Economy will continue operating below capacity for the near term — BOJ
Bank of Jamaica building located in downtown Kingston

A new study by the Bank of Jamaica (BOJ) aimed at estimating the “output gap” in Jamaica indicates that COVID - 19 has put a check on working hours, productivity and output.

The term output gap attempts to measure the difference between the actual output of an economy and the maximum potential output expressed as a percentage of gross domestic product (GDP). A country's output gap may be either positive or negative.

The BOJ Working Paper “Estimating Jamaica's Total Output (2021)” was authored by its Research Unit and prepared by Hubert Scarlett. It was published in May of this year.

The working paper concludes that, for the near term, the Jamaican economy is expected to operate “for the most part below capacity which signals no inflationary pressures over this horizon.”

The BOJ said that this has broader implications for wage setting, inflation expectations and monetary policy decisions in Jamaica.

At the start of 2021, the BOJ said, Jamaica's negative gap was estimated at approximately 2.9 per cent. This compares to the lowest negative gaps of 8.6 per cent for 2020, Q2 and 5.3 per cent for 1998, Q1.

The researchers said that the estimate suggests that over the period of study, Jamaica's resources were largely under-utilised. Over the last two years of the sample period, in the context of general firming of inflation at low levels, the economy showed signs of fall-off in capacity utilisation.

From modelling done by the research department, it was shown that average hours worked, however, dipped significantly below 520 hours for the 2004 to 2008 period before growing to 523 hours at the end of 2019, which implied that the average Jamaican worked the maximum hours as stipulated by the law, it was outlined.

However, by end-2020, actual hours fell to 501 hours, reflecting the negative impact of the novel coronavirus pandemic.

The BOJ is optimistic about improvements in working hours, but says that less obvious changes will occur in output in the medium term.

It was stated, “ For hours worked per person, we project a gradual rise to a 40-hour work week into the June 2023 quarter, after the fallout due to the COVID-19 pandemic where domestic movements were constrained due to restricted movements. The projection for the participation rate also reflects a rebound to its long run level of 65.0 per cent after the temporary fall-off stemming from the COVID-19 pandemic.”

The BOJ said the output gap was estimated to be negative for the sample period 2016 to 2019, but it was closing gradually, until the effect of the COVID-19 pandemic which caused significant widening.

The decline in the potential labour supply, Total Factor Productivity (TFP), and potential capital stock at the end of the sample period (the December 2020 quarter) was estimated at 2.2 per cent, 1.2 per cent and 0.1 per cent, respectively. At the end of the sample, the output gap was negative 2.9 per cent.

The Central Bank indicates that the output gap plays an important role in informing the BOJ's monetary policy. The aim of the paper is to augment the information set available to the Bank of Jamaica in estimating and projecting potential output growth and inflation.

The paper estimates Jamaica's potential output and, consequently, the output gap using a production function framework augmented with human capital as an additional factor input.

The results of this study indicate that the output gap, based on the PF framework augmented with human capital and potential labour supply as a function of long-run unemployment rate (NAIRU) is the preferred measure to forecast Jamaica's inflation, the BOJ stated.

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