Government of Jamaica
The Restructuring of Public Sector Compensation
In my column last week, I made the points that the COVID-19 pandemic would have serious and significant economic consequences. I wrote that while Jamaica is better placed than ever before to absorb and recover from the shock, there will be little room for policy error.
Macroeconomic stability eluded Jamaica for 50 years. Until recently, we have not had the concurrent experience of low inflation, adequate foreign reserves (measured by an objective international metric), financial-sector stability, and fiscal sustainability. Getting here took much effort and sacrifice.
History suggests that macroeconomic stability is necessary for economic recovery and growth but not sufficient. There are other foundations that are just as important. In this part of the series, I draw on the COVID-19 Economic Recovery Task Force Report (the “Task Force Report”) to make the case that recovery to the envisioned Jamaica 2.0 will need a strong social foundation – not just from a social protection standpoint, but also more broadly from providing the supporting infrastructure – to improve the productivity and lives of people.
While Jamaica’s social challenges long predate COVID-19, the crisis has unveiled social fragilities that need to be addressed for Jamaica’s sustainable and resilient recovery.
There are several important elements to developing Jamaica’s social foundation.
The suboptimality of informality, for the State and citizen, has been brutally exposed by the pandemic. According to the International Labour Organisation, an informal economy refers to “all economic activities by workers and economic units that are – in law or in practice – not covered or insufficiently covered by formal arrangements”. It also defines informal employment as “all remunerative work (i.e. both self-employment and wage employment) that is not registered, regulated, or protected by existing legal or regulatory frameworks”.
The informal economy is a persistent feature of developing economies. It is estimated that approximately 60 per cent of Jamaica’s employment is informal. Employment data as at January 2020 estimated employment at 1,269,100 jobs while active contributors to the National Insurance Scheme (NIS) total approximately 500,000.
According to STATIN data, more than 90 per cent of persons who work in, or around, the home are informally employed. In addition, more than 80 per cent of those who work in construction, more than 60 per cent of those who work in wholesale or retail, and more than 50 per cent who work in transportation are informally employed.
The challenge for the State and citizen is that most often, informal workers do not have formal employment contracts and do not participate in the GOJ’s flagship social-protection scheme, the NIS.
As we have seen from the COVID-19 experience, participation in formal systems provides easier means of validation in accessing government-assistance programmes. Conversely, informality obstructs social-assistance efforts. This imposes invisible costs that affect us all.
Informality is not exclusive to Jamaica. What we know from experience across the world is that informality flourishes where labour markets are rigid and where inclusion in the formal system is costly in time, effort, and resources.
In particular, payroll tax deductions in Jamaica are unnecessarily complicated. Payrolls are subject to four statutory deductions – Education Tax, HEART, NIS, and National Housing Trust (NHT) – each calculated on different income bases and in different ways. Though progress was made with reform that allows for these to be amalgamated and submitted on one form, the complexity of the regime accounts for much of the informality that exists.
Zooming into one specific example, domestic workers are among the most disenfranchised groups with respect to NIS participation. The very persons who could most benefit are often the ones excluded by structural barriers. And anecdotal evidence suggests that their under-representation is not only due to the incremental dollar cost of statutory deductions, but also to the complexity of filling out forms, calculating four tax types on different bases, and filing monthly deductions.
The Task Force Report recommends replacing the current system with a single consolidated statutory deduction, which is then allocated among the various uses. This would lead to greater administrative efficiency and compliance and help increase formalisation of activity. For some employment groups, such as domestic workers, the task force recommends that streamlining could go even a step further by allowing for annual contributions.
Greater formalisation would make it easier to build a social registry of all families with incomes below a particular threshold to which state-sponsored social assistance can be administered during a crisis. This database would be separate from PATH though there would be some overlap. As we know, working people who would not ordinarily qualify for PATH can become vulnerable in times of crisis. Pre-crisis income level is a workable proxy for this vulnerability. Having such a registry is essential to building economic resilience.
Pre-COVID-19 unemployment was at historical lows. However, for many Jamaicans, household wealth is insufficient to serve as an income stabiliser in bad times. The Government’s CARE Programme thereby serves an important function in the short term. Over the medium term, however, we will need to strengthen social protection with more permanent institutions. The feasibility study by the PIOJ on unemployment insurance that considers possible companion labour-market and social-security reforms is therefore timely.
To reiterate the previous point, it is impossible for unemployment insurance to assist the target population if they remain informal.
There is a strong moral case for interventions on behalf of those who may have worked most of their lives and who, in their old age, are without a source of income, including NIS pension, due to some of the aforementioned structural barriers. It is for this reason that I announced the introduction of a social pension in my 2020 Budget presentation.
In terms of age of eligibility and level of benefit, this is being designed so as to avoid perverse incentives that may dissuade NIS enrolment. Ultimately, within a decade or less, social pension expenditures could be substantially reduced in real terms as reforms to increase the participation in NIS impact old-age income dynamics.
Realisation of the strong social foundations that will modernise Jamaica will require investing in digital infrastructure that creates efficiency in service provision and enhances productivity. Other small countries, such as those in the Baltics – Latvia, Lithuania, and Estonia – have made great strides in reducing the size of government and increasing their overall productivity, economic competitiveness, and resilience by embracing digitalisation in their day-to-day life.
There are some critical components to help build this digital infrastructure.
• NIDS: Implementation of a robust and secure national identification system (NIDS) will enhance the efficiency and effectiveness of government and improve the delivery of government services to the public. In particular, the delivery of social and welfare services will dramatically improve with the scope of broadening coverage. Planning for the social and physical infrastructure needs could be more granular and impactful. NIDS will also greatly facilitate increased financial inclusion as satisfaction of KYC requirements would be easier. Commerce and economic activity would benefit from easier validation and integrity of platforms. Immigration, border-control management, public safety, and national security would also benefit from the implementation of NIDS.
• Digital Payment Platform. Faster progress in financial inclusion – which has been proven in other countries to be achievable with digitisation, including easier opening of bank accounts and access to digital platforms – would support the expansion of SMEs and increase formalisation, which, together, will build the backbone of domestic value added and economic growth.
The GOJ will support the acceleration of an enabling environment for digital payments. As such, the Bank of Jamaica is working on the implementation of a National Payment Switch. This digital payment platform offers the prospect for greater inclusion of Jamaicans in the financial system, offering seamless payment options while lowering transaction costs and improving security. This single reform has transformative potential.
Complementing the above with universal access to broadband and onboarding of public services online, within the context of greater social protection coverage and economic formalisation, will usher in Jamaica 2.0, which improves the life of all Jamaicans.
The COVID-19 Economic Recovery Task Force Report is available at: https://mof.gov.jm/wp-content/uploads/Rebuild-Jamaica_-COVID-19-Economic-Recovery-Task-Force-Report-FINAL-1.pdf
Published in the Gleaner – July 26, 2020
Dr Nigel Clarke is Minister of Finance and the Public Service and Member of Parliament for St Andrew Northwestern. Send feedback to email@example.com.
The Hon. Nigel Clarke, D.Phil., MP
Minister of Finance and the Public Service
30 National Heroes Circle, Kingston 4
Tel: (876) 932-4656 / 4660 / 4655
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