Dear Editor,
APNU+AFC campaigned on significant increases for public sector workers, which although politically expedient, would have an inflationary effect when implemented unless there is a corresponding increase in worker productivity.
Significant increases to public service wages will lead to pressure on other unions to get similar increases for their workers just to keep pace. This would involve not only quasi-government organizations such as GPL and GuySuCo, but the entire private sector. These wage increases will be inflationary.
Inflation is the increase in general prices in the economy. It erodes consumer purchasing power and results in people buying fewer goods and services, marking the onset of a recession. There are two sources of pressures on price levels, ‘demand pull’ and ‘supply push’. Demand pull occurs when supply is constrained and increases in demand from say, increases in wages, compete for that limited supply in the marketplace. The winners are those willing to pay higher prices for the supply. In Guyana, due to constant GDP growth over the last decade, it is safe to conclude that surplus capacity does not exist and supply cannot be readily increased in the short term.
Supply push comes about from increases in the cost of the factors of production such as labour, from say, again, increases in wages, in the absence of improvements in productivity. Such improvements are attained by companies changing their labour to capital ratios and once more this cannot take place in the short term. Competition from outside the area not subjected to the wage increases would temper the magnitude of the increase, but prices will increase.
The previous government managed inflation by increasing public sector wages roughly equal to the growth in GDP and had success in keeping the level under caps. The new government has indicated a different approach, but needs to manage the impacts from their proposed wage increases. This can be accomplished through measures to increase workers’ productivity – either increasing workers’ output or reducing the number of workers required to produce the same level of output, or some combination thereof.
Yours faithfully,
Louis Holder
