Government?s 4.5 percent pay increase to civil servants could set a benchmark for wage agreements throughout the economy, according to economist Craig Simmons.

The increase, which is above the rate of inflation, reflects ?inflationary expectations? in an overheated economy, Mr. Simmons said.

?It may set a benchmark for wage agreements throughout the economy. In that sense one would have concerns about that since the public sector is a large employer of labour,? he said.

?So there are potentially inflationary implications. Inflation can be started by a number of factors ? some come from the demand side of the economy and I think the source of the inflation is a consequence of an overheated economy.

?If the economy is overheated, that suggests that there is excess demand and excess demand results in a rise in prices. Sometimes these effects are one off and they don?t work their way into the labour market.?

Noting that wages in the blue collar sectors have not been keeping up with inflation in the private sector, he said that unions of blue collar workers may want to use the public sector increases as a benchmark for their own negotiations.

?I would imagine that the blue collar sectors will be using this 4.5 percent increase as a benchmark since one can argue that the increase has in it expectations of inflation and those expectations I would think are in excess of three percent nowadays given the average rate for the year. So in fact there is a small percentage allowance for productivity and real gains. But that?s because there?s a large expectation of inflation in that increase.?

He added: ?Let?s assume an inflationary expectation of 3.7 percent. That would suggest a real improvement in the pay package of less than one percent. And that is, in fact, unfortunate because of the large inflationary component.

?It is a big deal in the light of the fact that inflationary expectations are increasing.

?It means now that people will begin to incorporate a higher inflationary expectation into prices, rents, profits, the works and then it becomes a self fulfilling prophecy and that initiates a new round of higher expectations. But again all of this is coming from the fact that the economy is overheated and therefore is to be expected.?

Mr. Simmons added that it was not altogether clear whether other unions had the strength to negotiate a similar pay increase.