THE PRESS FRIDAY, FEBRUARY 25, 1983. Wage policy in balance

Press, 26 February 1983, Page 14

THE PRESS FRIDAY, FEBRUARY 25, 1983. Wage policy in balance

Designing a system to set wages — the task ahead of the joint committee set up by the Employers’ Federation, the Federation of Labour, and the Government must take' account of the different, and sometimes conflicting aims of workers and their employers. For employees, wages are an income that they wish to increase. For employers, wages are a cost that they wish to contain. If wages are increased too quickly, employment may suffer as firms are forced to reduce staff to maintain profits; if wages are too low, employee dissatisfaction and industrial disruption may occur. Incomes are determined not only by wage rates, but also by the proportion of wages paid in income tax. The level of personal income tax, however, does not .alter the cost of labour to an employer. Accordingly, while taxation changes can be used to alter incomes, those changes will not have a direct bearing on an employer’s demand for labour. If the reduction of unemployment is a genuine goal — and it should be — this could be attained by linking wage increases to increases in the value of productivity. Such a system would avoid labour becoming more costly than the value of goods produced by each employee. A serious attempt to reduce unemployment would take account of the rapid escalation of labour costs compared with productivity over the last decade and contain wage increases for at least the next two years to below the increase in productivity. Linking wage increases to the growth in productivity would mean that wages would rise whenever real productivity . increased, or whenever the prices of domestically-produced goods increased. Wages would not change if consumer prices rose solely as a result of a decline in the terms of New Zealand’s overseas trade. Higher import prices, or lower returns for New Zealand’s exports, would mean that some goods would cost more; the consumer price index would rise; but wages would not automatically follow them. As a result a trade decline would mean lower real wages for employees in relation to consumer prices, but it would not affect the cost of labour. Under the existing system, where wages follow consumer price increases, a decline in the country’s terms of trade does not affect the purchasing power of wages, but it does increase the relative cost of labour to an employer. This has to mean that either the employer’s income — translated into profits for expansion or dividends for reinvestment — will decline, or that labour will be made redundant as it becomes relatively more expensive. Most businesses have several ways of making their goods or providing their services. By varying the amount of raw materials, energy machinery, brainpower, and elbow grease they use, they aim to produce at the least possible cost for the greatest possible profit. They will steer away from expensive labour if cheaper machinery can do the same job without industrial strife. The committee that has been set up to review New Zealand’s wage-fixing procedure will have to address itself to the question of whose income will alter when a change occurs to the country’s terms of trade. The advantage of linking wages to the value of productivity during a decline in the terms of trade is that unemployment caused by relative wage increases is avoided. The disadvantage for wage

earners is that real incomes are reduced, but the effect on wage-earners in universal and relativities between jobs remain unchanged without increasing the risk of lay-offs or redundancies. Linking wages to the value of productivity makes no allowance for changes in taxation. An increase, in taxes must be borne either by the wage-earner if wages are left unchanged, or by the employer if wages before tax are increased to maintain take-home pay. If an increase in taxation is borne by employers, the relative cost of labour increases and employment may decline. In recent years, the unions have argued that wage rates should be set to give a desired income after tax. The arguments for a minimum living wage, in particular, focus on wage increases for lower-paid workers. This is at odds with a link between wages and productivity. A redistribution of wealth — if agreed to as desirable — can be achieved more equitably, and with considerably less risk to employment, through taxation. Taxes on lower incomes could be reduced, or a “negative” income tax be introduced to supplement the wages of lower-paid workers by subsidies to achieve the take-home pay desired in the minimum living wage. This approach avoids increasing the cost to employers of hiring lower-paid workers and so reduces the risk to these workers of redundancy associated with higher wage rates. To raise the same total amount of revenue by taxation, however, the Government would need to increase taxation of middle or higherincome workers, or find alternative forms of taxation. The Minister of Finance, Mr Muldoon, showed a willingness before last year’s Budget to use tax rates as a redistributive tool as part of a total wage policy and such a system will no doubt be canvassed again by the present committee. Questions of relativity have become an important consideration in wage determination. If wages in each industry were linked to the value of productivity in that industry, then wage rates would rise fastest in those industries that could afford the higher wage rates. Industries with slow growth of productivity would not be forced to pay the higher wages gained in other industries and would not need to look to reducing their employment in an effort to maintain profits. Successful implementation of such changes in relativity would require the acceptance of both employers and unions. This could be forthcoming if the Government and the unions could agree on taxation policies that would ensure the real take-home pay of lower-paid workers is maintained. A successful wage-fixing system is tightly bound to the taxation system. Another question for the committee is whether wages should be set by some central authority, or whether free wage bargaining can continue. To a large extent this will depend on the amount of agreement between unions and employers on the guidelines by which wages are to be set. Free wage bargaining would be preferred by both parties and would allow adjustments to occur more easily than would central approach. Failing widespread agreement on the guidelines, however, a central approach might be required to bring about the essential changes. The.willingness of the parties to negotiate reflects an awareness of this.