Editorial: Blanket wage increase just isn't on

For several weeks, trade union drums have been beating out a call for higher wages. The message, initially a vague call for the fruits of economic prosperity to be spread more widely, has now found the focus of a demand by the Engineering, Printing and Manufacturing Union. The union, the country's biggest, says it will accept no pay offer below 5 per cent in any sector until a key employment agreement covering metals industry workers is renewed. Its stand is supported by the Council of Trade Unions, which describes a 5 per cent increase as the bare minimum.

The union's blanket claim was accompanied by jibes that many employers were being "tight and greedy" and by the veiled threat of militant action if it was not met. But missing from the smoke and fury was a credible justification - simply because there is none.

Any wage rise should equate broadly to the rate of inflation plus productivity growth. Union claims that workers have been hard done by on that score are not backed by Statistics New Zealand data. These show average wage growth over the past decade of 3.1 per cent a year. In the same time, inflation has averaged 2 per cent and labour productivity has grown 1.3 per cent on a head count and 1.4 per cent on the basis of hours worked.

Last year's annual inflation rate of 2.7 per cent, plus little, if any, improvement in productivity, points to where the average wage increase should fall this time around. Some workers will, however, undoubtedly do much better out of today's economic climate. Some, indeed, already have. Over the past few months there has been strong wage growth in sectors that are not facing the constraints of international competition and a high exchange rate, and where there are particular skill shortages - the likes, for example, of the building industry and the public sector. Demand for construction workers helped to account for a 0.7 per cent increase in private-sector wage rates in the December quarter, the fastest in almost a decade.

In other instances, most pertaining to individual companies in which there have been surges in productivity, there is also justification for significant pay rises. But to suggest there should be a minimum 5 per cent increase across the board not only defies logic but would work counter to the best interests of many workers.

Employers who are dogged by ongoing productivity woes have only two sources for higher wages: they must either lift the price they charge customers or cut their profit margins. Both courses have consequences. Higher consumer prices could lead the Reserve Bank to lift interest rates, negating any benefit from higher wages. In any event, a slowing domestic economy means that option may not be tenable to many companies.

This suggests excessive wage demands would have to be absorbed within profit margins. In some cases, accommodation may be possible. But in others, they would restrict companies' ability to expand their operations, and their workforces, by investing in new plant and equipment. And in some cases, they could result in employers laying off workers.

Where economic fundamentals do not support a wage increase above a certain level, and where costs cannot be passed on to customers, this will be a company's only viable option. And that would torpedo what has been the big pay-off from the economic buoyancy - an unemployment rate of just 3.6 per cent.

At the moment, the pressures within the labour market, while strong, have not upset the economic applecart, whether by cutting profit margins below the bare minimum or pushing inflation outside the Reserve Bank's target range. The union's blanket demand for a 5 per cent wage increase threatens to undo that. It employs a blunt instrument to do a job that requires a considerable degree of refinement. For some, a sizeable wage increase is a realistic and justifiable goal. Across the board, it is out of the question.