THE Bank of Jamaica (BOJ) said it is concerned about the potential destabilising effects of a tight labour market on its efforts to combat inflation, especially if wage increases being negotiated by various private sector entities are “substantial” or are not accompanied by increased productivity among the working population. The concern comes as the job market continues to show remarkable resilience despite a series of interest rate hikes to contain inflation, with official reports showing a historically low unemployment rate of 4.5 per cent, while the number of people working is at an all-time high.

Richard Byles, governor of the BOJ, speaking Monday at the central bank’s monetary policy briefing cited “higher-than-projected future wage adjustments in the context of the tight labour market” among a number of risks — including second-round effects from the agricultural price inflation, a worsening in supply chain conditions, and an unexpected rise in world oil prices — to its effort to bring inflation down to the target range of 4 per cent to 6 per cent by year end. The inflation rate has hovered around the top end of the range — approximately 6 per cent — for the last four months.

“The private sector are constantly doing wage adjustments and those are the ones we have some concern about, that they are not too substantial or that they are accompanied by productivity increases,” Byles outlined.

He went on to expound what level of wage increases will concern the BOJ.

“Generally speaking, if the wage increases are nominal, that is within say the 6 to 7 per cent inflation that we are currently experiencing, the impact won’t be that significant. If it is accompanied by increase in productivity, again, it will be ineffective on inflation. But once it goes significantly above the inflation rate currently and is not accompanied by productivity, it will have an effect,” Byles said as he expressed hope that the right strategies will be employed long before wage increases become a major issue for inflation.

The warning runs counter to that proferred in May of this year, following concerns that hefty wage hikes for politicians could derail the central bank’s push to contain inflation. Byles said then that the impact of those wage increases would be negligible, amounting to inflation of about 0.5 per cent.

Yet, getting productivity increases in Jamaica on the scale the BOJ Governor said would help to counter wage push inflation is daunting. Data provided by the Jamaica Productivity Centre, an arm of the Ministry of Labour and Social Security, show that since the start of the century in 2001, productivity among Jamaica’s labour force has averaged a 0.9 per cent decline each year.

Still, there is a glimmer of hope despite the trend. In the last 20 years, Jamaican workers have improved productivity four times. The Jamaica Productivity Centre said productivity recorded marginal growth of 0.6 per cent in 2001 before picking up to 2.6 per cent in 2011 and another reasonable increase of 1.4 per cent in 2021. It also grew by 0.4 per cent in 2022 and is already up 0.8 per cent in the first quarter of 2023 compared to the same period a year earlier, but has not yet recovered to pre-2019 levels. By comparison, productivity in Trinidad and Tobago rose at an average 1.5 per cent so far every year this century. The Dominican Republic fared better with an increase of 2 per cent in productivity each year, while the United States recorded a 1.3 per cent annual increase in the output of its workers.

So far, to tackle inflation, the BOJ implemented 10 increases in its policy rate between October 2021 and November 2022, moving it from 0.5 per cent to 7 per cent, and has kept it at that rate for almost a year to allow its effect to filter through the economy.

A tight labour market is characterised by low unemployment rates, indicating high demand for workers and a limited supply of available labour. In such a scenario, businesses often struggle to fill job vacancies, leading to increased competition for qualified workers. This can drive up wages as employers try to attract and retain talent. While higher wages can provide economic benefits to workers, they can also have unintended consequences, in terms of inflation, diminished competitiveness, and pose challenges to economic growth. As businesses face higher labour costs, they may struggle to compete with firms in countries with lower labour costs, especially if it is not linked to higher production levels which can lead to a decline in export competitiveness, negatively impacting Jamaica’s overall economic performance.

“One of the key things that we will be assessing is how this tight labour market conditions, how that is actually transmitting to actual wage inflation and then how that wage inflation is spilling over to price inflation,” Dr Wayne Robinson, senior deputy governor, the central bank, said. Robinson indicated that the BOJ’s policy rate at 7 per cent is “appropriate” to manage the situation for now, but left the door open for further adjustments in the future if wage hikes start feeding into inflation.

“Our policy adjustments will be data-driven,” he told reporters.