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Association calls for adjustment of wage based on Inflation

Ethiopian Economics Association (EEA) calls for the adjustment of wages of senior citizens and pensioners by taking the inflationary pressure into consideration.

The Association, in policy working paper undertaken by Atnafu Gebremichael and published on December 31, 2020, recommended that fixed income of senior citizens and pensioners should be indexed for inflation.

“In addition, civil servants and low fixed income earners suffered from the inflationary pressure that has reduced the purchasing power of the birr. The government, thus, is expected to adjust the salaries of civil servants on the basis of the rising inflation rate,” Atnafu told The Reporter.

The policy paper, which has examined the drivers of inflation dynamics and its effects on macroeconomic stability, found out that the welfare cost of inflation has exhibited a sharp increase since 2010, negatively affecting the economic life of the great majority of the population.

This has had severe implications for the welfare of wage earners prone to inflation and particularly those on minimum wages and pensioners with fixed incomes not subject to wage or income indexation, according to the paper.

“Although the call for the indexation of wage against inflation seems appealing, it is very difficult to implement it under the current condition in Ethiopia - where the government is likely to face a fall in tax revenues and the private sector is experiencing a business slowdown because of instability, forex shortage and other economic shocks,” said Tiruneh Assefa, a Research Analyst and an Economist.

In some countries, especially those that are developed, frequent adjustments of wage are common when inflation accelerates. This includes France where minimum wage is automatically increased whenever inflation exceeds two percent within a given year.

Economists warn automatic indexation is sometimes risky and may lead to a perpetual loop or cycle of consistent price increases in situations of sharply accelerating inflation.

“Although adjustment of wage is necessary as inflation erodes the purchasing power of money, in case of Ethiopia where inflation is in double-digits, doing so is impossible. Yet wage should be adjusted reasonably, though it should not be frequent like other countries as it may lead to more inflation,” said Atlaw Alemu (PhD), an Economist with decades of experience.

Inflation has been double-digit for the last three and half years in Ethiopia, reaching almost 19 percent in November 2020. Food inflation has reached 22.1 percent during the same month, while non-food component of inflation stood at 15.1 percent.

The Association’s working paper found out that there is strong evidence that a growth in money supply contributed to the inflationary pressure.

“As there is strong evidence that the monetary component of inflation is due to money growth, a prudent monetary policy is critical. This may call for a new institutional arrangement of the monetary authority, to the extent of allowing the operational independence of the central NBE,” the working paper underscored.

Independence of the Central Bank could mitigate the problem of time inconsistency, giving it the benefit of keeping monetary policy away from political pressure, preventing the government from irresponsible revenue raising and keeping rent-seeking economic actors at a distance, thereby encouraging competition and enhancing economic progress, according to the paper.

The working paper also suggested zero tolerance for corruption, the enforcement of rule of law and the strengthening of regularity arrangements as a necessary and sufficient condition to fight inflation. It also recommended constraints should be removed for exiting small businesses and entry conditions slackened to the point of allowing and facilitating entrepreneurs start businesses with minimum requirements while they proceed to formal licensing.

This would enable the economy fight inflation from the supply side, points out the paper.

By Samson Berhane