Wage indexation: a panacea for Zimbabwe's wage crisis?

Wage indexation: a panacea for Zimbabwe's wage crisis?

• Chinotimba's firm in court over unpaid wages

• Zimbabwe unions threaten strikes

• Zimbabwe sets new controls on charities

• ZCTU 'stay-away' flops

• Mduduzi Mathuthu: Beyond job boycotts

By Marshal Padenga

A LOT has been said and written about wage indexation, alas no credible attempt has been made to scratch beneath and beyond the surface on this subject matter; hence no clear explanation of how it would work in arresting the precipitous decline of real wages has been afforded to the panacea-yearning populace.

In an economic environment where month-on-month inflation is in its hyperinflationary state of beyond a 100 percent and official annual inflation is over 4530 percent (with unofficial figures of 200 and 6000 percent respectively), one must shudder and wonder as the imperative is on to try and go beyond the definitional aspects of wage indexation. Rather than just spell out the consequences of not adopting wage indexation there is need to look at the modus operandi of how to invoke this tool of real wages management.

Wages in Zimbabwe have been for a good part of the collective bargaining process indexed to inflation, but what has been different has been the approach and selection of the indexing criteria. The main tools in collective bargaining have been primitive on the whole; by this one would consider such things as the arbitrary determination of the basket of basic commodities at sector or industry levels, which have been different across National Employment Councils (NECs), distorted by the bargaining strength of the councils in question, hence raising the fallacious question of what is a basic commodity and what is not.

Cascading the dilemma further, there has been no consensus at both industry and national level on what the standard measurement of inflation should be. In most wage negotiations there has always been a tussle between the parties, with employers arguing from the point of Producer Price Indices (PPI) and profitability, whilst the workers tugged on with the Consumer Price Indices (CPI). Frankly, this is where the crux of the matter is, and this is the heart of Zimbabwe’s problem at this juncture. How does the country tackle the ravages of driving inflation when there is no common rallying point on the nature and character of this critical parameter at empirical level?

In aggravation as well, NECs have been incapacitated by the debilitating macroeconomic problems from without, and consequently they have no influence now on even the microeconomic fundamentals impacting on their own industries – this is frustrating to say the least.

Basically, the point coming from all this is this, that there has been some form of wage indexation in Zimbabwe over the years but this time distribution has been so spatial and methods so primitive, variant and inconsistent, but none the less supported by stable economic ambience of the past it never seemed to disenfranchise wage earners.

Given the low levels of inflation in the 1980s (single digit inflation) and 1990s (double digit inflation) it is clear that the primitive methods seemed to work and the legislated collective bargaining systems at plant, sector and industry levels were compatible with this, and seemed to indicate that the system was viable due to economic stability or perception of it. This meant annual reviews of salaries and wages were effective as there wasn’t any galloping inflation that has come to characterise the economy now.

What needs to be borne in mind is this very fact that workers are now turning to national leaders at the Tripartite Negotiating Forum (TNF) to intervene where the bipartite arrangement (NECs) has failed to guarantee viable real wages let alone maintain the status quo since economic stability has dissipated.

Despite the fact that we have been indexing wages in Zimbabwe, whether consciously or otherwise there has been vehement criticism of wage indexation on a capricious excuse that it is inflationary. Bear this in mind that wage indexation is not inflationary and most important wage indexation does not cause economic instability. Real wages are considered to be pro-cyclical (Padenga, 2005), meaning that wages respond invariably in sympathy to economic movements (business cycles), hence in a stable economic environment real wages are stable and the opposite is also true with a volatile economic scenario.

If real wages are pro-cyclical where does that leave the workers then? The simplest answer is this that it leaves them at the mercy of macroeconomic and political whims. A more serious response to this question will be to instigate wage indexation at a higher level using models (neo-classical models) that simulate the behaviour of the economy at best. Wage indexation at an empirical level must be adopted as financial asset indexation and physical assets indexation has been effected across the economy from observing the behaviour of economic agents; from the point of labour as an asset this is the only modus vivendi that can bring workers at par with the rest of the economy.

Bringing a dialectical approach to this exposition and moving away from evolving a solution from a political or economic perspective, but from a political-economy point of view there is need to balance the two and give serious thought to the ensuing ramifications of the interactions of the two, rather than observe them in isolation. The problem, Zimbabwe’s problem at this moment, has been dealt with extensively and what needs to be done with the economy is very clear; arrest the economic decline by ensuring the superstructure iterates with the base and vice-versa, harmoniously. Anything short of this is piece-meal and will not yield long-term gains and consequently recovery of real wages will remain an ivory tower hallucination.

Critical to wage indexation (in its most robust and econometric form) is monetary policy, particularly where it relates to tackling inflation. Of course this does not mean negation of fiscal policy because this is also important where dinsflation is concerned, that is the losses to the economy, output-wise due to the fall in the inflation rate, it needs to be managed effectively as well with that same diligence. The importance of monetary policy in any wage indexation model brings the central bank into play and one should also hasten to say even the governor is implicated by association with it too. A question may then be asked, how then do these two come into the fray? Wage indexation is predicated on inflation, and a standard measurement of inflation is the CPI (which is calculated from the national average of prices of properly selected items) and it constitutes a good part of the agony of monetary policy pursuits.

There are two things central here, firstly the central bank, our Reserve Bank of Zimbabwe (RBZ) must of necessity be independent or must be perceived to be such, if economic agents are to go by what it stands for and says. To economic agents this is critical, as it is based on this that they make business and economic decisions today that relate to their future and consequently the national economy’s direction. The central bank must be seen to be beyond political reproach if it is to be respected, so to speak.

Secondly, amongst critical prerequisites in monetary policy formulation and implementation is that the central bank governor, our Governor, must be a man of his word, he must be the epitome of credibility, he must be an honest man. It’s important for him and for the entire economy too, for him to mean what he says or perception thereof. Thus if he says the central bank is targeting inflation, and the target is 50 percent, does he move in that direction and are his actions in sync with what he says. If he doesn’t hit the target does he then take that remedial action to bring the ship back on course or does he play to the gallery and engage in the blame game and polemical digressions.

This then leads one to say that if the central bank is not independent and the governor is not credible then pursuit of inflation will remain a pursuit, and hard experience has taught us – inflation can be stubborn and elusive.

For empirical wage indexation to succeed then there is need to develop a model that is cyclical in nature embodying within it the dynamics of the economy as a way to transmit the upswings and downswings of the economy through to real wages. At the core of the model should be inflation, not inflation as in the broad sense of the word, but the CPI conveniently. In this model the CPI must invariably be split into three forms to help the model select the most suitable form of the CPI.

The three forms of CPI that must be considered are historical inflation (or past inflation), expected inflation (forecasted inflation) and target inflation (specified inflation). Using this kind of model it is possible to determine empirically which form of CPI is suitable and also the contract length of the nominal wage agreement that will maximize the adjustment of real wages to inflation. This is where the independence of the central bank and credibility of the governor is crucial and will make or break this endeavour.

If for instance the model determines that wage indexation must be predicated on target inflation but on the contrary the central bank and the governor have failed to deliver on targeting inflation in the past, workers as economic agents will not believe that target inflation will be achievable, and consequently won’t accept it as a factor of real wages adjustment. The fallout from this is that this scuttles the wage indexation process in particular and the economy in general.

The failure to arrest the decline of real wages is not due to the fact that wage indexation has failed to work, but it’s due to the fact that economic agents have reservations about the commitment and seriousness of the monetary policy establishment to fulfill promises made on important monetary policy matters. In a study done on applying wage indexation in Zimbabwe (Padenga, 2005) it emerged that using quarterly times series data from 1980 to 2000 is most effective when adjusting real wages using target inflation and engaging quarterly wage contracts to maximize the gains accrued within a prescribed economic regime.

Interesting enough for Zimbabwe using historical inflation data such as CPI has a negative impact and does not allow for the proper and adequate adjustment of real wages and the same goes for expected inflation. But why is this? In econometric modeling there is a risk of feedback processes where the changes in circumstances in a future time period may not necessarily be resolved by previous period information (problems of adaptive expectations and lagged variables). The simple fact of it is that historical inflation is not a good measurement in the determination of real wages of tomorrow because it distorts the reality of the time in question. The same is true for expected inflation information, which as the name correctly spells out its only expected after all. Yes, it has been modeled and yes, it is expected to be at that level, but it has not been proactively sought, it is a consequence of the status quo.

A piercing look at expected inflation reveals to economic agents that it is what is expected of inflation in advance of time but that it is not a consequence of deliberate policy by monetary authorities, but a consequence of the prevailing economic climate. This then leaves target inflation at our disposal and most suitable for that matter, this is what the central bank must strive to have and the raison d'être for this is that it is achieved by them proactively making or initiating the right policy mix (fiscal and monetary) by invoking the right policies that impact on the key variables with real wages included. In this case the central bank selects a parameter for target inflation (not randomly of course), and the selection of this parameter will then cause desired shifts in the economy with measured and carefully calibrated consequences on an assortment of key variables via a meticulously designed transmission mechanism. In all this there is a reverberation of independence of central bank and credibility of the Governor echoing throughout the delicate modeling process.

Once the measurement of inflation has been selected, the next step will be to determine the form that wage indexation should adopt. As the endeavour to introduce empirical wage indexation gathers momentum it is critical to bear in mind that there are two main forms that this can assume. The first form is full wage indexation, where nominal wages are adjusted by the total value of the selected adjustment factor, say, at 45 percent target inflation nominal wages are adjusted by the full 45 percentage value. In this setting of galloping inflation the full adjustment is meant to keep the deterioration of real wages in check, otherwise with this runaway inflation once out of sight real wages may never be redeemed.

The second form is what is referred to as partial wage indexation, where if target inflation is set at 45 percent, for instance, the actual adjustment of nominal wages is less than 45 percent, say, 30 percent. These are decisions made drawing from the dynamic econometric models designed to assess the gains to real wages vis-à-vis the losses in output (disinflations) through simulations.

Evidence from Chile suggests that in a gravely hyperinflationary situation such as ours, the implementation of full wage indexation is more meaningful and will yield significant results. Partial wage indexation, on the other hand, will be most useful in the early on set of inflation, particularly under the creeping inflation phase of an economic meltdown. The moment inflation breaks the ranks then partial wage indexation will create problems in managing wage contract lengths as these have to be shorter each time to cope with diminishing real wages.

For this to be fruitous the mandate lies with the TNF, which is already in place, thankfully, since this is beyond the employment council level. The current effort to work under the TNF is commendable and relying upon the advice of an independent RBZ, with a Governor focusing on delivering on target inflation, this combination will be formidable and critical in unraveling the gains of wage indexation as well as minimising the disinflations.

The central bank will manage the empirical modeling aspects, delivering on economic goals, such as target inflation, interest rate management, base wage rate calculations, determination of wage contract lengths and the form that wage indexation should take through dynamic econometric models, whilst on the other hand the NECs through their legislated structures (designated agents) will then keep an eye on the implementation of the wage indexation process. Once there is credibility on this real wage adjustment process then labour will be satisfied and out of reason will support this initiative. It is only when there is no clarity and credibility that problems tend to dog processes such as this one.

There must be effort to empirically determine the base wage rate or base wage rates, as a starting point, given the many years of sub-normal adjustments to nominal wages and also the unrelenting deterioration of wages over the years. This process of determining the base wage rate must go beyond the current wages and salaries survey that has been proposed, and consider the base wage rate as a mix of a living wage component, performance-linked or output-linked wage component and profitability-linked wage component. This will guarantee the ‘return’ of the middle class that has been decimated under the current economic regime. The results of this effort must be binding under the current social contract framework that is in place. Once this is done then for those companies that are offering above the base wage rate they must continue on that path making sure the adjustments remain within the target inflation figure.

In summing up it is only fair to say that empirical wage indexation, rather than being an anathema, is a solution that can eventually stabilise real wages. This country has seen ultra vires economic policies over the last decade, thus giving wage indexation a chance will not be that dreadful, if anything, it will give a desired reprieve to the suffering populace. As with any model in macroeconomic management it will be necessary to adapt it to our own situation so that it suits us and hence solve our problems that are akin to Zimbabwe.

In as much as the other players have critical roles to play in all this, like in the game of chess, someone has to make the first move and one’s opinion would be that, that burden lies with the Government supported by its relevant institutional appendages. Government must address the economy, because it is the economy that forms the base, the supporting base.

Again, remember that it is independence of institutions and credibility of policymakers that carve out success in macroeconomic management, particularly that of a monetary nature, and for this reason government must afford its quasi-government institutions that independence and its officials that credibility. Keep this in mind always that economic agents may be powerless and feel left out in the design of economic policies (both monetary and fiscal) but they cannot be fooled; they know a mirage when they see one, and thus they are surprisingly powerful in rendering those same policies ineffective on implementation. Thus in monetary policy formulation and implementation ignoring the irrevocable duo of ‘credibility’ and ‘reputation’ is surely done at one’s own peril – think about it!

Marshal Padenga is a labour economist. He has had collaborations with regional labour movements and non-governmental organisations on economics and labour relations
JOIN THE DEBATE ON THIS ARTICLE ON THE NEWZIMBABWE.COM FORUMS
newsdesk@newzimbabwe.com