Productivity based wages good for industry-led economic growth


With Labour Day around the corner, industry continues to urge government to have wages based on productivity. Last year a good precedent was set where no ceremonial wage increments were announced by the President on Labour Day and industry applauded that move. In an environment whereby industry-led economic growth is the lynchpin for achieving Vision 2030, it is imperative that wages are based on productivity.

Kenya is a country which has a thriving small scale industry and it is important to grow this infant industry and ceremonial wage increments will just shatter any dreams of small manufacturers scaling up.

Job creation is a key factor for economic growth in Kenya. Industries are creating millions of jobs through direct and downstream activities. A shock in the system as a result of ceremonial wage increments would just result in layoffs of many employees which defeats the whole agenda of creating more jobs.

It is true that cost of living may have gone up in some sectors, however industries factor in inflationary adjustments in the wages and an additional increment which comes without notice just sends balance sheets into the red. Somehow industry would then have to find a way of recouping the costs and at times this comes through increasing the product cost which is terrible for a country which trying to maintain its global competitiveness.

Some prices have gone up and even at the old rates we are seeing the results already of the high cost of doing business affecting the trade of local products in the East African Community. One of the reasons is that there are goods from Asia which are landing in the region way cheaper than locally manufactured goods. One asks how did we get to the point whereby goods are shipped from Asia, land at Port of Mombasa pay all duties and taxes, are transported to Uganda or Tanzania and still land there cheaper than local goods? As other factors are worked on it is important not to worsen the situation by increasing the costs of our products because of ceremonial wage increments.

The Kenya Association of Manufacturers has, to the chagrin of some labour bodies, continued to support productivity based wages. This argument is not without basis; the cost of doing business in Kenya is high-electricity costs are high- Government is working on reducing the same by expediting the 5000MW project, which is commendable; taxes are high, transport network needs to be fixed. Therefore as the country works on creating an enabling environment for businesses we should not be our own enemies by calling for ceremonial wage increments. Any increments which are ceremonial will only take the country back to a vicious cycle of an increase in final cost of goods and possible retrenchments of some workers if companies cannot sustain them.

Labour cost is a major production cost and an increase without considering how it will tip the scales could be a big mistake and a move in the wrong direction especially in the case of labour intensive industries and will impact on efforts to expand employment.

The increasing cost of living experienced in Kenya has played a part in increasing pressure for higher wages. However, the government should focus on the reducing the entire spectrum of the cost of living with a special focus on creating an enabling environment for business to operate and manufacture goods at a globally competitive rate.

The World Bank notes that increasing Labour productivity is the only way for a country to accommodate wage increases without jeopardizing competitiveness as well as boosting its economic growth. Indonesia, for example, plans to factor in productivity into a new rule to set annual minimum wages in the effort to lift employees’ skills and avoid labour disputes, which may be worth considering in the
Government has a goal of creating one million jobs and as long as industries cannot sustain the employment rates then the goal will remain unrealized.

(The writer is the Head of Finance at Kenya Association of Manufacturers and can be reached on

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