Keith Rankin's Thursday Column
17 August 2000
Yesterday, to the relief of just about everyone, Reserve Bank Governor did not raise the Official Cash Rate, the interest rate that 'tells' financial markets what interest rates should be. Also, and to the relief of many, the Employment Relations Bill was finally passed into law.
Dr Brash has warned workers not to seek wage increases as compensation for exogenous inflation (eg imported oil costs and tobacco taxes). To be fair, he also suggested that the recipients of profits and dividends should absorb petrol and cigar price increases rather than to seek reimbursement for them.
Brash's argument is based on the principle of "ceteris paribus" (the assumption that everything not being considered remains as it would otherwise have been). This principle, well known to economists, is not always understood by, for example, journalists who write about monetary policy.
Bearing this principle in mind, a careful reading of his words suggests that Brash is not opposed to workers getting a wage increase in excess of the inflation rate. Indeed, if employees are to maintain their share of the economic cake, they will need to get pay increases of between 3½ and 4 percent. What he is saying is that they should not seek an additional wage increase to compensate for present inflation being higher than predicted.
To illustrate the need for wage increases to exceed the inflation rate, it's useful to take a historical perspective. In 1900, the median weekly wage was about £1. Given that consumer prices increased 65-fold during the 20th century, if workers had got full compensation for inflation but no other wage increase, then the median weekly wage today would be just $130 per week, or $6,760 per annum. (GDP would still be as it is today; around $28,000 per man, woman and child.)
In fact, in 2000, pre-tax wages are four times higher than inflation-adjusted 1900 wages. The real after-tax wage today is three times higher than in 1900.
Inflation should have nothing whatsoever to do with the setting of wages. Indeed, as the long-term figures reveal, it doesn't. Rather, the main principle for setting wages should be that of 'fair shares'. Employees, employers and beneficiaries should all fair and stable shares of national income. Dr Brash does understand that.
Despite the status quo that each group should get pay increases relative to other groups, there have been long periods in which employee remuneration has fallen behind the payments made to the managers and owners of capital. To put it crudely, for most of the last half-century, capital has been winning the 'class war'.
>From the mid-1950s to 1968, there was no real increase in award wages, despite compulsory unionism and despite high rates of real economic growth. (There was however wage drift, with actual wages drifting well above award wages.) The de facto inflation-indexing system collapsed in 1968. The Arbitration Court refused to make a general wage order, despite accelerating inflation and the emergence of real unemployment. The aftermath was that the unions started to negotiate fair shares. Workers had a lot of catching up to do. Wage-led inflation in 1970-73 was an inevitable by-product of that catch-up process.
Through 1982 to 1997, wage growth fell behind inflation, and fell much more dramatically in comparison to the growth of interest, profit, rents, executive salaries and capital gains. At least, in 1998 and 1999, wage increases jumped ahead of inflation, almost keeping up with the growth of national income.
For at least 35 of the last 50 years, wage-workers have had cuts in their relative incomes.
It is imperative for New Zealand's social cohesion that wages fall no further relative to profits. Hence, the Employment Relations Bill is timely. The danger, however, is that, despite increased bargaining power, unions will be too meek, as they were in the 1960s. The ERB is just the start of a 21st century quest for fair income shares.
The ERB is going to be a headache for Don Brash, however. While the ERB gives labour more ability to match their capitalist bosses' income claims, it provides no mechanism to dampen inflationary profit claims. 'Capital' - meaning the managers and owners of the country's capital stock - has acquired a culture of demanding and getting ever-bigger slices of the economic cake.
Under the 1991 Employment Contracts Act, excessive payments to capital were offset by the diminished income shares being paid to labour. Now that labour has more power to match capital's excessive claims on the nation's income, classic demand inflation may take place. The conditions are in place for a repeat of the class antagonisms that we experienced in the first decade and a half of the 20th century.
The Reserve Bank, which did not exist in the 1900s, will feel compelled to act. Shoving interest rates up is not the answer though. That's the problem. Interest represents payments to the owners of capital. The solution is to talk down (or otherwise bring down) the unsustainable profit demands of organised business, allowing labour unions to negotiate fair income shares without seeming to initiate an inflationary spiral.
Governor Brash's comments are interesting for one other reason. In noting that exogenous price increases represent real costs that we all must bear, he is conceding that inflation is not, as Milton Friedman claimed, "always and everywhere a monetary phenomenon". That admission itself questions the intellectual foundations of the 1989 Reserve Bank Act. Some - maybe most - inflations are of a form that should not be treated by monetarist doctoring. That's not to say that monetary policy cannot suppress all inflations. Rather, for inflations that originate on the supply side of the economy, monetarist remedies cause much more damage than they alleviate.
Times are changing. We are discovering, belatedly, that inflation is a multi-headed beast that requires a more sophisticated level of understanding. In many cases, the best response to inflation is no response. For example, inflation may be an inevitable symptom of a process of realignment of income shares.
We cannot continue to use the inflation bogey to deny ordinary wage-workers fair shares of the nation's economic cake. Dr Brash should join Deputy Prime Minister Jim Anderton and make some blunt remarks to those organised business interests who seek increased income shares for themselves at the expense of the rest of New Zealand society.
© 2000 Keith Rankin
Thursday Column Archive (2000): http://pl.net/~keithr/thursday2000.html