Problem of wage bill more complex than it is portrayed

The wage bill issue occupied a significant part of President Uhuru Kenyatta’s 2017 State of the Nation address on Wednesday. He said that “50 per cent of all the money collected as revenue in Kenya goes into the pockets of less than two per cent of the country’s total population” and that “[the wage bill] has denied our citizens crucial services, disrupted the normal functioning of our society, and adversely affected the economy.”

In fact, the President has argued for reduction of the country’s wage bill in multiple forums including at a national conference on the wage bill in 2014. He has maintained that the high wage bill is undermining fiscal planning and that disproportionate rise in government wages may cause divergent labour costs that could undermine Kenya’s competitiveness, export performance and economic growth.

Nonetheless, reduction of the wage bill remains a daunting task that has eluded even the Salaries and Remuneration Commission. Global labour statistics show that while most developed countries have experienced a substantive decline in the wage bill or labour income share, for most developing countries like Kenya, it has been on an upward trend.

For Kenya, the upward trend is attributable to the bloated size of government, low labour productivity, the largely labour intensive character of our economy and undue wage increases for a small proportion of people, mainly politicians and civil servants at high echelons of government. Nonetheless, there is an impulsive drive towards drastic wage bill reduction accompanied by a virulent wage increase bashing that I find insincere and unhelpful.

AD HOC

The clamour for wage bill reduction may not meet it objectives. This is because it is largely ad hoc and reactionary. Calls for wage bill reduction come with citations of “desirable international standards”, which are often insensitive to the contextual realities of our economy and the history and evolution of our labour markets. But rather than making roadside pay cut proclamations and whimsical denial of demands for higher pay for workers, reduction of the public wage bill should be comprehensive and adapted to the circumstances of our economy.

Let’s face it: for as long as we continue to run an economy where government is the main employer and sustain a public mentality that views government as the major source of employment, we will continue to experience an expanding wage bill. If anything, it is not a given that drastic declines in the wage bill will be all rosy. Declining wage bills and higher capital shares have been associated with higher income inequality in some developed countries. Also, research has shown that a falling wage share may constrain household income and consumption, leading to stagnation of demand that may undermine private sector investment and growth. Clearly, it is not as simple as we tend to portray it – cut salaries. What can we do?

TO SUSTAIN

First, the truth is that it is possible to sustain high wage growth if labour productivity gains are even higher. Emerging economies like China, Mexico, Turkey and South Africa have sustained rapid increases in wages because labour productivity has grown in tandem. According to the International Labour Organisation, a combination of growth in labour productivity and capital investments accounted for the wage bill declines in the Organisation for Economic Co-operation and Development countries between 1990 and 2007. We have been disproportionately increasing wages for a small percentage of the labour force in Kenya without serious investments and efforts to increase productivity.

Second, we have a big problem with the size of government. This is partly because of choices about the role of government and the approaches to service delivery. The civil service is bloated in unnecessary elements and slim in crucial sectors and essential services like health, education and internal security. We have also insisted on retaining two parallel county governments headed by Governors and County Commissioners. We must effectively rationalise government and the public service – so that sectors receive a fair share of public servants and commensurate resource allocations for their compensation. Perhaps institutional change and labour market reforms to moderate the power of unions in wage bargaining could also help curb wage growth. Lastly, we must wean the country off the idea that government is where work is. An effective government’s job should be to facilitate the private sector to create employment.

Kenneth Okwaroh is research associate and director for policy and research, Africa Centre for People Institutions and Society.

Twitter: @Okwaroh