An analysis of the determinants of money wage change in Jamaica 1958-1964

This paper is prepered for staff use and is not for publication. The views are those of the author and not necessarily those of the Bank. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT Economics Department Working Paper No. 7 AN ANALYSIS OF THE DETERMINANTS OF MONEY WAGE CHANGES IN JAMAICA 1958-64 October 30, 1967 WASHIN1GTOND.C 20161 Appliod Quantitative Research Division Prepared by: Marshall Hall (Consultant)  Introduction This paper, together with paper No. 8, was prepared as part of a research project on Jamaica within the work program of the Division, which is concerned wqith the use of quantitative techniques as aids for country economic analysis. The choice of Jamaica, made in consultation with the Area Department, was based on the need to include within the work program an example of a small country. It was also felt that Jamaica was a country in which the Bank was likely to be involved operationally. The project consists of three inter-related parts; (1) a structural model (circulated in draft form in November, 1966) and now under revision. (2) special studies of problems relating to employment, wage levels, productivity and savings behavior of which this paper and paper No. 8 represent the first draft conclusions. (The work on savings behavior will be incorporated in the revised version of the structural model). The problems of employment and wages structure were raised by the Western Hemisphere as likely to be crucial areas for consideration in their continuing economic work on Jamaica. The object of the paper is to test out the widely held view that the level of wages in Jamaica has been artificially distorted as a result of the economic and political strength of the trade unions. The economic structure of Jamaica presents a cross-section ranging from capital intensive mining operations, producing for a world market where prices and wages need bear little relationship to the domestic economy; at the other end of the spectrum there is a labor intensive plantation economy producing tropical crops for export alongside a domestic agricultural sector still largely based on family farms. The paper makes use of econometric techniques to test whether the data available bears out the assertion that wage levels have tended to become divorced from productivity. This paper was prepared by Narshall Hall of the University of Washington, St. Louis, as a consultant to the Economics Department. The work was done in the Bank during the summer of 1967. The author wishes to acknowledge the assistance of Dawn Elvis in its preparation.  AN ANALYSIS OF THE DETERNANTS OF MNEY JAGE CHANGES IN JAMICA 1958-64 1. The Jamaican economy in the 1950's and 1960's has experienced a rapid rate of growth, a large outward migration of the labor force to Britain and persistent and chronic unemployment. This perverse behavior of unemploy- ment has been explained or rationalized by pointing out, among other things, that the growth has occurred to a large extent in capital intensive industries and that wages, due in part to powerful trade unions, have increased rapidly thus diminishing the demand for additional workers. / 2. This study will focus only on the experience in money wage changes, although in the conclusion we will comment on the relevance of the capital intensive thesis as an explanation of the continued high rates of unemployment. Specifically, we are concerned with analyzing the determinants of changes in money wages over time (by time series) and among industries (by cross-section analysis). 3. Since our analysis is concerned with money wage changes demand and supply equations, as such, are not analyzed. Instead, the focus is on what has been termed wage adjustment equations or the wage price-productivity nexus .2/ Wage adjustment equations for developed countries - particularly the 1/ The belief that trade unions are responsible for "high" or "too high" wages and that in part this slows down employment is a popular one in Jamaica. Ineed according to Cumper even the unions believe it. He states that union leaders "aware that their actions may face the employer with the alternative of employing more workers at lower wages or fewer at higher wages deliberate- ly adopt the high wage policy in the avowed belief that 'government' must take care of unemployment - and apparently in the confidence that it will be able to do so". G.E. Cumper "Labor and Development in the West Indies: Part II" Social and Economic Studies Vol. II Mlarch 1962, p. 31. 2/ Bodkin, R.G.o, The Wage-Price Productivity Nexus, University of Pennsylvania Press, Philade'pipa 196.  - 2 - United States and Britain, have been analyzed by a number of economists. Their studies suggest that the key explanatory variables of money wage changes are changes in unemployment, changes in consumer prices and changes in productivity, although other explanatory variables such as the profit rate and degree of trade unionization have also been introduced