Friday, June 05, 2015

Public sector wages — what are the real options?

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ONCE again the public sector wage negotiation is the main topic of the day. This was also the case in 2004, when the first round of wage freezes was agreed. Then, just like today, I didn't see a public sector wage freeze as a long-term solution. In fact, the 2004 agreement never saw it as that either, as it proposed actions that included retraining public sector workers and preparing them to transition, voluntarily, to start their own businesses or seek employment in the private sector.

So what we are seeing today is not a new problem. It is just worse because we have delayed solving the underlying problems. And even if we were to get another wage freeze, or lay off workers, it still would not solve the underlying problem by itself and we would be back in this same situation within another two to three years.

What is really needed is proper public sector reform that results in performance related-pay measurements and labour market reform. It is our failure to do this, and just talk, that has led to where we are today. And if we do not carry out this reform effectively, we will still find ourselves back where we are today, because at the heart of the problem is the matter of productivity.

The approach to public sector reform in 2010 (through the centralised PSTU at the OPM) was never going to work. When I indicated that in 2010 I was told that I didn't know what I was talking about. The approach today is somewhat better, based on what I have seen, but the centralised approach is still too bureaucratic and will not have any short-term impact. The best solution is to decentralise the reform process. But that is for another article, as I want to look at the immediate options to resolve the current impasse.

Emotional responses

The response from many on the public sector wage dispute is emotional. I have heard many people say that the government should pay the public sector workers significant increases, or more than 25 per cent. When I ask them to put forward their immediate solution, bearing in mind that new taxes won't work and debt is not possible, they speak to medium-term solutions such as tax reform, public sector reform, and reducing wasteful expenditure.

One person, when pressed, even went as far as to say that people over 55 should be forced to retire and the other workers should be given an increase of at least 25 per cent. In other words, lay off other workers as long as it does not affect me. But there's no mention of keeping the most productive, or of paying based on performance.

What these responses show is that they are not supported by any thought-out solutions. One man I heard on the radio, when asked for a solution, said that the government can raise taxes -- which betrays a lack of understanding of how the economy works. That solution would cause even further hardship, not only on businesses, and SMEs in particular, but for the same public sector workers.

Let us be clear that I empathise with public sector workers, and in particular the police, nurses, and teachers. Even though these groups have demonstrated their willingness to go the extra mile, in general, the fact is that both productive and non-productive people have been grouped together, in relation to the negotiations. The result is that you apply the same compensation amounts to people with varying degrees of productivity, and the productivity level as a whole will fall.

So, because of our failure to properly address public sector reform, we are in the same place, or worse, than we were 11 years ago when the first wage freeze agreement was inked. Resolving this, however, is a longer-term solution and the chickens have now come home to roost.

The fact is that the options available to the government today are very limited. There are only two options (i) accept the government's offer, within its ability to pay, or (ii) as Minister Dalley said, if the demands are met then it means 10,000 to 15,000 jobs will be lost. Or else there will be an inability to pay.

The private sector seems to be profitable today, and the truth is that they are improving, but they are still far from where they were pre-recession. This success, however, came after much pain in the private sector, as they suffered from two debt swaps and also lost a significant amount of jobs, when the unemployment rate went close to 20 per cent. Many businesses also closed, and even today many are struggling. Every week, I get many requests from people seeking employment -- even for a job way below their training.

So what has happened in the private sector is that the market has adjusted, and as a result organisations are becoming more profitable. This is just as it happened in the US market, where job losses and business closures were rampant, and after a few years of pain the market is recovering.

This adjustment never happened in the public sector, however, resulting in the difficult situation we are in today. The fact, however, is that sooner or later the market will demand that the adjustment either be made, through public sector reform, or the suffering will continue for a much longer time. And it would have happened earlier had we not gone out and borrowed money to cover up for our inefficiencies.

Just as in 2009 myself and Ralston Hyman said (i) the debt needed to be restructured and (ii) the government would have to turn to the IMF, and we were told that we didn't know what we were saying. Approximately three months later, however, we signed an agreement with the IMF and the debt was restructured. The point being that the way to deal with the fiscal problem must be looked at practically, and not from an emotive position.

So while public sector and policy reform, is necessary for a long-term sustainable solution, the fact is that an immediate solution is necessary. In my view, the best solution for the country now, is for the government's offer to be accepted. I don't subscribe to the selfish view that we should retire the older people so that the younger ones can benefit. I know that people are having a difficult time, but trust me when I say that any significant increase, without the accompanying productivity increase, will only lead to increases in inflation and the depreciation of the exchange rate, and make it even much worse for everyone.

However, while accepting the offer, it is important for both parties to sit down and arrive at a win-win long-term solution for all. This will of course require an improvement of the trust factor between both parties, as the lack of trust for me is the most divisive factor in these negotiations.

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