10 PER CENT. “CUT.”

Waikato Times, Volume 110, Issue 18407, 14 August 1931, Page 2

10 PER CENT. “CUT.”

PRESENT SITUATION. I THE FUNDAMENTALS DISSECTED, i EFFECT ON INDUSTRIES. (By E. P. Neale, in the N.Z. Financial Times.) The stresses and strains of the preant economic situation are fundamentally attributable to the underlying tendency for prices to fall the world over. This tendency has been in evidence now for some ten years, and has been gravely accentuated during the past two years. The attendant difficulties have boon supplemented by other influences, many of them local in character. •»n countries like Australia and New Zealand which are producers for export of raw materials and foodstuffs'; the depression has fallen with special severity; partly because of their high per capita export trade, but even more because these raw materials and foodstuffs have manifested for many years j wi«ler price fluctuations than manu-! factured commodities. In the past; two years these two countries have had to face up to a heavy fall in the prices being realised by their staple exports by no means balanced by a scarcely perceptible fall in the prices they have had to pay for their imports. New Zealand’s position is much less s°rious than Australia’s; but nevertheless our figures, when they are examined, are startling enough. From April, 1929, till April, 1931. the index number for the prices in New Zealand nf exported commodities ( 1909 to 1913 prices equal 1000 fell from 16 *0 to 900; or 45 per cent —a fall which would have been even greater had the exchanges not moved “adversely” to New Zealand in the meantime. Assuming a constant volume of exports and of imports, this would be equivalent to a decline in New Zealand’s national income on account of overseas trade amounting to about £22.000,000 per annum; a decline which would be offset to the extent of about £1.000,000 annually by the fall that has taken place in the New Zealand prices nf imported commodities, the index number for which has fallen from 1467 to 14 42 during the past two xears, and would have fallen a further jo nr 15 per cent but for the recent adverse movements of the exchanges >nd last year’s tariff increases. Reduction In Volume of Imports. Actually, of course, the volume of Imports must be reduced to meet a situation such as that just described. This reduction is effected through credit rationing, higher internal interest rates, and more adverse exchange rates introduced by the banks as a protection to their London balances, which tend to suffer a serious drain whenever there Is a reduction in the usual excess of exports over imports shown by New’ Zealand’s trade. The reduction in the volume of imports thus effected is never quite adequate to offset the reduction that has taken place in export prices; and therefore there is always soma depletion of the London balances of the New’ Zealand banks in a time of depression, unless we happen at the time to be borrowing heavily in London. This depletion, however, does not usually matter very much, for export prices have a habit of recovering before the depletion has gone too far. The first effect of the onset of depression is then a loss of national income. This loss is concentrated first on the unsheltered industries producing for export. The loss of this income would not matter so much if the volume of imports could without serious consequences be immediately reduced by the necessary amount to offset the fall in export prices. Actually the loss of income and purchasing power sustained by the export industries destroys also to some extent the market for the articles and services both produced and consumed within New Zealand, and. therefore, reacts adversely on those engaged in New Zealand's sheltered industries, where it may even create a serious unemployment problem. Rise In Purchasing Power. When prices fall the purchasing power of £lOO automatically rises; so that borrowers find they have to give tack a greater purchasing power than they borrowed, while lenders receive an unbargained-for increase in purchasing power when they get their money back. It is clear then that a fail in prices is apt to benefit all those who live on fixed incomes. A fall in prices Just as surely penalises debtors, and this class happens to include the actively producing classes. Industrial profits fall, and sometimes vanish entirely. Many businesses cease to function. Unemployment tends to increase. A double purpose would be served by a special tax on recipients of fixed incomes from private investments excluding dividends, the amounts of which are not fixed . Prices and with them tlie cost of

living have fallen, giving in unearned r* al incremc— to persons drawing 1 \ed wages or salary. Money wages remaining steady, real wages have I -en purely on account of the rise in the purchasing power of the pound. In s' far as such a cut is applied to the salaries or wages of Government employees It also helps the Govcrnr ent to solve its problem of nalan ’ing the budget. The essential point is that a severe depression like the present one imposes a burden too great to be borne b> the few groups on whom it primarily falls. and the wages cut is one method of mitigating that burden, it is not inherently unfair in so far as the cut is merely sufficient to maintain a constant “real’’ as distinct from “money” level of wages. Tho Amount of the “Cut.” The position Is somewhat complicated by the fact that the weekly hours of labour have been substantially reduced during the last d»'code ami a half. Looking at the m.;t‘e. purely from the point of view’ of the worker, the most relevant tlgui? i« the Government statistician's index number of we--ku- adult male wa-'S This Im- ri-cn 66 p r cent, since 191 »; jo, .I'Siiiiiing that week I > adult male wages were at a reasonable level in 191 the fact that the Government s: Gist.m - index number for retail prices is now per cent, above July 191. |e\cS >• •••»!* I - justify a rut «»f 16 |».». .or ds-ut 9* per cent. Fhirhiihons in tlir cost nf living are i reason itde l».»>ls of wage adjust c ■ ■ ■ V Ig. . t :ner> above this level it is l . i .\r. - - in the »Alue of tho

productivity of the worker s labour. When the employer comes to look at the wages question, however, what is relevant to him is the fact that since 1914 the weekly hours of work have been reduced by 6 per cent., so that hourly adult male wages are not up 66 per cent, since 1914, but 76 per cent. In some industries, it is true, increased mechanisation and other improvements have rendered the worker able to yield a greater output in a shorter time, and even when regard is had to the capital sunk in more elaborate machinery, it may still be that in some industries the worker is worth more to his employer to-day during a short week than he was worth 15 years ago during a longer week. The position varies materially from industry to industry, and in those Industries where mechanism has not proceeded rapidly from the employer’s point of view what is relevant is rather changes in hourly adult male wages than in weekly adult male

wages. On this basis a very much greater cut is justified than the 9| per cent, cut above-mentioned. On the other hand, in certain industries where mechanisation has proceeded rapidly, without a greater corresponding increase of capital commitments, it may he that the employer can stand a greater reduction in working hours, or, alternatively, an actual increase in wages paid. Mitigating Factors. There are other complicating factors which may be introduced from the worker’s standpoint in justification of minimising the cut. There is the point that unemployment is much more acute just now than perhaps it has been for 40 years: therefore wages should be kept up, so as to enable the worker to provide against a rainy day. There are two answers to this argument. One is that never before in the history of New Zealand has there been such liberal provision for the unemployed. To this the worker may counter that he is in part paying for that provision through the unemployment levy, and in any case the work of the Unemployment Board has failed to inspire confidence in the adequacy of its provisions. The answer to this is to quote Professor Pigou in his work on “Unemployment,” where he shows that unemployment is largely a symptom of unduly high wages, and that the best solution of unemployment is not to tinker with palliatives, as our Unemployment Board is doing, but to deal with the problem fundamentally by reducing wages.

Another point advanced by the representatives of the workers is the undoubted fact that under present-day conditions when work is in short supply there lias been a tendency for specially skilful workers no longer to be able to command as large a premium for the special skill as was formerly possible, ami that the real rise in wages is less than the Government statisticians figures suggest. This is correct: but the cost of living as a basis for fixing wage rates loses much of its cogency in respect Io skilled workers, and in their case the money value of their productivity to the employer becomes specially relevant. On this basis a substantial cut in such wages is justified. Still a further point advanced was the inability of workers who had substantial commitments in respect of unpaid purchase money on their homes to make any adjustments to reduce these fixed obligations. This Is the point already adverted to of the increased real burden imposed on debtors by a falling price level. It falls on the worker as a debtor, not as a worker. “Will The Out Be Passed On?” The Prime Minister, in a statement some months ago rather dogmatically i asserted that a 10 per cent, cut in , wage rates would be reflected in a ■ substantially similar reduction in re- ; tail price values. The writer of this I article finds himself quite unable to I accept this statement. He believes I that the cut will be followed by a I drop in retail prices, but not that the : whole of that fall will be due to the | cut, nor that the fall in retail prices ; due to the cut will be anything like | the full 10 per cent, cut envisaged by I the Prime Minister.

The recent falls in prices have either directly or indirectly eaten seriously into the profits of many establishments, and It will be the case in many instances that the wages cut merely minimises losses that have already taken place. The cut may have the effect of preventing some of the undertakings concerned from going out of business altogether. The cuts will reduce the purchasing power of the wage-earners as a class, at least in the short run, and will therefore reduce the amount spent in establishments where it is customary for workers to spend their surplus incomes. This reduction of purcahsing power will, however, be offset by increased rece’ipts of other classes from dividends and other similar directions. Some, for instance, will go to swell the business reserves, and here It will probably create a demand for capital goods to enable plant to be extended, and it does not seem that there will be any reduction in aggregate purchasing power. If anything, the cut will increase aggregate purchasing power by cheapening production and thus assisting our products against oversea competition.

The cut represents merely an attempt to alter the distribution of our national incomp so as to prevent certain industries which are of national importance being entirely wiped off the slate. There is. therefore very

little in the contention that the cut represents a reduction in the national purchasing power. Actually it represents an attempt Io redistribute the. loss in national purchasing power that as already taken place. . In some of the sheltered industries substantial price falls may be expected as results of the cut. The manufacturers. etc.. concerned, knowing that wages have fallen, will be tempted to lower prices in order to maintain sales. In these Industries, too. on the whole, labour constitutes a much greater proportion of total production costs than in the case of (say' the farm industries, and a reduction in selling price will be facilitated by the cuts (but only to the extent that labour enters into the cost of production'. Moreover (since, by hypothesis, these sheltered industries have not suffered a great price fall in the I past they are less likely to the whole j to have sustained substantiol losses ' which will absorb any savings in I wages costs 1 than are the industries I more sharply exposed to overseas 1 price Influences.. In so far as these : industries provide the materials of , each other, prices may still further be I enabled to fall. The cuts should also 1 enable such industries in so far ns in tli*’ past they have been only partly i sheltered industries, better to compete with imports from abroad. Un ; employment should, therefore. on the whole, diminish in such industries; but it may actually increase in those 1 Industries which cater for the siir pluses in the expenditure of (he i In the unsheltered industries, par ti.-ularh those catering for export trade prices have alroad' dropped | (Continued in next column )

substantially under the influence of world conditions, and many undertakings, if not the majority, are nowoperating at a loss. In so far as the cut enables these Industries to buy their materials more cheaply from sheltered industries, the unsheltered industries will benefit. In so far as the cut enables them to hire the comparatively limited amount of labour they employ at reduced rates, they will benefit. In so far as the cut means reduced costs of processing, transporting, or otherwise dealing in farm products, it will reduce the margin between what, the New Zealand farmer receives and the London prices of his products, and thus increase his returns. The losses of farmers will be reduced. A profit may

even emerge. Less land al the margin of cultivation will go out than would have been the case had there been no cut. Our farm industries will produce more for the world's markets. Farm employment will therefore tend to be greater than if there had been no cut.

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