CTU Monthly Economic Bulletin

No. 75 (November 2006)

Either read on, or download a printable version here (PDF file, 85 kb).

Comment

Externalities. I know they don’t sound that exciting, but they are a very important aspect of economics. Externalities are where the costs or benefits arising from an economic activity are not reflected fully in prices. They are sometimes called spillovers or third party effects. Examples of positive externalities include the beneficial effects of new technology or one that is often cited which is where bees that are kept solely to produce honey also pollinate crops in the nearby area. An example of a negative externality is pollution. Externalities are a form of market failure because these costs and benefits are not incorporated into prices therefore do not impact on resource allocation, production levels, consumer demand and so forth. In essence, externalities create a divergence between the private and social costs of an economic activity.

Of course, many economists do not accept that such market failure is a fatal flaw in the logic of capitalism. They argue for the creation and full allocation of property rights for socially important factors such as clean air. These can then be traded and are therefore part of the price mechanism. In other words, everything has a price. But whenever a government actually attempts to put a price on a negative externality, such as carbon emissions, there are howls of protest from business. Fierce opposition is mounted to either taxes or regulation being imposed to limit the negative effects of a business model which aims to privatise the profits and socialise the costs of enterprise. There is somewhat less opposition to subsidies for firms in order to internalise the social benefits of a positive externality!

If multinational companies really were forced on a global basis to price in such factors as: the true cost of accidents and industrial diseases; pollution of rivers; contamination of drinking water; air pollution from burning coal; higher risk of illness such as bird ‘flu due to chicken production methods; lowering water tables through waste of water in production methods; health effects of poor housing and diet of low paid workers; teenagers left to their own devices while parents juggle long and unsocial hours of work – then the whole system of private enterprise would be transformed. In some cases, there can be legitimate debates about a causal relationship between a firm’s activity and a harmful social or environmental effect. And to be fair, we have to remember that pricing in the positive externalities, while also difficult to calculate, would have the effect of ‘crediting’ firms for positive effects that flowed on from their activities. But the ledger is starting to tip more and more – the negative externalities of multinational capitalism are now a huge threat to the well being of society, and are also resulting in more and more criticism of the prevailing business model.Some firms are using social audits, triple-bottom-line accounting, carbon neutral business models, and other methods to improve the social and environmental responsiveness of their organisations. But most firms appear happy to load all these social costs on to citizens either directly or through government expenditure. And then they try to cut down the size of government as well. What is becoming abundantly clear is that this model of business is not sustainable.

Consensus forecasts (note 1) published by NZIER
The consensus forecasts were updated in September 2006.  

Economic Snapshot

Consumer prices rose by 0.7% in the September 2006 quarter and were up by 3.5% annually. Food prices were up by 4% in the October 2006 year. The next CPI update is on 17th January 2007. Unemployment is at 3.8%. M?ori unemployment is 7.6% and Pacific peoples’ unemployment is at 5.1%, compared with 2.7% for European/P?keh?. The minimum wage is $10.25 for those aged 18 years and over and $8.20 for 16 to 17-year-olds and trainees. Ordinary time wages, as measured by the Quarterly Employment Survey (QES) for September 2006 (note 2), were up annually by 5% (5.4% in the private sector and 3.2% in the public sector). The QES showed that the average ordinary time hourly wage is now $22.18 ($20.77 in the private sector and $27.56 in the public sector). The female rate of $20.31 is 85.5% of the male rate which is $23.75.  The Labour Cost Index (LCI) shows that ordinary time wages went up by 3.2% in the September 2006 year (2.9% in the private sector and 3.9% in the public sector). Probably the key statistic for unions to note is that, where there were wage increases in the last measured quarter, the average rate of increase was 4.7% and the median increase was 3.8% (the average for the year was 5.5% and the median was 4.1%). The next update of wages data is on 5^th February. Economic activity (GDP) increased by 0.5% in the June 2006 quarter and was up by 1.9% for the June 2006 year. The next GDP update is on 21st December, 2006. The official cash rate set by the Reserve Bank remains at 7.25%.

Wages

The Labour Cost Index shows that wages rose by 1% in the September quarter and 3.2% in the September 2006 year. The increase was 2.9% in the private sector and 3.9% in the public sector. The average wage increase for those who got a pay rise in the last year (57% of the workforce) was 5.5% (5.8% in the public sector and 5.4% in the private sector). The median was 4.1% (4.5% in the public sector and 4% in the private sector). In the last quarter, of those who got an increase (20%), the average was 4.7% (5% in the public sector and 4.6% in the private sector) and the median was 3.8% (for both public and private sectors). The Quarterly Employment Survey shows that ordinary time hourly wages rose by 5% in the September year to $22.18 ($20.77 in the private sector and $27.56 in the public sector). The female rate of $20.31 is 85.5% of the male rate which is $23.75. The QES also shows that total hourly earnings increased by 8% in the September 2006 year. This includes increases in employment, hours and wages. Meanwhile a Northern EMA survey of 641 companies with 38,016 employees across 213 different job positions found that wages increased by 3.8% in the year ending July. 

Unemployment

The unemployment rate has lifted to 3.8%. This is 83,000 unemployed. But not all of these people are on an unemployment benefit. In mid-November the number on an unemployment benefit fell to 39,001 compared with 160,000 in 1999. M?ori unemployment was 7.6% and for Pacific peoples it was 5.1% compared with 2.7% for European/P?keh?. Unemployment for 15-19 year olds was 13%, with 6.8% for 20-24 year olds compared with 1.8% for 40-44 and 50-54 year olds. Underemployment (which measures those wanting more hours) was at 69,600. The jobless number (which adds to the unemployed those people available for work but not actively seeking it, or actively seeking but not currently available for work) was 144,400. The Quarterly Employment Survey shows that the rate of employment growth has slowed. Full time equivalent employment was up by 2% in the September 2006 year compared with 4% in 2005 and 4.6% in 2004. Construction, finance, insurance, cultural and recreational services industries showed the highest growth in employment. Meanwhile there is evidence of a growth in the number of older workers in the workforce.  The number of workers aged over 65 increased by 109% in the five years to 2005 with those aged 60 to 64 up by 67%, and those aged between 55 and 59 are up 48%. 

Housing and Property

Quotable Value puts the average house price for October at just over $345,000, with a national rise in value of 9.6%, the first time in nearly 4 years that it has increased by less than 10%. There is however a steady increase in the trend for the number of new housing units since May 2006. In October 2006 building consents were issued for 2,377 new housing units, 476 more than during the previous October. Meanwhile the rate of borrowing continues to rise. The BNZ has noted that in the year to September 2006 consumers expanded their total borrowing by more than $17 billion (approximately 20% of disposable income). This was more than triple the accumulation seen during calendar 2001.  

Retail Sales

Retail sales volumes rose 1% in the September quarter, higher than market expectations of a 0.7% rise. However, annual growth in total real sales was 1% which is similar to population growth so that real sales per capita have not grown at all over the year to September. 

Price Indices Rise

The capital goods price index (CGPI) rose 1.9% in the September 2006 quarter. The main driver was higher construction services costs for commercial buildings. In the year to the September 2006 quarter, the non-residential buildings index rose 6% and the overall CGPI rose 4%. Meanwhile, output prices rose 0.7% and input prices 2% in the Producers Price Index (PPI) during the September 2006 quarter, mainly driven by higher prices in the livestock and cropping farming index for output prices and increases in the wholesale trade index for the inputs index. In the September 2006 year, the PPI outputs index rose 4.5% and the PPI inputs index rose 6.9%. 

Trade

Imports for October 2006 were $3.9 billion, a 15.8% increase on October 2005 and the highest ever for any month. At $2.7 billion, exports were also up on October 2005 (by 10.5%). The resulting trade deficit was of $1.2 billion (43% of exports), the second-largest deficit on record for any month. Major contributors were imports of electrical machinery and equipment and exports of logs; milk powder, butter and cheese; and aluminium. For the 3 month period ending October 2006 imports were up 8.7% and exports were up 15.5% on the same period a year before.  According to the Trade Weighted Index, the New Zealand dollar rose 1.5% in October 2006 but was 6.3% lower than in October 2005. 

Government Accounts

Figures for the 3 months until end of September show a cash deficit of $525 million, but an operating balance of $1.864 billion and OBERAC (operating balance excluding revaluations and accounting changes) of $1.812 billion. 

Public sector productivity

A recent Treasury paper on this topic has been released. To see the paper go to http://www.treasury.govt.nz/workingpapers/2006/tpp06-09.pdf. 

Paid Parental Leave

Total paid parental leave payments of over $316 million have been made to nearly 90,000 people since the scheme started in July 2002.  

Public Service Numbers Up

The total number of public servants has increased by five percent in the last year mainly in Inland Revenue and the Department of Corrections. 

Migration

In the year ended October 2006, there were 82,200 permanent and long term arrivals, up 3,100 (4%) on the October 2005 year. Departures decreased by 4,600 (6%), to 68,400. There was a net migration gain of 13,800 in the October 2006 year, up on the net inflow of 6,000 people in the October 2005 year. In the year ended October 2006, there was a net inflow of 11,100 from the United Kingdom, up from 9,400 in the October 2005 year. There were also net inflows from Fiji (2,200), India (2,100), Philippines (2,000), Japan (1,800), China (1,600), Germany (1,500) and South Africa (1,400). The net inflow from Asia increased from 5,900 in the October 2005 year to 10,500 in the October 2006 year. The highest net inflow from Asia in recent October years was 31,200 in 2002. The annual net outflow to Australia was 20,700 in the October 2006 year, down slightly from 21,100 in the October 2005 year. 

Prison rates and Unemployment

Roland Schneider of TUAC (Trade Union Advisory Committee to the OECD) has been commenting on what he calls “prisonomics”. New Zealand has a high rate of imprisonment at around 150 people per 100,000. While low compared with USA (738), Russia (594) and South Africa (335) this is higher than England (144), Australia (126) and Finland and Denmark (66). Some critics of the Nordic economic model have over many years pointed to the lower rates of unemployment in the USA (currently 4.4%). This is not the case now with unemployment of 3.4% in Norway and 3.7% in Denmark. However, if we also consider the fact that the USA has, in addition to 6.7 million unemployed, another 2.2 million people in prison, then adding the unemployment rate and the prison rate produces a figure of 6.1%. For Denmark, adding the unemployed and the prison rate gives a figure of around 4.7%. Of course prisons also provide jobs. But these comparisons do make you think about how the unemployment rate would look in the USA if the prison rate was as low as in the Nordic countries. As a rough calculation (and leaving aside issues about what the employment prospects are for those just out of prison) it would be around 6% rather than 4.4%. 

Screen Industry

In 2005, some 2,058 active businesses were considered to be part of the screen industry. They had total gross revenue of $2.6 billion. Feature films and short films were the highest earning sub-sector with $699 million in gross revenue. This was followed by television programmes and commercials with $361 million and $184 million, respectively. There are about 5360 people working in the sector including many contractors.

For further information contact Peter Conway on 04 802 3816 or peterc@nzctu.org.nz