Facts of the matter: The year ahead - unusual times


We are in unusual times. The economy is growing strongly yet deflation (falling prices) is on the cards.

By Bill Rosenberg

 

There are still serious problems in other developed economies which are creating great hardship for working people and could bite us through falling demand for New Zealand exports, but at the same time contribute to falling prices. Employment in New Zealand is growing strongly, but unemployment is still much too high.

It is good that the Reserve Bank has stopped raising its Official Cash Rate. That has helped bring down the exchange rate which is still far too high. Interest rate reductions would help bring it down further, but the Reserve Bank would need to take other action against speculation in housing and in financial markets.

Deflation is not necessarily a good thing. It is to be feared when an economy is contracting, people are losing their jobs and businesses are closing. That can end in a downward spiral that only government action can fix by spending financed by printing money (“quantitative easing”) or borrowing. While everything is not right we are certainly not in this situation. But neither can we just sit back and relax.

Falling prices aren’t of much benefit if incomes fall too or rise very slowly. For New Zealand workers, there is a lot of catching up due. The market economy’s productivity has grown faster than real wages (wages adjusted for price increases) since the bottom of the recession in 2009. The wages share of the nation’s income fell over that period from 51.2 per cent to 50.0 per cent.

Public sector workers are especially due for a catch-up. In the year to December 2014, the pay rates of healthcare and social assistance workers went up only 0.7 per cent according to the Labour Cost Index, falling behind the 0.8 per cent increase in prices measured by the Consumer Price Index. Central government administration, defence and public safety workers’ pay rates rose 1.3 per cent and education and training only 1.0 per cent, compared to 1.8 per cent for the private sector. Pay rates of all public sector jobs except in electricity, gas, water and waste services have fallen behind inflation since June 2009.

And that’s only average wage increases. People on lower incomes have tended to get lower increases. The difference between the median (middle) wage and the average wage is growing. In addition, there are big pay equity issues, demonstrated by the aged-care workers’ case that women are systematically underpaid in that sector.

Low-income households have also seen faster price increases than higher-income households. Part of that is increasingly unaffordable housing, especially in Auckland and Christchurch. Prices need to be tamed, but affordability also needs higher incomes.

What is holding pay rises back? It is obvious for government-funded employers: government policy. For all workers, unemployment at 5.7 per cent or 143,000 people, continues to be high for New Zealand, especially with the economy growing at its current rate. This is partly caused by welfare policies which push people into work when there are not enough jobs – and certainly not enough decent ones. The Reserve Bank described the situation in its December Monetary Policy Statement as: “some excess labour supply remains, with elevated net immigration and high labour force participation boosting labour supply”. Employers are also using immigration to avoid training needs and paying higher wages. And finally, of course, the Government has over several years weakened collective bargaining and with it workers’ bargaining power. While only 2 per cent of workers on collective agreements received no pay rise in the year to June 2014, 52 per cent of those not on a collective received no pay rise.

With lower inflation and lower incomes, debt (such as mortgages) and interest rates get harder to pay off. Because we have such low inflation, real mortgage and credit card interest rates (interest rates after taking account of expected inflation) are as high and higher than they were during the mid-2000s. Historically, inflation is an important way that people and governments dig themselves out of indebtedness. New Zealand as a whole has high debt levels that need to reduce. It is harder to do in times of low inflation.  

You can read more about this in the January 2015 CTU Economic Bulletin, available at http://union.org.nz/economicbulletin164

 

This article is from the March 2015 issue of the PSA Journal. You can read back issues of the Journal by clicking here.