Inflation Cuts Real Wages Despite Rise in Pay Perks

Business Daily (Nairobi)

Geoffrey Irungu

23 May 2011

Kenyan workers lost buying power last year despite being awarded pay increments after a two-year freeze caused by the combination of the 2008 post-election violence and global economic recession, official data released last week shows.

Though nominal wages were up by an average of 3.5 per cent, prices of goods and services rose at a higher rate of 4.1 per cent, leaving workers with negative real wages, according to Economic Survey 2011.

The decline in real wages by 0.6 per cent – the third consecutive year pushed the cumulative decline in purchasing power to 17.5 per cent since 2008 – signalling that recent battles between employers and trade unions over wages will persist for the rest of the year.

Last month’s entry of the inflation rate to the double digits territory and the continued rise in the cost of energy and commodities in a year when the economy is expected to expand by a smaller margin than last year raises the chances of a further dip in real wages this year.

Real wages – a measure of inflation-adjusted pay – remains a key measure of employee welfare that in many countries forms the basis of pay bargains between trade unions and employers.

This is despite recent attempts by the government to reposition productivity at the centre of wage negotiations, arguing that only what is produced can be shared.

“We should not be unduly concerned about inflation or the cost living, but about productivity,” said Julius Muia, the chief executive of the National Economic and Social Council – the official think-tank that advises the government on economic policy, adding that without productivity improvement there is no money to be shared.

Economists said the decline in wages by nearly 20 percentage points in the past three years without big trouble in the labour market points to a maturing of employee relations in favour of legal disputes resolution mechanism.

Some labour market observers have however argued that the relative labour market calm in the face of serious wage erosion shows the extent to which trade union power has declined in Kenya.

Increase

Economic Survey 2011 confirms this loss of union power in its finding that the number of collective bargaining agreements declined to 266 in 2010 compared to 297 in 2009 and more than half the companies surveyed reported a decline in the number of employees covered by unions.

The Central Organisation for Trade Unions (Cotu) has been pushing for an increase in minimum wages pointing to the rise in the cost of living for years without adequate compensation.

“We have been telling employers that the pay increments they have offered workers are not enough to cover the rise in cost of living and these statistics clearly demonstrate this fact,” said Ernest Nadome, a Cotu council member.

Cotu was on Saturday expected to ratify a planned industrial action on grounds that the government had refused to acknowledge serious erosion of wages in the country during the past three years.

“We changed the way we calculate inflation but that did not mean prices have stopped moving upwards,” said Mr Nadome, adding that incomes have been eroded by at least 50 per cent in the past three years.

Trade unionists argue that pay increments of between 20-30 per cent is not enough to cushion workers whose incomes have significantly declined in the past three years and are living in difficult economic environment marked by high inflation.

Inflation rose for the fifth consecutive month in April to 12 per cent pushing the cost of many consumer goods beyond the reach of low-income households.

The survey found that salaries and wages declined for three consecutive years starting with 10.4 per cent in 2008, 6.5 per cent in 2009 and 0.6 per cent last year.

High level inflation has seen real wages decline in Kenya for the past 15 years save for 2006 and 2007 when growth in pay was positive.

The combination of declining real wages and a freeze or slow down in jobs growth means Kenya could be losing some of the human development gains it made during the period of steady economic growth between 2003 and 2007.

The decline in real wages and the demand for higher pay has become the centre of a protracted battle between trade unions and the employers’ lobby the Federation of Kenya Employers (FKE).

Kenya’s wage guidelines of 2005 say the desire to give workers a fair minimum wage on the basis of inflation and productivity gains should be the factor in pay negotiations and determination of other terms of employment.

Samson Osero, the executive director at the Institute of Human Resource Management, reckons that lack of clear policy guidelines on management of people at the workplace including how to handle compensation and productivity remains the major obstacle to peaceful labour relations in Kenya.

“Wages should be reviewed regularly as part of a policy so that we don’t have a situation where everyone must wait for May Day to get a pay rise,” said Mr Osero.

Pay negotiations between trade unions and employers are expected to become increasingly difficult with the recent research findings that the most profitable companies around the globe are those that have linked remuneration to productivity.

A joint study by Deloitte Consulting LLP, The Manufacturing Institute and Oracle last year found that 58 per cent of the world’s largest corporations with top quartile profitability had linked employee pay to productivity, while only 36 per cent of bottom quartile companies performed similarly.

Productivity

“Considering all respondents (regardless of size), 55 per cent of highly profitable companies rate their current capabilities in linking employee pay to productivity as “high” compared to only 41 per cent of the less profitable companies,” the report said.

Deloitte found out in another 2010 survey titled “Top Five Total Rewards Priorities” that 66 per cent of respondents planned to make changes in the design of compensation plans, with particular emphasis on performance-based pay and performance management tracking and administration.

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