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Fixing Jamaica's labour productivity problem

Friday, December 29, 2017

In my last article, I indicated that in order for Jamaica to become more competitive (and to see higher sustainable GDP growth), we must fix our labour productivity problem. The logical explanation for this is that GDP growth is measured by value added by the domestic economy, which is all value added created by local inputs. This can only happen, however, if labour is used to create more value (especially in Jamaica that is so highly labour-intensive).

So it follows that even when we have many infrastructure investments taking place, we still will not see high levels of GDP growth, because most of the construction input is imported, including some skilled labour, which is usually the most productive and higher paid.

For this reason, PB Scott (former PSOJ president) always says that what Jamaica needs is to train more technical persons such as engineers, and unless we can provide more locally trained technical people, then our growth will be compromised as we will need to import that high value added labour.



This is why we speak about Jamaica's low absorptive capacity to take advantage of foreign direct investments (FDI), for example. In the 1990s we had very high FDI levels, but growth in the 1990s averaged maybe one per cent. So the question always asked is: Why have we received so many FDIs and still we struggle to grow?

As an example, if it costs $1 million to construct a new hotel, and imported raw material is 80 per cent and labour is 20 per cent, it means that our ability to grow rests on the 20 per cent labour contribution. However, if engineering skills are not present, then we may have to import 50 per cent of our labour needs, bringing the import content to 90 per cent. Further, if bureaucracy and unproductive labour cause the project to take two years instead of one, then that 10 per cent value added is spread over two years of growth, rather than one.

Recently, the public sector wage negotiation has once again become a bone of contention. I remember in 2003 when the first wage freeze was announced, I gave an address at a Rotary meeting, and also commented publicly that it would not have worked over the medium to long term, unless the agreed retraining of public sector workers to get them into alternate private sector employment was achieved.

We never did carry out any of that, which would have made their labour more productive. Hence we are back at this point again.

I had also pointed out at the time that the only way to permanently fix this recurring wage crisis is to introduce pay for performance compensation. In the private sector, productivity increases because the primary motivation is more money through pay for performance.

The reason for this is that if we continue on this path of collective bargaining while ignoring pay for performance, then all that will happen is that everyone will conform to the lowest productivity level, because that is what collective bargaining approaches can afford. The result of course is band-aid solutions -- such as long leave and duplicated agencies -- to fix productivity. That results in public sector bureaucracy, which is the second greatest inhibitor to doing business behind crime.

In 2009 when teachers were given a salary increase in excess of what was affordable, I indicated that by the next year they would be back at the same real incomes. And I indicated that when we increased the income tax threshold real incomes would soon fall back to where they were before the increase.



This is not rocket science, as basic economic principle tells us that where you increase income without a commensurate increase in productivity then what occurs is inflation, taxes, or debt. This is because irrespective of how much power Governments think they have through fiscal and monetary policy, at best that influence can only be temporary, as money and capital always in the long run adjust to where it is more efficient. So when Cuba nationalised private sector assets in 1959, what happened was that capital left the country, resulting in its economy today.

So when taxes and laws try to redistribute income from where it is most productive to where it is least productive, capital will shift naturally to other uses. The long-term result of that policy is that the same unproductive labour to which the policy attempted to shift income will ultimately become poorer, as at the worst, capital will just stop producing, meaning less income to shift.

Jamaica's labour force has therefore fallen prey to poor fiscal and monetary policy over decades. But this “give a man a chance” mentality has not only affected labour compensation but also caused general lawlessness and indiscipline today.

To change this, we must fix our labour productivity issue. So we should understand that the heart of public sector reform is not merging functions, but rather changing the way we compensate public sector workers so that the more productive ones get much better pay. The result will be that eventually most people will be much better paid (which is well needed).

We must also ensure that our labour laws support increased productivity. When we made the labour dispute laws apply to the private sector, for example, what we did was to reduce private sector productivity (the engine of growth) and to bring about greater labour market informality, which in a few years will cause a pension and health cost crisis for these very same workers we want to protect.

The fact of the matter is that unless we fix our labour productivity crisis (declining since the 1970s), we will end up with a continued fight for growth and social development, which has a higher probability of not happening.

I really don't believe in New Year's resolutions, but this is one I would encourage for 2018. Happy holidays.


Dennis Chung is the author of Charting Jamaica's Economic and Social Development AND Achieving Life's Equilibrium . His blog is dcjottings.blogspot.com.

Email: drachung@gmail.com

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