Dialogue: Simple rule the essence of fair wage

By KEITH RANKIN*

Don Brash has been mischievous in suggesting that if wages rise by the rate of inflation then he will have to act to push interest rates up. A careful listening to his words suggests that he is being intentionally ambiguous.

While the Reserve Bank Governor is aware that wages should rise regardless of inflation, he would feel more comfortable if wage rises were minimal. So, in an act of brinkmanship, he threatens to derail the nation's economy as a kind of punishment for organised labour's reduced timidity.

How much should wages increase by? There is a very simple rule, from which Dr Brash has diverted our attention. The rule is that, by default, all our money incomes should rise by the same percentage rate. It never quite happens that way, of course. But that's the status quo.

When media such as the Herald report the latest gross domestic product (GDP) figures, they usually report "real GDP" figures that are corrected for inflation but not for population change.

When we are trying to estimate a fair wage increase, we need to do the opposite. We must use money GDP rather than real GDP. That means we should ignore inflation. But we do need to adjust for population. The important economic statistic is called "nominal GDP per capita."

For the 1999-2000 financial year, nominal GDP was estimated in the Budget to have been 4.9 per cent up on 1998-1999. For 2000-2001, GDP is forecast to rise another 5.5 per cent. With the population increasing by about 1.2 per cent a year, then - ignoring inflation - the average slice of New Zealand's economic cake is rising at about 4 per cent a year (from $27,000 to $28,000).

That means average New Zealanders should get pay increases of 3.7 per cent to maintain pay relativity. Next year there should be another increase, of 4.3 per cent.

Given that there has been a rise in inflation from 1.5 per cent to 2 per cent, and much of that rise was caused by external factors such as oil prices, we accept that the real purchasing power of a 3.7 per cent wage increase will be quite low.

Nevertheless, if there is not a wage increase in excess of the inflation rate then average workers will continue to fall behind other groups. The principle that wages should rise with GDP is well-entrenched. For example, we had a number of debates in the 1990s about whether benefits and pensions should be adjusted to prices or to wages. The understanding has been that money wages should rise in line with money GDP (that is, nominal GDP per capita) and that, therefore, wage rises would in most years exceed the inflation rate.

When we had the big debate over whether the Shipley Government "cut" pensions, the Opposition insisted that this was a pay cut. What Labour meant was that retirement income had been cut relative to wages and profits.

There are only three situations in which one group of people can legitimately claim a bigger pay increase than others. None of these has anything to do with inflation.

One is that a group's contribution to GDP growth has been unusually high.

This is the productivity argument that was used in the late 1980s to deny most workers adequate wage increases. When, in the 1990s, worker productivity was rising faster than wages, those 1980s advocates of productivity-based wages fell silent.

The second reason is bargaining power. In practice, it is almost always bargaining power and almost never productivity that enables the incomes of certain people or groups of people to rise faster than GDP per capita. In the 1970s the bargaining power lay with organised labour. Following the 1980s reforms bargaining power shifted dramatically in favour of capital.

Some would argue that that was the real purpose of the reforms.

The third reason is called indexing, where "dependants" - people making no direct contribution to the market economy - should be treated as if they had the same claims for a share of the economic cake as a contributing group such as wage-workers. On that basis, benefits were once tied to wages. The understanding was that both benefits and wages would rise by more than the inflation rate.

If wage-workers accept a pay rise of less than 3.7 per cent this year they will, once again, be conceding bigger shares of the economic cake to those who are far more prosperous.

Dr Brash should openly acknowledge that workers are due a wage round that at least maintains pay relativity with the owners and managers of the nation's capital stock.

* Keith Rankin teaches economics at Unitec.