(MENAFN- Jordan Times) Economic science tells us that inflation cannot happen and officials do not need to take precautionary measures against it at times when unemployment is rather high and industry still has some spare capacity to activate in case of need.
The logic in this rule is that unemployment prevents rising salaries and wages because creating new jobs for the unemployed has priority over improving salaries and wages for those who were lucky to be employed.
On the other hand, any increase in demand for products can be met by activating the spare production capacity of the industry. Extra demand can be met by extra supply instead of rising prices to curb demand.
Despite this economic reasoning, Jordan, which has high unemployment, still increased salaries and wages, especially during the last two years. It did so in a way that higher wages started to hurt the country's competitiveness and its ability to attract domestic and foreign investments.
Most Jordanian industries do have spare capacity. They usually work one eight-hour shift, an indication that they can double their production by working two shifts if there is extra demand to justify such a step. This state of affairs did not prevent Jordanian industrialists from raising the prices of their products at a rate higher and faster than the general inflation rate.
Why does Jordan defy the economic rule? Is the rule itself wrong or do some special circumstances in Jordan prevent the rule from prevailing as expected.
The explanation I offer is that the rule is based on the assumption that the market is functioning properly and that supply and demand dictates the prices and wages.
As a matter of fact, wages have been rising rapidly, not due to an increase in demand for labour, but due to pressure coming in the form of strikes, demonstrations and sit-ins performed by the relatively best paid labour groups that are exploiting the politically sensitive situation and the extreme softness of the government.
Rising salaries and wages did not cause substantial inflation, not because local industry covered the market with extra production, which it did not. Inflation did not rise because import has no restrictions, and prices of imported goods did not rise following the increase in demand due to the unlimited elasticity of supply through more imports.
No wonder the volume of imports is rising sharply to equal three times the exports.
Absence of flexibility in the labour market is not serving the working class. On the contrary, it is causing higher unemployment. Allowing supply and demand to interact freely would achieve a healthy balance and serve the best interests of the working class and the economy as a whole.
Artificial rising of wages and salaries causes unemployment. Job security and harsh penalties for the so-called unfair firing of staff help reduce unemployment.
Managers hesitate to employ a new labourer unless it is absolutely necessary, as long as they are unable to let go if and when he/she is no more needed.
In Greece, for example, job security is absolute. Employers are not allowed to fire a single employee unless the company goes out of business.
Unemployment in Greece stands at around 25 per cent. By contrast, the labour market in America is flexible. Employers can hire and fire at will. The rate of unemployment in America is only 8 per cent despite the economic crisis.
The reason: employers start to hire staff in anticipation of economic recovery because they know that they can get rid of the unneeded staff if circumstances change.
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