Don Brash's pre-emptive strike to limit wage rises will have won him no friends in the trade union movement. If inflation is going up, why should workers not expect to be compensated when they negotiate pay increases? And as workplace law changes swing the balance of power away from employers towards unions, why would they continue to tolerate a situation which last year saw chief executives get more than triple the average 1.4 per cent wage increase? The answer, as unpalatable as it might seem, lies in the greater vulnerability of workers to the ravages of inflation.
Spiralling inflation extracts its greatest toll from those least able to weather sudden increases in interest rates. In such an environment, those with skills that are in demand can generally negotiate a wage rise that takes account of galloping inflation. Such is not the case with the unskilled. And they face a potential double-blow because fewer jobs are the consequence of a slowing economy.
The Reserve Bank Governor was, in fact, recognising that destructive possibility when he warned that wage increases would force him to raise interest rates. Such action would be necessary because one-off price shocks - most notably in petrol - already have inflation edging toward 3 per cent this year. That is the upper limit of the Reserve Bank's target range. Dr Brash can ignore the inflationary impact of one-off shocks under the bank's agreement with the Government. But he can turn a blind eye only if wage-setters do likewise.
Dr Brash has considerable justification for his nervousness. The muscle available to workers from October under the new employment relations law adds another element to the volatile scenario of a thriving export sector, a stalled domestic economy and a dollar under pressure from the large current account deficit.
Perversely, yesterday's statistics revealing a drop in the unemployment rate in the March quarter reinforced the potential for an inflationary surge. Even though the domestic economy is flat - and there may, in any event, be little capacity to pay higher wages - the low exchange rate has galvanised exporters, stimulating demand pressures.
Not all, however, is bleak. Petrol prices are likely to drop and a recovery in the dollar is expected to help reduce price pressure next year. Such an outcome would ensure that this year's inflationary surge was merely a spike. But if the dollar remains weak, inflation of 3 per cent or more may endure. In such circumstances, it would be asking rather too much of workers to forgo sizeable wage increases.
Dr Brash's pitch that the recent weakness of the dollar and the rise in world oil prices had simply made all New Zealanders poorer would lose any relevance. Workers may be convinced that they have to tolerate the one-off impact of rising petrol prices. But sustained higher inflation, and increased trade union power, would inevitably ignite a catch-up impulse.
Ideally, inflation and other national implications would be of less significance in wage-setting. The productivity and profitability of individual businesses would govern pay increases. However, the Employment Relations Bill, by resurrecting multi-employer agreements that smack of the old award system, is a giant step in the opposite direction. Such agreements also lay the foundation for trade unions to pursue jealous relativities, a suicidal step in a competitive economy.
Inflation, of course, also undermines international competitiveness. Its destructiveness on all fronts has made it the Reserve Bank's focus. For that reason, it will also always have an influence on wage-setting. Quite correctly and quite logically, Dr Brash has voiced his worries and indicated the disagreeable medicine that will inevitably follow any surge in wages.
It would be unfortunate, however, if his message blotted out yesterday's far more welcome economic indicator - a significant drop in the unemployment rate.
<i>Editorial:</i> Workers between rock and hard place
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