WAGES AND PRICES III How N.Z. performs against its rivals

Press, 23 April 1979, Page 16

WAGES AND PRICES III How N.Z. performs against its rivals

Bv

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 third of four articles in which he reports his findings. The final article will appear tomorrow.

The first two articles in this series reviewed the course of wages and prices in New Zealand during the last 10 years. In this article, New Zealand wages and prices are compared with those in other countries of the Organisation for Economic Co-operation and Development — New Zealand’s partners and competitors in trade. The implications for New Zealand’s balance of payments of allowing domestic costs to move out of line with those in other O.E.C.D. countries are briefly discussed. Table 4, compiled mainly from statistics issued by the International Monetary Fund, shows movements in consumer prices. It will be seen that only the United Kingdom shows a bigger increase in retail prices than

New Zealand during the last 10 years. Germany shows the smallest increase. Retail prices of these two countries, and of New Zealand, are shown in the first graph on this page.

New Zealand — unlike Britain which is now drawing most of its oil from the North Sea — is still heavily dependent on outside sources for petroleum products. As Table 3 (printed with Saturday’s article) showed, Britain’s terms of trade have improved in the last five years, while New Zealand’s have declined. Table 5 shows trends in wages or earnings in the same six countries — not all the figures being strictly comparable, but the nearest that the I.M.F.’s statisticians can devise. New Zealand is in the middle of this group,

with Japan at the top and the United States at the bottom. Both Japan and the United States have been able to improve their terms of trade, in spite of the O.P.E.C. efforts to keep their oil revenues buoyant. Pay rises in countries with improving terms of trade are, in effect, paid out of increased export earnings. Few New Zealand exporters

are in the comfortable position of being able to pass on their higher wage costs in the form of higher prices to overseas buyers; most are “price-takers.” New Zealand’s terms of trade are “given,” and New Zealand must accommodate its internal economy to world trends. The New Zealand dollar has been devalued three

times, and revalued once since 1974, against the “basket” of currencies used to determine the New Zealand exchange rate. The cumulative effect of these fluctuations in the exchange rate has been a devaluation of 28 per cent against the SUS, over a period when our terms of trade have slipped by 16 per cent. Yet the New Zealand balance of payments has continued to show a deficit over the last five years — an indication of continuing “disequilibrium,” in the economists’ jargon. Successive devaluations of the currency have not eliminated this deficit, in apparent defiance of the principle that devaluation provides an incentive to exporters and a check on importers.

But devaluation on its own can never reverse a

persistent deficit: It needs to be reinforced by other measures, such as firm control of the money supply, active encouragement of workers and entrepreneurs to switch from importing to exporting, inducements to consumers to use local rather than imported products. Perhaps the most important of all the essential accompaniments to a devaluation is wage restraint. The present New Zealand system of wage-fixing virtually ensures that the potential benefits of devaluation are eroded before devaluation has a chance to work. In the concluding article in this series I shall outline a new approach to wage-fixing which 1 consider would make the next devaluation work — or, if adopted soon enough, postpone the next devaluation indefinitely.

“International Financial Statistics” (1.M.F.); New Zealand Department of Statistics; United Digest”; Australian “Monthly Review of Business Statistics.” Kingdom Central Statistics Office “Monthly

TABLE 4: CONSUMER PRICES Aust. Germany Japan N.Z. U.K. U.S. 1969 ... 100 100 100 100 100 100 1970 .. 104 103 107 107 106 106 1971 .. 110 109 114 118 114 110 1972 .. 117 115 119 126 122 114 1973 .. 128 123 133 136 133 121 1974 147 132 166 152 155 134 1975 ... 170 139 186 174 192 146 1976 .. 192 146 203 203 224 155 1977 .. 216 151 219 232 259 165 1978— March .. 226 154 223 250 271 171 June .. 231 156 228 257 279 176 Sept. .. 235 156 229 265 284 180 Dec. .. 241 n.a. 230 271 290 183 TABLE 5: WAGES OR EARNINGS Aust. Germany Japan N.Z. U.K. U.S. 1969 .. JOO 100 100 100 100 100 1979 .. 110 115 116 112 112 105 1971 123 117 134 139 117 106 1972 132 128 154 152 133 114 1973 119 141 184 171 151 122 1974 183 155 229 191 178 132 1975 216 168 268 217 225 142 1976 247 .178 302 247 261 154 1977 .. 273 191 332 277 285 169 1978— March . . 291 194 346 290 308 178 June . . 294 200 356 293 326 180 Sept. 296 205 362 312 330 184 Dec. 307 n.a. n.a. 315 340 198 Sources: