean a further drop in competitiveness.

“One thing is important to remember, that in the absence of increases in productivity, wage increases that simply reflect inflation and which are completely delinked from performance will only serve to make whatever you are producing uncompetitive overtime and drive you out of the market, which doesn’t benefit anyone. We have to ensure that when we are negotiating for higher wages we are also adding higher value,” she explained.

With some pundits signalling that price increases could continue for some time, the National Union of Public Workers (NUPW) and the Congress of Trade Unions and Staff Associations of Barbados (CTUSAB) have been calling on government to increase the wages of public servants so they can live more comfortably as they battle rising food and other commodity prices.

In Barbados, inflation measured on the traditional 12-month moving average rose by 4.2 per cent, but by 9.3 per cent when comparing March 2022 to the end of March 2021.

Governor of the Bank of Jamaica Richard Byles said “creative” measures were necessary to take into account deflation.

He said in order to alleviate the pressures of inflation on the poor, the Jamaica government focused on providing temporary subsidies for specific groups including the poor, students, taxi operators and some households that consume “a very small amount of electricity”.

“And because taxes are often impacted positively by inflation some of that subsidy gets paid by the extra taxes that come from inflation. So that is the method we have adopted here in Jamaica,” said Byles.

In that country, inflation reached a high of about 11.3 per cent at the end of March, when compared to the previous year. Some 67 per cent of the increased inflation was attributed to rising food and energy prices.
marlonmadden@barbadostoday.bb

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