A Caymanian in his late 30s who worked for a large and reputable company on the island recently moved to another firm for a better wage, telling the Compass, the switch gave him a “better chance at being able to survive”.
His goals were fairly modest – to be able to afford rent and groceries, and perhaps save enough to eventually afford a down payment on his own home.
Amid record inflation, that has seen prices on basic essentials soar, many people are finding their pay cheques are no longer enough.
A look at the data shows that wages have not kept pace with prices. In real terms, we are all poorer than we were a couple of years ago, even if our take-home pay is the same or slightly higher.
Salary stagnation, price inflation
According to the Economics and Statistics Office, in the last three years, the median salary for the total population has remained stagnant at just under $3,000 a month.
Meanwhile the Consumer Price Index, which reflects the cost of key essentials including groceries, rent and electricity, increased by 13.1% between 2020 and 2022.
Government predicts a slowdown in inflation. That means prices will continue to rise, just at a slightly slower rate. The big picture, according to projections in government’s Strategic Policy Statement released earlier this year, is that by 2025, prices will have gone up by 25% compared with 2020.
That is more than double that which would have occurred under a normal inflation rate of 2% per year as determined by the US Federal Reserve Board.
Ralston Henry, a senior economist at Cayman’s Economics and Statistics Office, noted that “the spike in inflation began towards the end of 2021 due to supply chain issues and then continued through 2022 as the war in Ukraine led to an increase in commodity prices, especially oil prices”, which is a primary driver of inflation in Cayman.
The gap in growth rates has caused a marked erosion of consumer purchasing power and diminished real wages.
He cautioned against wage increases across the board, however, noting that the strategy of increasing interest rates, as the Fed has been doing for the past two years, was precisely to reduce consumer spending power and help bring inflation under control.
A real-term pay cut
The net result is that many people in Cayman have seen a real-term pay cut over the past few years.
To illustrate the loss of purchasing power, consider that in 2020, a basket of goods from the grocery store cost $100. This represents the ‘index’, according to the CPI.
For the sake of simple math, let’s consider a hypothetical individual earning $200 per month (some people do earn that little according to the 2020 Labour Force Survey, though they are likely to be part-time workers).
In 2020, that $100 basket of groceries cost 50% of that person’s monthly salary.
However, with prices inflating by 13% since then, at the end of 2022, that same basket cost $113.
Continuing with the example, during the same time, that person’s salary has not increased. That basket of goods will now cost them nearly 60% of their salary. This means that after completing their grocery purchases that person has less money left over to cover their other financial responsibilities.
The consequence is the same as if the price of goods never increased, but that person had received a pay cut. The increase in inflation without a commensurate increase in salary has the effect of a decrease in real wages.
The effect of this reduced purchasing power means that person’s standard of living will decline. Financial strain will increase as they struggle to make payments for existing and new expenses.
Money now key criteria for job seekers
The consequences of this significant gap between inflation and salary growth extend beyond individual households to impact businesses and the overall economy, including increasing competition in the job market for roles that provide better pay.
CML recruiter Will Koutney confirmed that he has seen a shift in the priorities of job applicants, moving away from emphasising the need for flexible work arrangements, immediately post-COVID, back to “money and career prospects”.
Henry of the ESO warns that rises in salaries may counteract the effort to decrease inflation as increases in income and consequent consumer spending could cause prices to go up.
Nevertheless, Koutney reports seeing companies increasing salary offerings due to a mismatch in supply and demand, especially in industries like financial services.
He noted that “companies have been forced to [increase salary offerings] by the market”, adding that in the last one-to-two years he has witnessed salary increases to the tune of “broadly 15-20%, broken down roughly into one-third cost of living and two-thirds market-driven.”
One local employer, who runs several franchises across the island, noted that his company increased employee wages in an effort to keep workers.
“We paid more for employee retention because we noticed that when we paid less, people bounce around more, so now we retain employees much more”.
He added that “smart companies will realise that there is competition, so if they pay more, they get the better employee”.
Koutney noted that there is “an abundance of opportunity for Caymanians to seek new employers and improvement in compensation, flexibility, benefits, and general quality of employer”.
According to a recent Labour Market Assessment, commissioned by the University College of the Cayman Islands in partnership with Workforce Opportunities and Residency Cayman and the Chamber of Commerce, 76% of firms are looking to hire over the next year and 88% of those future recruits are intended to be skilled and semi-skilled workers. Arguably, these roles would cost more to replace in the event of turnover since they require some form of training.
Minimum wage review implications
Despite the apparent willingness of some companies to increase wages, businesses have been generally slow to raise pay, with the median wage remaining the same.
One company manager who employs well over a dozen workers noted there is a point to which companies will not move past, saying that if they are compelled by the government to raise salaries much further it is the customers that will pay.
“Two things will happen: we’re going to raise prices because we’re not going to make less money, no company will do that; or we are going to replace lots of employees with machines.”
He added that if the to-be-determined minimum wage increase is deemed untenable by his company, “we will go to another country”. This employer pays more than the minimum wage for unskilled labour but is still close to that rate.
Lemuel Hurlston, chair of the Minimum Wage Review Committee, noted that its remit was “to account for changes that have occurred in the economy in the last seven years”. With the desire to be fair to the employee, he said, the committee will have to balance “the capacity of businesses to afford an increase”.
Economist Paul Byles, founder and director of FTS consulting, highlighted that the current minimum wage is “only .78 cents above the vulnerability [poverty] line” as recommended by “the National Assessment of Living Conditions which was completed more than 15 years ago”.
While it is possible that businesses that are able to hire work-permit holders can benefit from wage-based arbitrages, Caymanian employees don’t have the same flexibility.
To benefit from such arbitrage, companies source temporary labour from countries where the cost of living and value of currency are lower. These immigrant employees send portions of their pay cheque to their home country where they are able to extract much more value than they would have if their entire salary was spent in Cayman.
While this works out potentially for businesses and sometimes for those imported workers, it excludes Caymanian employees from those jobs because they can’t leverage that dynamic in the same way.
The company manager, who asked to remain anonymous, acknowledged that none of his employees are Caymanian.
Sunnier shores?
Employers and employees alike have only to consider if they are willing to accept and acculturate to a lower standard of living or if moving to another company with a higher pay or a country with a lower cost of living will be their next step.
For Caymanians seeking employment from local companies, who have nowhere else to move and who are not saving to send or spend money elsewhere, they may find that despite them not being able to afford to stay, that they have nowhere else to go.
For the young man who recently switched jobs, he didn’t speak of using his pay increase on luxury items or vacations; he spoke of it helping him to afford groceries and rent, and to perhaps one day better help him qualify to purchase a home.
Economists predict some relief by the end of 2023, as inflation growth is estimated to decrease by almost 4 points to 5.2%. That is the goal, according to the Strategic Policy Statement prepared by the Ministry of Finance and Economic Development and the Cabinet Office.
It will, however, be years before the country’s inflation normalises with the Ministry of Finance and Economic Development & Cabinet Office predicting a 2% inflation rate in 2026.
ESO Economist Henry, also cautioned that salary growth cannot match inflation growth since inflation is more volatile and companies cannot afford to increase salaries at the same pace; as such salary growth will always lag inflation.
The suggestion from the multiple experts consulted here, is that any increase in wages will likely be driven by workers themselves, demanding more or seeking new positions.
For how long employees can withstand the pain of that lag between inflation and salary growth will be determined by the decision each employee makes to remain in their salary range, or to seek out the “abundance of opportunities” referenced by CML recruiter Koutney and, in doing so, demand the market adjust.
The young Caymanian who recently switched jobs said that he has no regrets about his choice.
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