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Understanding public stagnation

Published:Wednesday | June 17, 2015 | 6:00 AM

What is public stagnation?

RECENT DEMANDS for an increase in wages by public sector workers, including the police, nurses and teachers, is long overdue considering that their incomes have been frozen for almost a decade, and average increase aggregate prices (the rate of inflation) has been close to 10 per cent per annum. In this case, overall prices have increased by almost 100 per cent, with no compensating increase wages to offset the increase in cost of living.

Real wages represent the amount of goods and services you can buy with your income at a given period of time taking prices into consideration. If prices increase and your income does not change, then real wages fall because your money buys less goods and services. Similarly, if prices fall, your real wage increases because you can buy more with the same income. Wage stagnation in the public sector has had a significant effect on the standard of living of these workers, with spillover effects on the rest of the country. Wage stagnation has been prevalent in both developed and developing countries since the global financial crisis of 2008. Real wages have remained relatively constant between 2010 and 2013 in the Organisation of Economic Co-operation and Development countries. Real wages barely increased in the United States, but fell in Japan and the European Union.

What are the economic

implications of stagnant

public sector wages?

In order for standard of living to remain the same, wage increases are necessary per annum, at least to match the rate of inflation. Furthermore, higher wages increase the spending power of public sector workers. If spending power increases, this will increase the overall demand for goods and services in the country so that supply can respond, thereby increasing gross domestic product (GDP). Stagnated public sector wage growth has contributed to stagnated GDP growth in some regard, from the expenditure, income and output approach.

Expenditure: The less we earn, the less we have to spend, the less we spend, the more inventory build-up in the warehouses of producers, which means they will produce less next year, so as total expenditure for the country falls, GDP falls.

Income: The less we produce, the fewer inputs are employed, including capital and labour. The fewer inputs employed, the less income earned, hence less GDP.

Production: lower disposable income equals lower demand, lower demand means lower production levels, hence less output is required to meet supply.

How can real wages improve?

Real wage in any economy grows at the rate of productivity in the long run. If productivity has been falling such is the case of Jamaica, then real wages will fall as well. Taxes have been the proposed solution to satisfy public sector wage demands beyond a certain point. If the Government decides to increase tax to pay public sector workers, it is merely acting as an intermediary, transferring money from private sector workers to public sector workers, with no corresponding increase in overall income. This indirect transfer occurs through the tax channel. If the channel is fluent, the country will incur minor losses in between transfers. However, if the channel is clogged (not fluent), losses occurring as a result of this transfer mechanism will be severe. In both cases, less tax will be collected than that which is required to meet the increase in wages offered to the public sector. Countries like Jamaica with innate tax collection problems will have greater losses than countries that are able to collect taxes smoothly. Progressive policies should aim to reduce losses to the economy.

What is the real issue?

Jamaica has found itself in the same position over and over again: low output, low productivity associated with low wages. More than halfway through the International Monetary Fund extended fund facility programme, the country's priority to achieve quantitative targets is not corroborated with the implementation of real strategies to consistently increase productivity and production . No platform is being developed to increase the robustness of the real economy as we remain very susceptible to internal as well as external shocks. No common goal is being pursued by Government, the private sector and citizens to boosts growth inclusively in the long run.

There is still the feeling that the country is taking a haphazard approach to policy. Fiscal policy must be supported by growth-oriented agencies targeting productivity and production, steadfast in improving Government, efficiency and seriously reducing doing business bureaucracy. Policies should really examine how to grow to export rather than how to import to grow. The country continues to favour tourism, imported inputs or imported goods for resale and imported investors supported by imported policies.

- Dr Andre Haughton is a lecturer in the Department of Economics on the Mona campus of the University of the West Indies. Follow him on Twitter @DrAndreHaughton; or email