Labour productivity as major constraint to further wage growth
Following the economic recession in Belarus, wages are gradually rising to the 2015 standard. In previous years, one of the reasons for devaluation in the economy was a disproportionate increase in wages relative to the pace of economic development. Economic authorities are likely to try not to repeat the mistakes of the past and limit the wage growth. The prospects for further wage growth would depend on enterprise managers and demand for their produces.
According to Belstat, wages in April in Belarus totalled BYN 776.7 or USD 412 in Dollar terms. This was the highest wage since August 2015. Thanks to the National Bank's actions aimed at curbing inflation in the economy, real wages in April rose by 2.9% as compared with April 2016. The key factor for the wage growth was the growth in industrial production, which totalled 5.4% in January – April 2017, enabling an increase in wages from USD 382 in April 2016 to USD 452 in April 2017.
In previous years, one of the reasons for devaluation was the outstripping increase in wages compared with the dynamics of economic indicators. In 2010, the Belarusian authorities raised wages by 37%, which for the first time reached USD 500. Meanwhile, Belarus's GDP in 2010 increased by 7.7%. That led to a sharp increase in consumer spending on imports due to the loss of competitiveness of domestic goods, an increase in demand for foreign currency and, ultimately, a three-fold gradual devaluation in 2011. The second attempt to ensure high wages amid growing negative economic processes in 2014, led to yet another devaluation.
In late 2016, the ratio of labour productivity to real wages was 1.03, in Q1 2017 it decreased to 1.01. The decrease was due to the outstripping growth of real wages in comparison with the labour productivity. The real wage grew due to the growth in nominal wages and reduced inflation. Labour productivity is growing, however, at an insufficient pace. According to the government's forecast, GDP may grow by 1.7% by the year-end, which limits the potential growth in nominal wages to the current pace. That said, attempts to increase nominal wage are likely to lead to a reduction in the ratio between labour productivity and wages below 1. The government is likely to prioritise macroeconomic stability and would not pump up salaries. Hence, enterprise managers, who could not ensure an increase in production indicators, would be blamed for the derailed wage plan.
Overall, in Q1 2017 salaries grew faster than labour productivity in Belarus. Taking into account the inflation forecast and GDP growth target, wage growth plan up to BYN 1000 by the year-end is likely to be derailed and enterprise managers would be the ones to blame, as if they had not applied enough effort to improve labour productivity or finding new markets for their products.
The rapid increase in wages has led to a decline in the ratio between labour productivity and real wages to one. Previously, the rule was that enterprises, in which the state owned more than 50% of shares in the founding capital, were not allowed increasing salaries if this ratio was equal to or less than one. The authorities are unlikely to be able to meet the wage growth requirement without long-term consequences for the economy. Hence, the government is likely to contain wage growth for the sake of economic growth.
According to Belstat, In January – August 2017, GDP growth was 1.6%. The economic revival has led to an increase in wages. In August, the average monthly wage was BYN 844.4 or USD 435, i.e. grew by 6.6% since early 2017, adjusted for inflation. This has reduced the ratio between labour productivity and real wages from 1.03 in January 2017 to 1 in the first seven months of 2017. This parameter should not be less than 1, otherwise, the economy starts accumulating imbalances.
The need for faster growth in labour productivity over wage growth was stated in Decree No 744 of July 31st, 2014. The decree enabled wages growth at state organizations and organizations with more than 50% of state-owned shares only if the ratio between growth in labour productivity and wages was higher than 1. Taking into account the state's share in the economy, this rule has had impact on most of the country's key enterprises. In 2013 -2014 wages grew rapidly, which resulted in devaluation in 2014-2015.
Faster wage growth as compared with growth in labour productivity carries a number of risks. Enterprises increase cost of wages, which subsequently leads to a decrease in the competitiveness of products on the domestic and foreign markets. In construction, wholesale, retail trade, and some other industries the growth rate of prime cost in 2017 outpaces the dynamics of revenue growth. This is likely to lead to a decrease in profits and a decrease in investments for further development. Amid wage growth, the population is likely to increase import consumption and reduce currency sales, which would reduce the National Bank's ability to repay foreign and domestic liabilities.
The Belarusian government is facing a dilemma – either to comply with the president’s requirement of a BYN 1000 monthly wage, which could lead to new economic imbalances and could further affect the national currency value, or to suspend the wage growth in order to retain the achieved economic results. That said, the first option bears a greater number of negative consequences for the nomenclature.
Overall, the rapid growth in wages no longer corresponds the pace of economic development. The government is likely to retain the economic growth and retrain further growth in wages. Staff reshuffles are unlikely to follow the failure to meet the wage growth requirement.