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Push and pull factors in the dreaded inflationary wage price spiral

Push and pull factors in the dreaded inflationary wage price spiral

By Josef Kefas Sheehama.

According to Keynesian economic theory, the wage price spiral describes the phenomenon of price increases as a result of higher wages. When workers receive a wage hike, they demand more goods and services and this, in turn, causes prices to rise.

Excessive wage demands triggered by the current high level of inflation could lead to a wage price spiral. The government has agreed to a 3% salary increment for civil servants to avert a strike as part of an agreement with unions that will cost it N$924 million. This includes an 11% increase in the housing allowance and a 14% rise in the transport allowance. An annual pay increase of 3% may not sound substantial, especially given what’s been going on in the world. But in today’s environment, it’s better than nothing. Remember that over time, relatively small raises will compound and may very well result in a very nice salary.

In addition, when you earn a high income, you tend to pay a higher percentage of taxes than average earners. Furthermore, an increase in the supply of money in circulation causes inflation. Higher wages are just one of the conduits by which that larger money supply gets into circulation. The offered increases for civil servants will certainly have an effect on the money supply even if the basic increment is less than inflation. Therefore, more workers will then demand more money again, leading to a never-ending inflation spiral.

If inflation remains high, households may ask for higher wages to make up for lost purchasing power and firms may raise prices to protect profit margins. And stubbornly high inflation may lead to institutional changes such as automatic indexation and cost-of-living adjustment. Increasing business costs have implications for the costs of living, which in turn have knock-on implications for wage demands, and for the potential creation of inflationary cycles.

The public and private sectors alike must proactively manage their cost base and drive efficiency, thus creating a virtuous circle between the costs of living, wage expectations and cost competitiveness. Interest rates and inflation tend to move in the same direction but with lags, because policymakers require data to estimate future inflation trends, and the interest rates they set take time to fully affect the economy. Higher rates may be needed to bring rising inflation under control. Hence, under this theory of inflation, workers ask for more as the cost of living crisis worsens. This leads to the Bank of Namibia increasing the repo rate to curb inflation.

Ceteris paribus, all work must be recognized, respected and, at the very least, paid at the market related remuneration. The stress on the government budget, arising from the strike of the economy itself, requires not only restructuring salaries, but also the entire set of government policies, programmes and budget. Higher prices made it difficult for households to maintain the basic standard of living, including civil servants, who ironically, are still the lesser paid in the economy.

The cost of living crisis deal with the plight of workers whose wages or benefits do not scale with inflation. Now, one could be forgiven for thinking that the concern must be that workers livelihoods are being left behind as inflation soars. Yet, the opposite is true with a warning of a wage price spiral where higher wages trigger further inflation. Even without introducing the need for harmonizing salaries, which is actually being misunderstood, there is a need to increase salaries for most civil servants. It is necessary to review civil servant packages because prices of goods and transportation had also skyrocketed. As you know, despite the increase in the pump price of fuel and the increase in the prices of food and other goods, civil servant’s salaries have remained the same. The 3% increase in their salaries could make a fractional impact, but will not even sustain them to the next salary day, as far as inflation is concern.

Therefore, we are appealing to the Government to do everything possible to increase workers’ salaries with a further 3% in the first quarter of 2023 to cover the deficit in their monthly take-home pay. We also call on the Government to increase the salaries of its workers by 7% especially those at the lower grades, in the first quarter of 2023.

Furthermore, scrap deputy ministers as this is a duplication. They are apparently here to serve us, even if we did not know it. It is clear that there are duplication of functions among ministers, their deputies and Executive Directors which does not augur well for the proper functioning of government. The monies being spent on these Deputies, if put together, could build more health centres and educational institutions in many deprived communities in the country than one can imagine. Similarly, the resources being paid on our Deputy Ministers could fund many development programmes that could absorb hundreds if not thousands of our deprived youths in gainful employment, thereby easing tension around the employment situation in the country. By doing that, we will avert inflation, reopen the economy in the areas of roads, infrastructure, energy, health and other strategic development projects.

In conclusion, the main effort should go to improving industrial dialogue, which should involve users of public services, whose needs must be taken into account. The goal is to arrive at social harmony in which the freedom of some does not interfere unduly with that of others.


 

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