Freeze, Budget aimed at lowering wages

Press, 19 August 1982, Page 1

Freeze, Budget aimed at lowering wages

PA Wellington The Government made it clear last evening that the main thrust of its wage-price freeze and Budget was aimed at lowering real wages.

The Minister of Energy (Mr Birch) outlined the Government's objectives for the economy in an address at Dunedin, and advocated a rise in productivity or a level of price increases higher than wage rises. iMr Birch told a University of Otago seminar: “I hardly need emphasise that a fall in real wages can be achieved by allowing prices to rise faster than money wages.” “Economic studies have shown that a stimulus to aggregate demand, to raise employment and output growth, would not on its own restore high levels of employment unless accompanied by a fall in the real wage — that is, prices rising faster than money wages, or productivity rising faster than the excess of money wage growth over price increases.” The enforced wage-tax

trade-off implemented in the freeze and Budget '’is a bold attempt to effect this kind of result,” he said. Mr Birch asserted that people were being paid a real wage which kept a significant proportion of the labour force out of work. “There is evidence of considerable excess growth in real wages in recent years," he said. “Real hourly gross earnings rose 7 per cent from 1977-78 to 1980-81 at a time of developing world recession and rising unemployment.” More jobs would be available if those in employment accepted lower real wages. Real wages now being paid meant that employers were not able to buy- labour and produce at truly competitive rates. There should be a greater

willingness to accept temporary declines in real wages. Mr Birch maintained. It was inescapable that “one cannot achieve rising employment and rising real wages in the face of little or no growth in aggregate real income. Protection of the jobs and real wages of employed labour can only throw the’ adjustment on to the employed.” “The Government cannot assist by expanding demand because the inevitable result is increased pressure on inflation and the balance of payments. In this sense, excessive real wages are a constraint on our capacity to fully use available labour and resources.” A “more flexible relative wage structure, coupled with greater willingness to accept temporary declines in real wages,” would allow income to be varied without high

levels of unemployment or business failure.

Voluntary adjustments inreal wages were “not unheard of,” Mr Birch said.

"In Detroit; for example, General Motors and Ford workers have forgone wage rises for greater job security. In May this year, meat workers at Ocean Beach in Southland are reported to have agreed to a reduction in gross wages to save the plant.”

Mr Birch warned that a risk inherent in the Government’s enforced wage-tax trade-off was that "the expansion in the public sector deficit arising from the personal income tax cut will not be offset by increased private domestic savings, and therefore result in an excessive expansion in aggregate demand at the further expense of the balance of payments.”

The wage-price freeze was “clearly designed to break inflationary expectations,” Mr Birch said. “To be successful in reducing inflation the Government recognises that it will need to be accompanied by firm restraint on fiscal and monetary policies, otherwise there will simply be a renewed and possibly worsened inflationary situation when the freeze is lifted.”

Economists generally agreed that two ingredients were essential in tackling inflation. Mr Birch said the ingredients were:

• A steady and persistent reduction in the rate of monetary growth.

• A change in community expectations and the attitudes of parties to institutionalised wage and price setting so they anticipate lower rates of inflation.