CTU Economic Bulletin No. 29

The August 2002 Bulletin includes comment on innovation and sustainable development, interest rates, wages, unemployment, new Reserve Bank governor, increase in union membership and health board deficits.

Comment

One of the policy commitments in Labour's manifesto for the recent election was to "initiate discussions between business, unions, and relevant government agencies to identify ways to lift the rate of productivity growth and to monitor and measure changes in productivity".

If New Zealand is to increase overall growth, then real incomes need to rise, and so will productivity. Productivity is usually measured as the average output produced by one or several inputs. So GDP divided by hours worked, or number of workers, or population are some examples. There is also total factor productivity that is often seen as the part of economic growth that remains unexplained once the contributions of capital and labour inputs to total output have been taken into account.

Like all these areas it is subject to considerable debate but many regard total factor productivity as reflecting technological progress and improvements in economic efficiency. There is also lots of discussion about measurement. For instance, measuring productivity in the service sector is difficult (a teacher's output is harder to measure than a dairy worker).

There is quite a large literature about the role of unions in relation to productivity. One of the main arguments is that unions act as a "voice" for workers and this has a positive effect on productivity.

But the authors of the study in 1984 What do unions do? Freeman and Medoff also said that "unionism is neither a plus nor a minus to productivity. What matters is how unions and management interact at the workplace". And a recent study from USA found that it was specifically in the unionised workplaces that employee involvement had the greatest impact on productivity.

The TUC in the UK has also released a report with the employer organisation (CBI) on productivity issues, especially investment in skill. As unionists however we know that with all forms of engagement between unions and management there are opportunities and risks.

The CTU has recently published a small booklet called Unions, Innovation and Sustainable Development where we discuss the high performance workplace that combines innovation, skill development, and workplace organisation to improve productivity.

In other policy, key sources of productivity enhancement that are often mentioned include - investment in physical capital, access to finance capital, investment in human capital (or we would say "in workers"), increased work effort or intensity, more efficient work practices including the ways in which work is organised, product market competition, conditions affecting growth in demand, and quality of managerial leadership.

As you can see, unionists would not be comfortable with some of these factors being emphasised. But given that increased intensity of work, decentralised bargaining, and flexible work practices imposed in the 1990s did not result in measurable productivity gains - then we have a good case to focus elsewhere.

A major UK survey identified a number of barriers to productivity improvements including: lack of training; lack of positive feedback; incorrect level of resourcing; stress; lack of development opportunities; lack of balance between work/life; low ICT investment and lack of financial incentives. At a macro or economy-wide level, debates about productivity inevitably weave into the overall drivers for economic growth and therefore include tax, inflation, capital formation, degree of competitiveness, research and development incentives as well as the importance of education and innovation.

This means that at a macro level we can't really disentangle productivity issues from a wider debate about a balanced approach to economic development that includes social development and awareness of environmental and cultural factors compared with a narrow and familiar business agenda of cutting taxes, lowering compliance costs and removing regulation.

Where there is strong employment growth, productivity can fall because GDP is not going up as fast as employment. Also, productivity can rise in periods of large-scale redundancies as was the case in the late 1980s in the manufacturing sector. So unions will not always support the circumstances that produce rising productivity. And it is not just investment in labour that is important. For instance, Treasury, the IMF, and economist Paul Dalziel have argued that the relatively low level of investment in physical capital explains a significant part of the growth and productivity gap between Australia and NZ.

But going back to Labour's policy. We don't know at this stage if this will end up being about analysis of productivity trends and drivers, some institutional arrangement where government, employers and unions come together to talk about productivity, or a number of sector or enterprise projects (or a combination).

But it is important that this process includes opportunities for all unions - public and private, large and small - to participate in some way and put your perspective.

One of the challenges of the period ahead is for unions to find a balance between maintaining an organising/campaigning/bargaining focus, continuing to push for improved employment-related legislation and other Government measures, and also push for a greater involvement in industry training, sector economic development strategies, the Growth and Innovation Framework and so forth.

Wages

Latest statistics on wages are, on the surface at least, a bit contradictory. Private sector wages (including overtime) as measured by the Quarterly Employment Survey show a 0.1% decrease in the May 2002 quarter and a 1.4% increase in the May 2002 year. For the public sector there was a 1.3% quarterly decrease and a 5% annual increase.

As Bancorp commented "There are obvious contradictions and confusions in this latest set of wages data, with the QES showing a large drop and the Labour Cost Index (LCI) showing a continuation of gains". Interestingly Bancorp also commented that the different measures both "point to the implication that it is no longer guaranteed that high capacity utilisation in the economy needs to result in accelerating inflation".

In other words, relatively low unemployment and higher skill shortages are not resulting in large wage increases to the extent of impacting on inflation.

As advised previously the QES wage figures are affected by compositional effects. On this occasion the main compositional change was an increase in part time employment. There was an increase in total employment of 1.7% in the May quarter, but the breakdown of this increase shows just a 0.9% rise in full time positions, against 5.5% increase in part time positions.

The LCI showed the largest number of annual wage increases since June 1996, with 54% of the survey increasing salaries and wages in the period. In mid-2001 wage increases were evenly spread across the categories, 0-2%, 2-3% and 3-5%, now, around 40% of increases are in the 2-3% and 3-5% ranges and just 20% in the 0-2% range.

For unions, it is also relevant to note that the LCI shows that where there were increases in wages in the last quarter (in any one quarter surveys show about 15% of employees get a wage increase), the average increase was 3.8%.

The QES shows average ordinary time hourly earnings for females was $17.00, 84.9% of the male rate at $20.03 with the combined average at $18.67. The private/public sector comparison in average ordinary time hourly earnings is $17.52/$23.14. Private sector ordinary time wages are up by 1.6% in the May 2002 year (which Deutsche Bank described as "paltry" but remember the compositional effect) and in the public sector, up 4.9%.

The LCI shows private sector ordinary time wages up 0.5% in the June quarter and 2.1% in the June 2002 year. The public sector figures are 0.4% for the quarter and 2.3% for the year.

Unemployment

The unemployment rate has decreased to 5.1%. This is the lowest recorded unemployment rate since the March 1988 quarter when it stood at 4.8%.

But 5.1% unemployed is still 101,000 people out of work, and if we include those not actively seeking work, the figure rises to 171,600. There are also 106,800 people who are underemployed (seeking more hours).

Employment growth was evident in full-time employment, which increased by 14,000 (1.0%) over the quarter. Over the same period, part-time employment decreased by 5,000 (1.2%). This appears to be at odds with the QES data but there are different survey methods and the Household Labour Force Survey figure is seasonally adjusted.

Over the year, the levels of full-time and part-time employment were up by 41,000 (2.9%) and 16,000 (3.9%) respectively. Hours worked rose by 2.4% in the June quarter and 4.2% over the June 2002 year. The working age population grew by 51,200 (1.8%) since the June 2001 quarter, an increase that can be partly attributed to a net gain in permanent and long-term migration of 26,000 over the June year. Unemployment was 11.0% for M?ori, 9.7% for Pacific peoples, 8.5% for the Other ethnic group and 3.7% for European/P?keh?.

Reserve Bank

The official cash rate was held at 5.75% on 14th August. Acting Governor Carr said that "for now, the prudent response is to pause, and to watch and wait". Comments from financial market economists are to the effect that the RBNZ is explicitly relying on a slowdown in the world economy flowing from global equity market weakness to cap domestic inflation pressures.

But the big news this month was the change of Governor. We can expect the new Governor Alan Bollard to be more pragmatic and less ideological than Don Brash when it comes to the application of monetary policy and also in terms of wider economic commentary. Don Brash gave various speeches on removing minimum wages, cutting benefits, putting time limits on benefit applicability and so forth.

However, we do not know what sort of Governor Alan Bollard will be. Time will tell. Certainly, he has been Treasury Secretary at a time when they have shifted to a more balanced approach and are more focussed on issues like economic transformation, an inclusive economy than the Treasury of the 1990s. In terms of the PTA (policy targets agreement), it makes sense to have a 1% - 3% or even 2% - 3% band which must apply in the medium term, and with wording that can stick.

After all in 1996, the wording in the PTA was changed to widen the band to 0-3%, and add text "so that monetary policy can make its maximum contribution to sustainable economic growth, employment and development opportunities within the New Zealand economy". In 1999 the words "and shall seek to avoid unnecessary instability in output, interest rates, and the exchange rate" were added. Getting words into the PTA and making them have a real effect appear to be two different things.

In a February 2000 speech, Don Brash noted that "once inflation expectations have fully adjusted, and have become well anchored, it may be feasible to reduce the variability of output slightly by being willing to tolerate a little more variability in inflation". There seems to be a general consensus that the time has come to put that sentiment into effect. In other words, growth and employment are more important than the occasional spike outside the 3% band.

Migration

There were 93,900 permanent and long-term arrivals in the year ended July 2002, up 22,800 or 32% on the July 2001 year. In contrast, there were 18,600 or 24% fewer permanent and long-term departures (59,300) in 2002. The overall result was a net migration gain of 34,600, compared with a net outflow of 6,800 in the previous year. The main contributors to this turnaround in net migration were non-New Zealand citizen arrivals (up 19,300), and New Zealand citizen departures (down 18,200).

There were net inflows from China (14,200), India (6,100), the United Kingdom (5,300), South Africa (3,200), and Japan and Fiji (both 2,300) in the year ended July 2002. Conversely, there was a net outflow to Australia of 13,400, less than half the net outflow of 30,000 in the July 2001 year.

Union membership

A recent Labour Department report notes that in March 2002 there were 342,179 union members, 22.7% of the labour force. This showed a membership increase of 7% since March 2001.

Although about 78 of the 170 unions are "new" since the end of 1999, they have only 2.1% of the total union membership compared with 97.9% of union members in the unions incorporated before 2000. 54% of unions have fewer than 100 members. The top ten unions have 75% of the total union membership.

Food Prices and other inflation measures

While overall annual CPI inflation is 2.8%, food prices rose 0.6% in July to be up by 3.3% in the July 2002 year. The next CPI figure will be known on 15th September 2002. Meanwhile Capital goods prices rose 0.2% in the June 2002 quarter and 1.4% on an annual basis, with the main factor being the residential buildings index.

And the Farm Expenses Price Index rose 1.5% in the June 2002 quarter and 4.5% in the June 2001 quarter with interest rates, livestock prices and fuel the main factors. The Producers' Price Index rose 2.3% in the last year for outputs and 1.5% for inputs.

Retail Sales

Over the June quarter, growth in retail sales volumes was 1.2% assisted by strong growth in motor vehicle sales. For the year, retail sales are up by 6.2%.

Trade

There are increasing signs of falling business and particularly agriculture sector confidence as commodity prices fall and the global outlook continues to be uncertain largely because of the US economy.

It also looks as if a scaling back of interest rate hike expectations has not had much of a positive impact on overall sentiment about the economy. However, the domestic economy is still reasonable strong and exports are trending down from a relatively high level. In terms of specific trade figures, the July figurers showed the usual deficit as farm exports wind down through the winter and imports begin to wind up in anticipation of the summer/Xmas season. This Julys deficit of $226m was higher than the 10-year average July deficit of $167m. Dairy prices were the hardest hit, and a surge in car imports pushed up the overall imports.

Health Board Deficits

The hospital and health service provider function of the district health boards has recorded an annual provisional operating deficit of $217.0 million for the year ended 30 June 2002. Total income increased 1.8% during the June 2002 year to reach $3,807.5 million. Operating expenditure reached $4024.5 million during the June 2002 year, an annual increase of 5.6%.

Skills Information Action Plan

The Skills Information Action Plan is designed to: speed up the matching of people's skills to the job opportunities that are currently available, reduce skill shortages in the future by helping people make to better decisions about education and training. The Labour Department has outlined a number of initiatives.

A Labour Market Information Portal, with the working title www.work.govt.nz, will provide seamless access to labour-market information from a single website. A six-monthly Skills Report will complement the Labour Market Information Portal, providing an alternative way to access current and new information. Work and Income New Zealand intends to enhance its Job and Talent Banks by allowing direct electronic contact and matching between job seekers and employers.

Existing sources of information on the labour market are being enhanced and better publicised. Career Services intends to upgrade its website to help workers to evaluate the skills that are needed in their current occupations, how their existing skills may transfer to other occupations, and what new skills would be required to make the transition to a new occupation.

Further analysis will be undertaken of the New Zealand Immigration Service work permit records (information on date, number, approval basis and occupational grouping of work permit approvals), Work and Income's vacancy and skills databases (regional trends in vacancies and placements by job-skill category, plus analysis of job-seekers by skills, qualifications and preferred occupation), a Pilot survey of Work and Income's work brokers (monthly report, currently being evaluated, of information from work brokers -- e.g. the percentage of brokers in each region who indicate a shortage of cleaners) , Public Service skill shortage survey (improve existing survey to provide robust data on skills shortages in the public sector).

Data about employees and their jobs will be integrated in order to examine questions that currently cannot be answered without increasing compliance costs on firms. These questions include: What types of firms create jobs? What types of job placements result in the best long-term employment outcomes? What types of firms make the most contribution to individuals acquiring skills? New and broader definitions of skills and occupations are being created. A new national survey will be put in place to improve quantitative information on current skill shortages by surveying employers.

A number of other case studies will be undertaken in regions and industries of concern. The Department of Labour will design a survey of the employment and earning outcomes outcomes achieved by tertiary graduates. Infometrics and BERL have won a tender to develop a model for occupational and skill forecasting. And each Industry Training Organisation will undertake strategic planning for its industry and lead the consideration of wider pressures on the supply and demand for skills in that industry.

Investment sources

For the year to March, there was over $171 billion of international funds invested in this country compared to $79 billion of New Zealand investments offshore. Of that invested overseas, nearly a third went to the US, a fifth to Australia and then Britain.

More than a quarter of the $171 billion invested here came from loans from foreign banks to their New Zealand operations. Australia was the biggest investor here, with the US, Britain, Singapore and Hong Kong also being significant players. The finance and insurance industry was the biggest investor offshore as well as the main recipient for foreign investments.

Building Consents

In the three months to July the number of dwelling consents issued rose 32.7% from a year ago. The main factor in the recent surge is a big increase in apartment consents. Some are warning that immigration is driving a major increase in residential construction, but the slowing of house of sales in the last 3 months could point to an easing back of consents in the near future.

Sustainable Development Indicators

The Statistics Department are asking for feedback on their report on sustainable development indicators. See :

http://www.stats.govt.nz/domino/external/web/nzstories.nsf/htmldocs/Monitoring+Progress+Towards+a+Sustainable+New+Zealand