Peter Espeut | Inflation, productivity and exploitation

I am having difficulty with the concept of “wage increases”. If last year I took home $10,000 weekly, and this year you offer me $10,500 then nominally that is a five per cent wage increase. But if over the year the economy experienced ten per cent inflation, then the purchasing power of my salary declined, so that in net terms I actually experience a decrease in real wages. I needed a ten per cent increase in my nominal wages to just restore the purchasing power I had last year, to be able to buy the same amount of food for myself and my family.

And so if inflation was ten per cent, and my nominal wage increase was ten per cent, did I get a real wage increase? The answer would have to be no.

A real wage increase would have to be fifteen per cent, so that in real terms my purchasing power has increased.

Some financial analysts are against any wage increases without prior increases in productivity. People must work harder (or smarter) to produce more before they should be paid more. Sounds good?

But if I must work harder to produce more, and all that happens is that my salary is adjusted for inflation, then I am working harder for nothing! No increase in my purchasing power! That is the definition of exploitation! I must work harder and harder to stay in the same place in terms of the purchasing power of my wages!

Wage “increases” to account for inflation should be automatic; that is only economic justice. I agree that any increases above that should be based on increases in productivity.

VALUE DECLINE

Every month as the government’s statistical office announces the inflation figures, wage earners watch as the value of their salary decline in real terms. The supermarket cash register rings up more money every week for the same trolley of groceries. Don’t you feel robbed?

The same thing happens every time the dollar depreciates (some people do not like the sound of the word devaluation). Ultimately, devaluation robs me of the value of my work, as I am paid less and less week after week for doing the same work.

Is there a moral imperative for employers to regularly increase nominal wages to maintain the purchasing power of the pay packages of their employees?

And what about pensioners? Their pension is based on their salary at retirement. Those who retired ten, twenty years ago have seen the value of their fixed pensions slowly but steadily eroded by inflation. For them poverty slowly approaches, and then arrives. Is this a just arrangement?

These pensioners look back at their former workplaces and see the persons in their old jobs doing the same work that they used to do, taking home sometimes twice or three times (in nominal terms) what they did then. Should not their pensions be related to current wage levels, and not on ancient history?

Jamaicans need to know that there is one class of person whose current pension is tied to the salary and benefits of the current office-holder. On November 29, 2005 Parliament amended the Pensions (Prime Minister Act) to provide every retired prime minister (PM) and their spouse with 100 per cent of the annual salary being accorded to the incumbent PM; if the retired PM is still a member of parliament (i.e. is still getting an MP’s salary) then his pension is two-thirds of the annual salary of the sitting PM.

In addition to their pensions, retired PMs get a subsistence allowance, a housing allowance, a secretarial allowance, a social secretary allowance, a household helper’s allowance, a gardener’s allowance, and a chauffeur’s allowance. Surviving spouses get the same pension and benefits, all based on the current amounts being paid to incumbents.

ALLOWED TO SUFFER

The pensions paid to retired PMs and spouses is cushioned against inflation in the sense that as the incumbent’s wages rise, so does the pensioner’s. Why are not all government pensioners treated in the same way? Isn’t what is good for the goose, good for the gander? Why are government pensioners allowed to suffer the ravages of inflation from which retired PMs are insulated?

Civil servants should use the PMs pension arrangements as solid precedent as they negotiate their salaries and benefits.

The government has the responsibility to control inflation, and when it fails (planned inflation is never zero) the people suffer the consequences. It is morally unacceptable that the person ultimately in charge of fiscal policy should be insulated from the negative consequences of their own fiscal policy failure.

The government actually benefits from inflation, as when prices rise due to inflation, GCT rises. The government can claim that there are no new taxes (because the GCT rate has not changed), but the quantum of taxes increases every time inflation increases. Inflation robs me twice: by increasing the prices of the goods I buy, and by increasing the GCT I pay on those goods. Inflation allows the government to collect taxes it could not collect before. Is that new taxes or not?

There is certainly moral hazard involved when government’s stated policy objective is low inflation, but yet when inflation is high they collect windfall taxes. There should be some cap on consumption taxes as a cushion against inflation. The government should not benefit from policy failure.

And negotiations for salary increases should start at the accumulated inflation rate since the last negotiations. Any further increases should be based on proven productivity increases.

That is economic justice!

Peter Espeut is a sociologist and development scientist. Send feedback to columns@gleanerjm.com