| Peer-Reviewed

Impact of Inflation on Labour Productivity in Sri Lanka

Received: 29 July 2021     Accepted: 12 August 2021     Published: 19 August 2021
Views:       Downloads:
Abstract

Inflation and labour productivity has been a longstanding research interest in developed and industrialized countries compared to developing countries, showing the importance of concept related to efficiency and competitiveness when the economies are growing. Capacity of the economy in Sri Lanka doubled within six years during the period from 2006 to 2012. However, aging populations, raising dependency ratio, lower labour force participation rate, are emphasized as labour force related problems that required to address. Further Sri Lanka has been identified as a country that stuck in middle income trap for a long period of time due to less economic diversification, inelastic and inefficient labour market. In these context, educational reforms to address the skills and knowledge gap in labour market demand and supply, improvement in labour productivity and efficiency-based productivity, are identified to overcome the challenges. This study explores the impact of inflation on labour productivity in Sri Lanka during the period from 2006 to 2020 by employing, univariate Vector Auto Regression model for secondary, monthly seasonally adjusted data. Model was estimated subject to conducting basic test to check unit root and cointegration of the variables. Lag order 16th for the model, was selected subject to lag length criteria, significant of the lag exclusion test, stability test and residual tests to consider the appropriateness of the model. As per the dynamic analysis of the results, labour productivity is strongly impacted by variable itself. Accordingly, previous period realization of labour productivity is associated to increase labour productivity in current period significantly by 0.54 per cent. Further, there is a negative relationship between inflation and labour productivity in short run. Accordingly, one percent increase of inflation in previous two months, are associated to decrease labour productivity by 0.014 and 0.324 on average ceteris paribus. Inverse relationship between variables is supported with the findings in empirical evidences. As per variance decompositions, labour productivity and inflation are forecasted by itself. Therefore, labour productivity and inflation are identified as strongly endogenous and strongly exogenous variables respectively. No granger causality relationships are existed between variables. Negative relationship between inflation and labour productivity is identified that imply, inflation can be effectively used in achieving higher labour productivity. Therefore, suggestions are made to keep a lower level, single digit inflation in enhancing labour productivity.

Published in International Journal of Economic Behavior and Organization (Volume 9, Issue 3)
DOI 10.11648/j.ijebo.20210903.13
Page(s) 57-70
Creative Commons

This is an Open Access article, distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution and reproduction in any medium or format, provided the original work is properly cited.

Copyright

Copyright © The Author(s), 2021. Published by Science Publishing Group

Keywords

Inflation, Labour Productivity, Sri Lanka

References
[1] Krugman, P. R., The age of diminished expectations: US economic policy in the 1990s. 1997: MIT press.
[2] Lucas, R. E., Some international evidence on output-inflation tradeoffs. The American Economic Review, 1973. 63 (3): p. 326-334.
[3] Hendry, D. F., Modelling UK inflation, 1875–1991. Journal of applied econometrics, 2001. 16 (3): p. 255-275.
[4] Freeman, D. G. and D. B. Yerger, Does inflation lower productivity? Time series evidence on the impact of inflation on labor productivity in 12 OECD nations. Atlantic economic journal, 2000. 28 (3): p. 315-332.
[5] Paul, S., C. Kearney, and K. Chowdhury, Inflation and economic growth: a multi-country empirical analysis. Applied Economics, 1997. 29 (10): p. 1387-1401.
[6] Asian Development Bank, International Labour Organization, and Regional Office for Labour the Pacific, Sri Lanka: fostering workforce skills through education: employment diagnostic study. 2017.
[7] Pruchnik, K. and J. Zowczak, Middle-income trap: Review of the conceptual framework. 2017, ADBI Working Paper.
[8] Gokal, V. and S. Hanif, Relationship between inflation and economic growth. Vol. 4. 2004: Economics Department, Reserve Bank of Fiji Suva.
[9] Sarel, M., Nonlinear effects of inflation on economic growth. Staff Papers, 1996. 43 (1): p. 199-215.
[10] Eggoh, J. C. and M. Khan, On the nonlinear relationship between inflation and economic growth. Research in Economics, 2014. 68 (2): p. 133-143.
[11] Burdekin, R. C., et al. When does inflation hurt economic growth? in Different Nonlinearities for Different Economies. Available as a Claremont Working Paper at< http://spe. cgu. edu/institutes/conference/mainindex. html. 2000.
[12] Behera, J., Inflation and its impact on economic growth: Evidence from six South Asian countries. Journal of Economics and Sustainable Development, 2014. 5 (7): p. 145-154.
[13] Mallik, G. and A. Chowdhury, Inflation and economic growth: evidence from four south Asian countries. Asia-Pacific Development Journal, 2001. 8 (1): p. 123-135.
[14] Hussain, S. and S. Malik, Inflation and economic growth: Evidence from Pakistan. International Journal of Economics and Finance, 2011. 3 (5): p. 262-276.
[15] Aslam, A. and S. Lebbe, Inflation and economic growth in Sri Lanka: An ARDL bound testing approach. 2017.
[16] Madurapperuma, W., Impact of inflation on economic growth in Sri Lanka. Journal of World Economic Research, 2016. 5 (1): p. 1-7.
[17] Konieczny, J. D., Inflation, output and labour productivity when prices are changed infrequently. Economica, 1990: p. 201-218.
[18] Sinn, H.-W. and M. Reutter, The minimum inflation rate for Euroland. 2001, National Bureau of Economic Research.
[19] Hoogenveen, V. C. and S. K. Kuipers, The long-run effects of low inflation rates. PSL Quarterly Review, 2000. 53 (214).
[20] Feldstein, M., Inflation, tax rules and the accumulation of residential and nonresidential capital. The Scandinavian Journal of Economics, 1982: p. 293-311.
[21] Buck, A. J. and F. Fitzroy, Inflation and productivity growth in the federal republic of Germany. Journal of Post Keynesian Economics, 1988. 10 (3): p. 428-444.
[22] De Gregorio, J., Economic growth in latin america. Journal of development economics, 1992. 39 (1): p. 59-84.
[23] Jarrett, J. P. and J. G. Selody, The productivity-inflation nexus in Canada, 1963-1979. The review of economics and statistics, 1982: p. 361-367.
[24] Smyth, D. J., Inflation and total factor productivity in Germany. Weltwirtschaftliches Archiv, 1995. 131 (2): p. 403-405.
[25] Clark, P. K., Inflation and the productivity decline. The american economic review, 1982. 72 (2): p. 149-154.
[26] Hondroyiannis, G. and E. Papapetrou, Seasonality-cointegration and the inflation, productivity and wage growth relationship in Greece. The social science journal, 1997. 34 (2): p. 235-247.
[27] Wakeford, J., The productivity–wage relationship in South Africa: an empirical investigation. Development Southern Africa, 2004. 21 (1): p. 109-132.
[28] Christopoulos, D. K. and E. G. Tsionas, Productivity growth and inflation in Europe: Evidence from panel cointegration tests. Empirical Economics, 2005. 30 (1): p. 137-150.
[29] Narayan, P. and R. Smyth, The effect of inflation and real wages on productivity: New evidence from a panel of G7 countries. Applied economics, 2009. 41 (10): p. 1285-1291.
[30] Kim, S., H. Lim, and D. Park, Does productivity growth lower inflation in Korea? Applied Economics, 2013. 45 (16): p. 2183-2190.
[31] Tsionas, E. G., Inflation and productivity in Europe: an empirical investigation. Empirica, 2003. 30 (1): p. 39-62.
[32] Bulman, T. and J. Simon, Productivity and inflation. 2003: Reserve Bank of Australia Sydney, Australia.
[33] Mahadevan, R. and J. Asafu-Adjaye, The productivity–inflation nexus: the case of the Australian mining sector. Energy economics, 2005. 27 (1): p. 209-224.
[34] Mahadevan, R. and J. ASAFU-ADJAYE, IS THERE A CASE FOR LOW INFLATION-INDUCED PRODUCTIVITY GROWTH IN SELECTED ASIAN ECONOMIES? Contemporary Economic Policy, 2006. 24 (2): p. 249-261.
[35] Sbordone, A. and K. Kuttner, Does inflation reduce productivity? Federal Reserve Bank of Chicago Economic Perspectives, 1994. 18 (6): p. 2-14.
[36] Cameron, N., D. Hum, and W. Simpson, Stylized facts and stylized illusions: inflation and productivity revisited. Canadian Journal of Economics, 1996: p. 152-162.
[37] Freeman, D. G. and D. B. Yerger, Inflation and multifactor productivity growth: a response to Smyth. Applied Economics Letters, 1998. 5 (5): p. 271-274.
[38] Hondroyiannis, G. and E. Papapetrou, Temporal causality and the inflation-productivity relationship: evidence from eight low inflation OECD countries. International Review of Economics & Finance, 1998. 7 (1): p. 117-135.
[39] Papapetrou, E., The inflation and productivity relationship in Poland. Journal of Economics and business, 2003. 2003 (2): p. 11-33.
[40] Gujarati, D. N., Basic econometrics. 2009: Tata McGraw-Hill Education.
[41] Granger, C. W., P. Newbold, and J. Econom, Spurious regressions in econometrics. Baltagi, Badi H. A Companion of Theoretical Econometrics, 1974: p. 557-61.
[42] Freeman, R., Labour productivity indicators: Comparison of two OECD databases productivity differentials & the Balassa-Samuelson effect. Retrieved from OECD Statistics Directorate Web site: http://www. oecd. org/dataoecd/57/15/41354425. pdf, 2008.
[43] Engle, R. F., D. F. Hendry, and J.-F. Richard, Exogeneity. Econometrica: Journal of the Econometric Society, 1983: p. 277-304.
[44] Engle, R. F. and C. W. Granger, Co-integration and error correction: representation, estimation, and testing. Econometrica: journal of the Econometric Society, 1987: p. 251-276.
[45] Liew, V. K.-S., Which lag length selection criteria should we employ? Economics bulletin, 2004. 3 (33): p. 1-9.
Cite This Article
  • APA Style

    Rohini Dunuwita Liyanage. (2021). Impact of Inflation on Labour Productivity in Sri Lanka. International Journal of Economic Behavior and Organization, 9(3), 57-70. https://doi.org/10.11648/j.ijebo.20210903.13

    Copy | Download

    ACS Style

    Rohini Dunuwita Liyanage. Impact of Inflation on Labour Productivity in Sri Lanka. Int. J. Econ. Behav. Organ. 2021, 9(3), 57-70. doi: 10.11648/j.ijebo.20210903.13

    Copy | Download

    AMA Style

    Rohini Dunuwita Liyanage. Impact of Inflation on Labour Productivity in Sri Lanka. Int J Econ Behav Organ. 2021;9(3):57-70. doi: 10.11648/j.ijebo.20210903.13

    Copy | Download

  • @article{10.11648/j.ijebo.20210903.13,
      author = {Rohini Dunuwita Liyanage},
      title = {Impact of Inflation on Labour Productivity in Sri Lanka},
      journal = {International Journal of Economic Behavior and Organization},
      volume = {9},
      number = {3},
      pages = {57-70},
      doi = {10.11648/j.ijebo.20210903.13},
      url = {https://doi.org/10.11648/j.ijebo.20210903.13},
      eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.ijebo.20210903.13},
      abstract = {Inflation and labour productivity has been a longstanding research interest in developed and industrialized countries compared to developing countries, showing the importance of concept related to efficiency and competitiveness when the economies are growing. Capacity of the economy in Sri Lanka doubled within six years during the period from 2006 to 2012. However, aging populations, raising dependency ratio, lower labour force participation rate, are emphasized as labour force related problems that required to address. Further Sri Lanka has been identified as a country that stuck in middle income trap for a long period of time due to less economic diversification, inelastic and inefficient labour market. In these context, educational reforms to address the skills and knowledge gap in labour market demand and supply, improvement in labour productivity and efficiency-based productivity, are identified to overcome the challenges. This study explores the impact of inflation on labour productivity in Sri Lanka during the period from 2006 to 2020 by employing, univariate Vector Auto Regression model for secondary, monthly seasonally adjusted data. Model was estimated subject to conducting basic test to check unit root and cointegration of the variables. Lag order 16th for the model, was selected subject to lag length criteria, significant of the lag exclusion test, stability test and residual tests to consider the appropriateness of the model. As per the dynamic analysis of the results, labour productivity is strongly impacted by variable itself. Accordingly, previous period realization of labour productivity is associated to increase labour productivity in current period significantly by 0.54 per cent. Further, there is a negative relationship between inflation and labour productivity in short run. Accordingly, one percent increase of inflation in previous two months, are associated to decrease labour productivity by 0.014 and 0.324 on average ceteris paribus. Inverse relationship between variables is supported with the findings in empirical evidences. As per variance decompositions, labour productivity and inflation are forecasted by itself. Therefore, labour productivity and inflation are identified as strongly endogenous and strongly exogenous variables respectively. No granger causality relationships are existed between variables. Negative relationship between inflation and labour productivity is identified that imply, inflation can be effectively used in achieving higher labour productivity. Therefore, suggestions are made to keep a lower level, single digit inflation in enhancing labour productivity.},
     year = {2021}
    }
    

    Copy | Download

  • TY  - JOUR
    T1  - Impact of Inflation on Labour Productivity in Sri Lanka
    AU  - Rohini Dunuwita Liyanage
    Y1  - 2021/08/19
    PY  - 2021
    N1  - https://doi.org/10.11648/j.ijebo.20210903.13
    DO  - 10.11648/j.ijebo.20210903.13
    T2  - International Journal of Economic Behavior and Organization
    JF  - International Journal of Economic Behavior and Organization
    JO  - International Journal of Economic Behavior and Organization
    SP  - 57
    EP  - 70
    PB  - Science Publishing Group
    SN  - 2328-7616
    UR  - https://doi.org/10.11648/j.ijebo.20210903.13
    AB  - Inflation and labour productivity has been a longstanding research interest in developed and industrialized countries compared to developing countries, showing the importance of concept related to efficiency and competitiveness when the economies are growing. Capacity of the economy in Sri Lanka doubled within six years during the period from 2006 to 2012. However, aging populations, raising dependency ratio, lower labour force participation rate, are emphasized as labour force related problems that required to address. Further Sri Lanka has been identified as a country that stuck in middle income trap for a long period of time due to less economic diversification, inelastic and inefficient labour market. In these context, educational reforms to address the skills and knowledge gap in labour market demand and supply, improvement in labour productivity and efficiency-based productivity, are identified to overcome the challenges. This study explores the impact of inflation on labour productivity in Sri Lanka during the period from 2006 to 2020 by employing, univariate Vector Auto Regression model for secondary, monthly seasonally adjusted data. Model was estimated subject to conducting basic test to check unit root and cointegration of the variables. Lag order 16th for the model, was selected subject to lag length criteria, significant of the lag exclusion test, stability test and residual tests to consider the appropriateness of the model. As per the dynamic analysis of the results, labour productivity is strongly impacted by variable itself. Accordingly, previous period realization of labour productivity is associated to increase labour productivity in current period significantly by 0.54 per cent. Further, there is a negative relationship between inflation and labour productivity in short run. Accordingly, one percent increase of inflation in previous two months, are associated to decrease labour productivity by 0.014 and 0.324 on average ceteris paribus. Inverse relationship between variables is supported with the findings in empirical evidences. As per variance decompositions, labour productivity and inflation are forecasted by itself. Therefore, labour productivity and inflation are identified as strongly endogenous and strongly exogenous variables respectively. No granger causality relationships are existed between variables. Negative relationship between inflation and labour productivity is identified that imply, inflation can be effectively used in achieving higher labour productivity. Therefore, suggestions are made to keep a lower level, single digit inflation in enhancing labour productivity.
    VL  - 9
    IS  - 3
    ER  - 

    Copy | Download

Author Information
  • Department of Economics, University of Colombo, Colombo, Sri Lanka

  • Sections