WAGES AND PRICES II Earnings, taxes and purchasing power

Press, 21 April 1979, Page 14

WAGES AND PRICES II Earnings, taxes and purchasing power

By

NORMAN MACBETH

Mr Macbeth, an economic consultant, was commissioned by the New Zealand Employers’ Federation to make a study of wage inflation and its implications for the economy. This is the second of four articles in which he reports his findings. A third article will appear on Monday.

The first article in this series traced the course of wages and earnings over the last 10 years, and arrived at an estimate of $155 a week for the current average weekly earnings. After tax, a married man’s take-home pay would be $129.

The graph entitled “Earnings and prices” shows average earnings, as revealed by the Labour Department’s six-monthly surveys; prices (Consumers’ Price Index): and “Real ea rings after tax’* — average earnings, less tax, deflated by the C.P.I. Real earnings after tax are now about 22 per cent above their level 10 years ago. In other words, the average take-home pay today buys only 22 per cent more than it did in 1969, in spite of the huge increase — to nearly four times its 1969 figure — of the pre-tax pay cheque in the meantime.

On his April, 1969, earn-

ings of $41.90 the average worker (married man, two children) was paying $3.98, or 9.5 per cent, in tax. Today, on earnings of $154.72 he is paying $26.10, or 16.9 per cent, in tax. The proportion has been higher — up to 19.6 per cent in 1975. Is it any wonder that aircraft engineers are resisting the taxation of their travel allowance, hitherto tax-free? Or that trade unions are increasingly looking at the after-tax value of employers’ wage offers? From the employer’s point of view, it makes sense to offer a worker a $4 a week travel allowance (so long as it remains non-taxable) instead of a $5 a week increase in his wage. In the higher salary (and tax) brackets, a rapacious executive demanding a $4OOO a year salary increase will be better off to settle for the use of a company car and forgo his — taxable — pay rise.

To the extent that these attempts to deprive the Government of revenue by (more or less) legal means are successful, the more revenue the Government has to find from other sources, such as higher rates of income tax. The higher rates of tax encourage more workers and employers to find ways of avoiding them; and so the spiral continues. The tax bite, however, has a much smaller effect on what the pay packet will buy than does the inflationary impact of pay increases. The most recent work on the relationship between wages and prices has been done by Professor B. P. Philpott, Macarthy Professor of Economics at Victoria University.

Professor Philpott has calculated that a 10 per cent wage rise leads to a 6 per cent increase in the C.P.I. after a six-month lag. (A wry thought for those whose marginal rate of income tax exceeds 40c in the •$: a 10 per cent salary increase will leave you no better off six months hence if everyone else gets the same increase.)

So far I have made no mention of labour productivity. Obviously, if a worker produces 10 per cent more after a pay rise of 10 per cent the firm which employs him is able to hold its prices at the old level without reducing its profits. Unfortunately, productivity increases in New Zealand have fallen well short of wage in-

creases over the last decade.

Productivity — as measured by the volume of production per worker — has risen in 10 years by a mere 21 per cent: earnings have almost quadrupled and prices have almost trebled. Other countries which recorded modest rises in productivity have mostly shown much less spectacular increases in prices. In the United States, for instance, labour productivity rose 14 per cent in the same period and retail prices rose 84 per cent. The Philpott “model” of the economy allows productivity gains as an offset against wage increases; but productivity has been static or declining in recent years. The full impact of wage increases in New Zealand is apparent in the C.P.I. Retail prices are affected also by the prices of ira : ports. Higher costs of imported fuel, for instance, are reflected eventually in the costs of virtually every factory product and every service provided in New Zealand. If New Zealand exports are being sold abroad at higher prices the country as a whole can afford the dearer imports, and a steeply-rising price level is not so alarming. Alas, the upsurge of fuel prices in the last five years has not been matched by comparable increases in export prices. The terms of trade are still well below their pre-1974 levels. (The terms of trade are the ratio of export prices to import

prices; a figure above 100 represents an improvement in the terms of trade since the base date, and conversely). Of New Zealand’s five mam markets and trade competitors, only Australia has failed to regain its 1974 terms of trade. The figures for these two countries, and for Japan, the United Kingdom and the United States, are shown in Table 3, inset. That New Zealand has fared rather better than Australia in this respect in the last two years is prob-

ably because of the depressed level of prices tor Australia’s wool exports, and the greater dependence of Australia on imports from Japan, whose exports have increased in price more than most. Australia, however is much less dependent on imports, and on overseas trade, than is New Zealand. The next article in this series examines the implications for New Zealand's balance of payments of cost inflation at a time of depressed terms of trade.

TABLE 3: TERMS OF TRADE (1974 equals 100) 1974 1975 1976 1977 1978 Australia . 100 86 80 75 74 Germany . 100 104 105 100 104 Japan . 100 95 91 94 114 United Kingdom 100 124 122 124 132 United States . . 100 104 105 100 104 New Zealand . 100 74 79 83 84 Sources: International Financial Statistics (I.M.F.); Australian Bureau of Trade and Resources: New Zealand Department of Statistics.