High settlements strain economy—Brash

Press, 9 November 1988, Page 4

High settlements strain economy —Brash

High wage settlements over the last three years have placed more strain on the economy than the high exchange rate, the Governor of the Reserve Bank, Dr Don Brash, said yesterday. In a speech to the Wellington Chamber of Commerce, Dr Brash said the loss of competitiveness over the last three years could not be attributed directly to the exchange rate or monetary policy. “It is fundamentally a result of the rise in domestic costs over this period (since March, 1985), especially wages.” Using the period of the 1982-84 wage freeze as an example, he said real product wages fell by 10 per cent, while total employment grew by 5 per cent. “By contrast, in the period from May, 1985 to May, 1988, real product wages grew by 18 per

cent, and total employment fell by 4 per cent. “Wage rises of the magnitude experienced over the last three years are simply incompatible with the stance of monetary policy, and so lead directly to company collapses and unemployment,” Dr Brash said.

Relaxing monetary policy to allow these wage rises without loss of employment would have caused a resurgence in inflation.

In Australia, wage restraint in the last five years had led to real product wages falling 5 per cent, while total employment had risen 17 per cent. “Not all the employment growth can be attributed to wage moderation, but according to a recent Reserve Bank of Australia study, around half the employment growth is a direct result of the real product wage reduction,” he said. “Wage setters — and here I am talking about firms as much as unions — must learn the lesson. “In the current climate of low and declining inflation, firms must budget for very low wage increases if they wish to remain competitive.”