Correctly Boost Productivity to Address Cost-of-Living Crisis

Editorial

With the significant rise in living costs all around the world, Governments must not delay investing in productivity.

The global escalation of cost-of-living has turned low-income households into chaotic messes. The rise of energy prices due to the imbalance between the spike in demand and shortage of supply or the increased cost of mobilization of goods, followed by the Russian invasion that mainly influenced Europe and US economies, intensified the cost-of-living crisis. As a result, housing and renting prices continue to rise, which go side by side with the increase in eviction rate by approximately 150-200 percent in the US and 43 percent in the UK.

The overall inflation, which is mainly driven by food prices and energy hikes, stands at 9.18 percent in Organisation for Economic Co-operation and Development (OECD) countries, and 8.2 percent and 7.80 percent in the United States (US) and United Kingdom (UK). This year’s hike in energy prices in OECD (32.53%), US (30.27%), and UK (51.90%) brought millions of households into poverty. In England, more than 15 million people are fuel poor. A household is considered to be fuel poor based on the estimated net household income after energy spending. If the net household income falls below the poverty line, a household is considered not only monetarily poor but also that it has a specific deprivation in fulfilling household energy requirements. Apart from single adults without children, low-income households in the UK spend around 16-29% of their income after housing costs on gas and electricity. Meanwhile, energy costs only consume 6-8% of middle-income households’ salaries.

Global food commodity prices increased by over 30 percent from 2021. The sudden jump in prices badly affects low-income families and pushes 65 million more people into extreme poverty and results in people changing their dietary styles and compensating for their nutritional needs, which triggers other development challenges such as hunger and stunting.

Efforts made by policymakers such as that of the UK Government in providing a warm home discount for vulnerable households during the winter along with other strategies currently in consideration should be applauded. However, the fact of the matter is that policymakers ought to think of a long-term solution that could address not just a subset of inflation but its whole issue. It is sensible to think that when a crisis occurs, the first reaction is a shock, and the typical solution would be a sort of coping mechanism. A realistic forecast would tell that this would cause a fiscal challenge in the long term.

Before COVID-19 and the Russian invasion, fuel poverty is a part of monetary poverty. But now, it is indicative of livelihood vulnerability. To minimize the impact of cost-of-living crisis, we cannot solely rely on social protection mechanisms for fuel-poor households. A lesson learned from this new crisis is that Governments should prepare a nation that can withstand shocks. Appropriate measures should be in place so that when any types of crises occur, less time will be wasted on shocks and more on a speedy recovery.

Bringing down costs and increasing wages are the two core challenges that policymakers should tackle – and no other solution could better meet these ambitions than boosting productivity. Because of low firm productivity, fewer goods are being supplied to the market, which escalates prices and drags those that live slightly above the poverty line into poverty. But, if the food industry can produce more units per hour, there will be more supply of goods and inflation will be under control. The same goes with the environmental sector: if more firms are willing to invest in producing renewable energy, not only can households save on energy, but we are also going in a positive step to combat the climate crisis.

To address the cost-of-living crisis, Governments ought to incentivize production and innovation so that firms will have the capability to produce more at a much lower cost. Incentives in the digital age are not merely monetary compensations but also public investment in building technological capabilities. The evidence that firms with high digital intensity have a higher productivity rate than companies with low digital intensity signal the importance of amplifying investment in digitalization. However, what often comes out of the productivity booster mechanisms is the conventional focus on production that mainly incentivizes companies but disregards the rights of the workers. To boost productivity, in a way that will sustain, Governments should also protect vulnerable jobs. In this way, not only are we bringing costs down, but we also help living standards improve.

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This article is featured in JUSTIN Development Review (JDR) Vol. 02 Issue 02 — June 2022