Real Wages, Inflation and Labour Productivity: Evidence from the Public and Private Sectors in Sri Lanka

Productivity as a measure of efficiency, how productively a nation produces its goods and services using its limited resources, a measure of competitiveness among the nation in the global world, has been a current research interest of many. The main objective of this study is to examine and analyse the relationships between real wages, inflation and labour productivity in Sri Lanka during the period from 2006 to 2019 using quarterly, secondary and seasonally adjusted data. Identifying the factors affecting labour productivity and determining the causal relationship among variables are secondary objectives. The Ordinary Least Square (OLS) and Vector Auto Regression (VAR) models are employed to determine the static and dynamic relationship among Labour productivity (LPDCT), Colombo Consumer Price Index (CCPI), Real Wages in Government Sector (RWGSEC), Real Wages in Private Sector (RWPSEC) and Real Wages in Informal Private Sector (RWIPSEC). Accordingly, in the short run, a negative dynamic relationship between inflation and labour productivity, and a positive relationship between real wages of all sectors and labour productivity are identified. As per the results of FEVD, DLPDCT is a strongly endogenous variable while other variables are least exogenous. Real wages of Private Sector and Real Wages of Informal Private Sector employees’ contributions to labour productivity are significant compared to the Real Wages of Government Sector employees as per the analysis of the sample period. Results suggest that economic growth stimulating policies, and that well-managed lower level inflation, increasing Real Wages of PSEC employees, encourage PSEC by facilitating initial requirements, infrastructure, innovations, research and development to enhance labour productivity. Allocating and assigning more work to government sector employees can be recommended as a measure to further enhance labour productivity in Sri Lanka. One directional causality exists from DLPDCT towards DLCCPI. Further, inflation Granger caused real wages in Private Sector employees as per the Granger Causality Block Erogeneity test during the period studied.