Editorial | More than a wage cap

Finance Minister Fayval Williams’ call for negotiations with public sector unions to establish a new cap on the proportion of national output that should be spent on wages is a rational suggestion that will be welcomed by the Independent Fiscal Commission (IFC).

Indeed, Courtney Williams, the fiscal commissioner, has been beating that drum, warning of the danger of runaway wages undermining fiscal stability since his agency began its reviews of the government’s fiscal policies in early 2025.

While The Gleaner supports this conversation, the debate, important as these factors are, ought not to focus solely on current nominal wages as ratios of the Budget, taxes earned or GDP. It must be a discussion, too, about lifting national productivity and spurring robust economic growth. Some of the issues that now cause concern would be moot if the Jamaican economy were more productive and had, in real terms, grown by more than the annual average of one per cent it has managed for nearly half a century.

As part of, or in support of, the wage-cap dialogue, Prime Minister Dr Andrew Holness ensured the early publication of the Green Paper he promised during the Budget debate in March “on how to improve our low level of productivity”.

REINSTATEMENT

Minister Williams squarely placed the reinstatement of a public-sector salary cap on the table last week as she signed a three-year wage agreement with public sector unions for the period 2025/2026 to 2027/2028. For the first year, workers will receive a tax-free one-off payment of J$80,000 and increases of five per cent in each of the two following years. With point-to-point inflation in July at 7.5 per cent, the wage increase lags significantly behind prices. However, things could even out if the central bank’s projection that its inflation target of four to six per cent will be back on track later this year holds true.

Under the legislated fiscal rules, the threshold for public wages, established under the tutelage of the International Monetary Fund (IMF), was nine per cent of GDP. But the cap was eliminated in the 2022/2023 fiscal year when the government gave hefty increases to state workers, especially those in the upper echelons of the public sector, as part of a job reclassification exercise.

“Compensation of employees now stands at close to 13.5 per cent of GDP,” Ms Williams said at the signing of the wage agreement. “By the end of fiscal year 2026/27, wages are expected to account for 54.4 per cent of tax collection, up from 44.9 per cent just four years ago.”

In 2020/2021, the government’s wage bill was equivalent to 8.8 per cent of GDP. The projection is for public sector wages to stabilise at around 13 per cent of GDP in 2029/2030. However, the fiscal commission fears that, without a disciplined approach to wages, compensating employees could consume too much of the government’s resources, leaving too little for capital investment and other services. That ultimately weakens the prospects for growth.

“Despite the projected decline, the wages and salaries ratio will remain elevated,” Mr Williams noted in his February review of the economy. “Given the foregoing, the IFC reiterates its suggestion for the GOJ to consider reintroducing a ‘fiscal rule’ in order to anchor wages and salaries expenditure and keep the underlying expenditure in check.”

WARNING

Ms Williams has now responded, calling for talks on the matter with unions and warning that, without clear guidelines during periods of economic shock, governments tend to resort to wage freezes.

“What we’d like to do is tell our public service workers at the beginning of the cycle, rather than at the end of it, what is genuinely available,” she said.

This is a logical suggestion. But while the growth of public sector wages is a real issue of concern, the deeper structural problem for Jamaica is low productivity and low growth. Fundamentally, Jamaica is a classic low-wage, low-value-added, low-productivity and low-growth economy.

As Prime Minister Holness pointed out in his March parliamentary speech, except for Haiti, Jamaica lags behind its Caribbean peers, and the global average, in units of output per worker, measured in purchasing-power-parity (PPP) dollars of GDP.

The US$8.81 per hour in GDP equivalent that Jamaican workers produced was 43 per cent of the Caribbean average of US$20.5. Panamanian workers, measured by their contribution to GDP, were approximately five times as productive as their Jamaican counterparts.

But the island’s productivity problem is broader than the measure of labour’s ultimate output. Total Factor Productivity (TFP), a measure of all the inputs that contribute to an economy’s productivity, has similarly been stagnant or in decline.

As this newspaper previously pointed out, between 1957 and 1972, Jamaica’s TFP grew by approximately 58 per cent, then entered a long period of decline interspersed with only mild upticks. By 2026, the TFP index was approximately 37 per cent below the 1972 level, representing an annual decline over half a century of 0.7 per cent.

The wage cap is important. But these figures point to the need for a deeper, more honest conversation about policies for growth and the kinds of investment, including by the private sector, that will truly stimulate national output.