Ronaldo Blake | Driving productivity in low unemployment economy

In April, Jamaica hit a record low unemployment rate of 4.5 per cent, underlining a shift from a decades-long economic problem of surplus labour capacity. The current rate of less than five per cent, defined by most economists as “full employment”, is unprecedented in Jamaica’s post-independence history, during which unemployment averaged 17 per cent. The labour market situation has created a shortage of workers across several industries and skill levels, and has led the Bank of Jamaica to become concerned about increased inflation as companies raise wages to compete for workers.

While positive, the rising employment has not been matched by commensurate economic growth. Between 2015 and 2023, employment grew by 13 per cent, but economic output increased by just 5 per cent. When employment grows faster than output, it implies that the average output of additional workers is lower than that of the previously employed ones, that is, there is a decline in productivity.

This productivity decline and the resulting growth gap of eight per cent emerged because most newly employed workers were less skilled and thereby less productive than those previously hired. The industries that expanded the most, construction and business process outsourcing (BPO), involve mostly low value-added activities, and have had to hire workers who are increasingly less skilled. In fact, while nearly all 12 major industries experienced an increase in employment, there was a simultaneous rise in productivity in only three of those industries.

CAPRI’s Growthless Jobs report, detailing this phenomenon, recommended shifting tax incentives away from labour intensive production, eliminating mandatory statutory deductions at lower income levels, increasing the income tax credit cap from 30 to 100 per cent for businesses with payable income taxes of less than $1.5 million, and reducing barriers to immigration. The reasoning is that the country can boost its economic growth by reducing the distortionary effect of government investment policies on the labour market, reducing the disincentives of formal sector work and commerce and allowing itself to capture a greater share of global talent. It is worth looking into each of these ideas more carefully.

The BPO sector is Jamaica’s single fastest growing employer, providing four out of every 10 new jobs since 2015. The growth of this industry is directly connected to the Special Economic Zones (SEZs) provisions, from which most BPOs benefit, which include an effective corporate income tax rate as low as 7.5 per cent, compared to a minimum rate of 17.5 per cent for most other domestic companies.

The tax benefits subsidising the rise of the BPO industry also give it a cost advantage in the demand for labour when compared to other industries. Consequently, these other industries, some of which are more productive than the BPO industry, lose out in the competition for workers. Gradually shifting away from these tax benefits being offered exclusively to SEZ companies may redirect productive resources to other higher value-added sectors and increase growth.

INFORMAL ECONOMY

One third of Jamaica’s economy remains informal, largely because the current tax arrangement disincentivises entry into the formal economy by workers and businesses. Less developed countries generally have larger informal economies, due in part to the unavailability of good-quality jobs and the relatively lower education levels of workers. However, even though 71 per cent of new jobs created in Jamaica since 2015 were formal jobs, only 44 per cent of employed people work formally, which means there is room to transition a greater portion of the labour force into formal employment.

Raising the threshold above which statutory deductions are collected and increasing the maximum deduction available to small businesses would reduce the costs associated with working or doing business in the formal sector, respectively. When paired with the tangible benefits of formal sector operations (access to loans, grants, labour law protections, etc), the recommended changes would incentivise more informal businesses to transition to formal sector operations. Since formal sector work is more productive than informal work (having the advantage of scale), a gradual transition to more formal sector work will improve growth outcomes.

In addition to changes to tax and investment policies, the financial and bureaucratic barriers to immigration should be reduced to make it easier for Jamaica to recruit from the global talent pool. This would contribute to improving the size, quality, and dynamism of the workforce, which is critical to any economic growth agenda. Immigration could increase innovation and economic output by strengthening human capital and enabling the development of new industries.

Several studies done on countries at all stages of development have affirmed the positive potential of immigrants, while noting their negligible impact on the wages and employment levels of locals. The potential socio-economic impacts of a more liberal immigration policy for Jamaica are examined more closely in a forthcoming CAPRI report, Brain Gain: Solving the Labour Shortage and Competing for Global Talent.

The government has already recognised that deliberate efforts should be made to upskill the labour force to take advantage of higher value-added jobs and to ascend the value chain. That upskilling should involve skills transfers from global talent. These public policy responses will move us closer to closing Jamaica’s growth gap.

Ronaldo Blake is a research associate at CAPRI. CAPRI Commentary is a platform where researchers share timely and succinct insights on topical public policy issues. Like the reports, this commentary is evidence-informed, and backed by reliable data and research. Send feedback to communications@capricaribbean.org