Pay inequality the biggest threat to economic growth

Over the past few years, public sector employees’ strikes have increased in regularity and duration. This is particularly the case of workers in education and health sectors. The new administration may soon be faced with widespread strikes as workers agitate for better pay and benefits.

Public sector strikes reflect real or perceived gross inequities. When there are wide differentials in wages and benefits, some sections of employees feel discriminated and neglected by the government.

The public sector in Kenya is characterised by a very skewed compensation distribution structure. Those on the higher end earn very high salaries as compared to those in the lower band.

The table below shows what is referred to as compression of wage structure for a number of countries during the mid 2000s. The data shows the top-to minimum ratios. It shows that the highest salary band was 30 times above the lowest band in Botswana. This number is even smaller for Kenya’s neighbours Uganda and Tanzania.

The perception of disparate treatment is a key motivation for workers to agitate for better pay. This appears to be the case with education and health sector workers.

Agitation for better pay and benefits and consequential strikes is also motivated by declining wellbeing of workers as a result of increased cost of living that is not matched by similar wage adjustments.

Related to above, public sector workers’ strikes are no doubt motivated by what employees see as a tendency by leaders to concentrate on their own well-being. If there is money to increase the pay of MPs, how come there is none for the meagrely paid teachers?

Finally, public sector employees often go on strike as a result of failure by the government to honour prior commitments.

Notwithstanding the reasons that trigger strikes, such work stoppages are extremely costly. Consider the case of a teacher for a class with 50 pupils. Ordinarily, schools are in session for about eight hours per day.

Thus, the total output by a teacher is 400 learning hours per day. If the teacher is absent from class for a week, 2000 hours of learning time are lost. Strikes by doctors and nurses associate with even more serious tragic costs of lost lives, pain and suffering of untreated patients.

Sadly the burdens of strikes are very unevenly distributed among various segments of the society. The rich and the middle class hardly feel the pain. It is probably because of the fact that the costs of strikes are borne by the poor that we do not see urgency in dealing with teachers’ and doctors’ strikes.

Children of the wealthy do not attend public schools. Strikes do not impact on their learning and it is business as usual for these lucky ones.

Fall victims of strikes

The increasing frequency of strikes is also associated with the fact that many families of the striking service providers such as teachers and doctors are not consumers of public services.

Increasingly, the children of public school teachers attend private schools. Thus, as public school teachers go on strike, their children continue learning. Likewise, families of public health care providers have access to private facilities and are not directly impacted by the strike.

So, the people who are really impacted by public sector strikes are the poor. The same people who truly need the public services are the ones that fall victims to the strikes. The poor do not have resources to exit from public provision and therefore captive. Yet, they have limited voice to compel government to act.

I can predict with a high degree of certainty that we are unlikely to see a strike by employees of the Passport Processing Agency or the airport immigration officials. Such a strike would greatly inconvenient the wealthy and middle class and there would be tremendous pressure on government to resolve such a strike.

The wage demands and the already high wage bill have broader implications on the economy.

Currently, the Kenyan wage bill is already quite high—about 50 per cent of domestic revenue. Pushing the wage bill above the current levels is likely to have serious implications on the economy.

For one, there is the obvious trade-off between wages and development expenditures. Increases in wages will necessarily have to be at the expense of other government expenditures.

The country cannot have it all and one has to give. The current demands will necessarily compel the Jubilee government to set aside some of its ambitious programmes.

And the alternatives are equally bad— such as more borrowing, an economically suicidal alternative.

During the slow growth periods of the 1990s and early 200s, Kenya’s public debt owed to domestic individuals, foreign nationals and multilateral institutions was in the range of 60-65 per cent of gross national product.

This figure declined from 2004 reaching about 45 per cent of GDP in 2009 and then started to increase slightly. The decline was in part due to economic growth that resulted in higher domestic revenue. But the decline in debt also reinforced the growth.

The current wage demands are likely to accelerate the debt burden substantially, which will no doubt have serious consequences on economic growth. One obvious direct outcome would be sharp increases in the interest rates with consequential declines in investment. In essence, the wage demands will have a double negative impact on the economy— slower growth and lower revenues.

The other alternatives to deal with the increasing wage bill would be raising taxes and broadening the base. This too could have negative consequences on economic growth if taxes turn out to be too high.

Currently, what the economy really needs are well designed supply-side policies to incentivise producers and high taxes will do just the opposite. These type of policies are not consistent with a rising wage bill. Raising taxes and broadening the base are possible alternatives but they too have negative consequences on economic growth.

The administratively set public sector wages that are not linked to economic performance have an ambiguous effect of increasing the prices. People have more money in their pockets to spend but the amount of goods produced remains the same—so we can expect inflationary pressure. Such pressure spills over to the private sector wages.

The escalating wages are quite detrimental to the economy because it makes the country less attractive to both local and domestic investors. By pushing the cost of production, the high wages translate into higher prices for goods, again disproportionately hurting the poor. Furthermore, the high prices make the country internationally uncompetitive.

The government must strategically deal with the increasing demands. There are few traditional alternatives and are all sub-optimal. But there are creative alternatives that have the potential of aligning public sector wages to productivity.

Prof Kimenyi is a Senior Fellow and Director of Africa Growth Initiative at the Brookings Institute, Washington DC, USA. ([email protected])