Low unemployment rate could push up inflation, says King

 

Economist Dr. Damien King says Jamaica's historic low unemployment rate could result in an increase in the prices of goods and services.

 

The Statistical Institute of Jamaica last month reported that the unemployment rate was 4.2 per cent in October 2023, 2.9 percentage points lower than the similar quarter of 2021.

 

Dr. King explains that the unemployment rate is low because many businesses are expanding and competing with each other for the limited supply of labour.

 

As a result, he says businesses are paying higher salaries to attract and retain workers due to low supply of labour. 

 

"If you talk to business people, the anecdotal evidence corroborates the statistical measure. All business people are telling you that you're struggling now to find new hires. So they are basically hiring from each other. Why would you leave the job you have now to accept another job that you're being offered? If they're giving you more money. So that is going to put pressure on wages, on the wage bill in general, on wage levels to go up. Fine, but when wage levels go up, the prices of those goods and services have to go up too, so it pushes up inflation," he reasoned.

 

Dr. King said the Bank of Jamaica needs to manage the effects of inflation arising from the low unemployment rate as this could compromise the ability of businesses to plan for the future.

 

He suggested that the BOJ increases its interest rates for commercial banks, to manage inflation. 

 

"So it raises its benchmark interest rate that commercial banks borrow from it at. And in doing so, then commercial banks also have to raise their own interest rates. That diminishes, that discourages all these businesses that want to expand from borrowing to finance that expansion, and so it dampens that excess demand in the economy. And that's the connection between the two things, really. By dampening the excess demand, by tempering it, then it doesn't go out of control and inflation doesn't get too high," he explained.     

 

Dr. King was a guest Monday morning on TVJ's Smile Jamaica.