CTU Economic Bulletin No. 77

February 2007

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Comment

Unions have a lot to contribute to the debate about climate change. It is increasingly accepted that greenhouse gas emissions are having a damaging effect on the planet and are harmful to workers and their families. This means there is a massive need for collective action in response to this threat. Although emissions in New Zealand are tiny on a global scale, the principle of collective action, the need to demonstrate leadership and increasing consumer awareness about the environmental ‘footprint’ of goods and services all underpin a need for action in New Zealand. Adaptation to climate change and practical responses to reduce emissions should be based on widespread consultation and analysis using a sustainable development framework which includes social, cultural and economic considerations as well as environmental issues.

Like any process of change – there are both opportunities and risks. Although there are some projections of a net positive employment effect in the long run if sustainable production methods are adopted, for workers, a change to technologies that are more environmentally-friendly can have a number of employment implications as well as an impact on household costs. Internationally, union bodies have called for a ‘just transition’ framework to protect workers’ interests during implementation of measures to reduce greenhouse gas emissions. We adopted a similar stance in 2001 in our submissions on ratification of the Kyoto Protocol. For instance, we supported the need for negotiated greenhouse-gas agreements for large emitters where their international competitiveness was at risk and we advocated for strong union involvement in such negotiations.

But workers could also have a major role in reducing harmful emissions, promoting energy conservation and suggesting work organisation and other improvements at a workplace and industry level. The potential is there for EECA (the Energy Efficiency Conservation Authority) to work alongside unions and tap into workers’ knowledge and networks. But workers will be rightly suspicious of such an approach if there is not a genuine engagement that recognises the risks for workers.

In addition to union involvement opportunities at a practical level, there is a need to participate in the policy discussions. Unions may accept that there is a place for some market mechanisms to internalise some of the negative externalities of greenhouse gas emissions. We will have views about where a cap should be set above which trading in carbon could occur. However, unions will not want to see too much reliance on market-based mechanisms compared with regulatory measures and incentives. And there will be a need for some mature discussion on issues such as the use of coal. In the meantime, it is clear that the focus has to be on renewable energy sources, but with 1000 years’ supply of coal reserves and the prospect of carbon sequestration technology (albeit of debatable safety) emerging at some stage, future options need to be preserved.

But for unions, sustainability is about much more than climate change. The sustainability lense can also be applied to a huge range of issues including lifelong learning, adequate income levels (including saving for retirement) work:life balance, health and well-being at workplaces, ageing of the workforce, industry strategies and so forth.

The CTU has been a strong supporter of a sustainable development framework. In 2002 we published a booklet called Unions, Innovation and Sustainable Development to underline our view that workers are vital to the innovation process and that unions are a partner in sustainable development. Our approach is that sustainable development, while open to all manner of interpretations, is a useful framework because it balances the vital importance of social, environmental and cultural issues with economic considerations. It is a framework that can apply to a workplace, an industry, a region, a country and internationally. It also recognises that there will be trade-offs. The only way to handle such trade offs is through an informed and democratic process. So it is crucial that unions get involved across the board on sustainability issues.

Meanwhile, the sustainability of current monetary policy is being questioned by more and more commentators. As I have noted previously, the key debates in economic policy at the moment are about structural issues – the distortions due to the housing market, embedded low wages, the current account deficit, high levels of foreign ownership of NZ firms, low savings and so on. Most believe that the official cash rate (OCR) will rise to 7.5% on 8th March despite falling inflation (projected by Treasury to go below 2% mid-year), mild economic growth, and a high exchange rate. No-one is that confident that such a rise will have much impact on the housing market, whereas it will damage the export sector. So even if it is acknowledged that there is some risk of underlying inflationary pressures building during the year to the extent that the top band of 3% could be breached again in 2008, the cure as provided via monetary policy does not look that effective. We can expect to see more discussion about measures such as additional instruments the Reserve Bank can use, or a form of capital gains tax, or changes to local government procedures around land allocation for housing. But some of the options will require widespread political consensus before any government takes the risk of floating options. The treatment of the mortgage levy proposal is enough evidence of that. So at this stage, the fate of workers trying to match small increases in wages to large increases in house prices, and the cumulative problem of housing affordability will remain a major issue but with no real solutions on offer.

Consensus Forecasts Published by NZIER¹

The consensus forecasts were updated in December 2006.

Economic Snapshot

Consumer prices fell by 0.2% in the December 2006 quarter and were up by 2.6% annually. Food prices were up by 3.4% in the January 2007 year. The next CPI update is on 18 April 2007. Unemployment is at 3.7%. Maori unemployment is 7.2% and Pacific peoples’ unemployment is at 6.8%, compared with 2.6% for European/Pakeha. The minimum wage is $10.25 for those aged 18 years and over and $8.20 for 16 to 17-year-olds and trainees. On 1 April 2007 these rates will increase to $11.25 an hour for a person who is aged 18 or over and $9.00 an hour for those aged 16 or 17 years old or a trainee. Ordinary time wages, as measured by the Quarterly Employment Survey (QES) for December 2006², were up annually by 5% (5.5% in the private sector and 4.1% in the public sector). The QES showed that the average ordinary time hourly wage is now $22.36 ($20.89 in the private sector and $28.09 in the public sector). The female rate of $20.49 is 85.7% of the male rate which is $23.91. The Labour Cost Index (LCI) shows that ordinary time wages went up by 3.2% in the December 2006 year (3.2% in the private sector and 3.5% 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 5.2% and the median increase was 4.2% (the average for the year was 5.5% and the median was 4.2%). The next update of wages data is on 7th May, 2007. Economic activity (GDP) increased by 0.3% in the September 2006 quarter and was up by 1.4% for the September 2006 year. The next GDP update is on 30 March 2007. The official cash rate set by the Reserve Bank is 7.25%.

Wages

Total gross weekly earnings rose by 9% in the December 2006 quarter compared with December 2005. This includes increases due to more people employed, more hours and also higher pay rates. Ordinary time wages, as measured by the Quarterly Employment Survey (QES) for December 2006, were up annually by 5% (5.5% in the private sector and 4.1% in the public sector). The QES showed that the average ordinary time hourly wage is now $22.36 ($20.89 in the private sector and $28.09 in the public sector). The female rate of $20.49 is 85.7% of the male rate which is $23.91. The Labour Cost Index (LCI) shows that ordinary time wages went up by 3.2% in the December 2006 year (3.2% in the private sector and 3.5% in the public sector). For those workers who actually got an increase in the last measured quarter, the average rate of increase was 5.2% (5.3% in the private sector and 4.7% in the public sector) and the median increase was 4.2% (4.2% in the private sector and 4.0% in the public sector). The average increase for the year was 5.5% (5.5% in the private sector and 5.8% in the public sector) and the median was 4.2% (4.2% in the private sector and 4.5% in the public sector).

Figures from the latest LEED (Linked Employer-Employee Data) which uses tax and other administrative data show that wages in December 2005 (it takes a while for these data to come out) were 20.9% up from December 2000 with a 25.4% increase in the public sector and 19.5% in the private sector. Average quarterly earnings rose in 2005 on the LEED measure by 4.8% with public sector earnings up by 6.7% and in the private sector the increase was 4.2%. But these percentages are based on total quarterly earnings and therefore include the effect of any increased hours people may be working on average. They are if anything a bit lower than what the QES showed this time last year for the 2005 year in review which was an overall wage increase for ordinary time wages of 5.4% (5.1% in the private sector and 6.7% in the public sector).

Unemployment

Employment increased by 1.4% in 2006 and unemployment in December 2006 fell to 3.7%, the fourth lowest in the OECD behind Norway, Denmark and the Republic of Korea. This means there are 82,000 unemployed. The jobless rate which includes those discouraged from seeking work or not currently available increased to 161,800 up from 144,400 in September 2006 and the underemployment rate (those wanting more hours of work) rose from 69,600 to 97,500. Maori unemployment is 7.2% and Pacific peoples’ unemployment is at 6.8%, compared with 2.6% for European/Pakeha. The unemployment rate for 15-19 year olds was 14.3% and for 20-24 year olds it was 6% compared with 0.7% for those aged 55-59 years. Unemployment has been below 4% for over 2 years.

Property

House prices as measured by Quotable Value were 8.8% higher in the 3 months ending January 2007 than the same period a year earlier. This compared with a 16.8% increase in the year to January 2006. REINZ figures show house prices rose by 9% in the January year down from 11.8% annually when they last reported. The average house sale price in January 2007 was $356,028. Meanwhile consents were issued for 1,880 new dwelling units in January 2007, compared with 1,900 in January 2006. However, the value of consents issued for residential buildings was $538 million in January 2007, 7% up on January 2006.

Producer Prices

There were small drops in both output prices (down 0.5%) and input prices (down 0.3%) in the Producers Price Index with electricity generation and supply the main driver. In the year to the December 2006 quarter, the PPI outputs index rose 3.6% while the PPI inputs index rose 5.3%. The Capital Goods Price Index (CGPI) rose 0.7% in the December 2006 quarter. The higher costs of building constructions (both residential and non-residential) were the main contributors to the increase. Annually, in the year to the December 2006 quarter, the CGPI rose 4.1%. This follows a rise of 2.9% in the year to the December 2005 quarter.

Trade

Trade figures show that despite monthly exports being 12.5% higher in January 2007 than in January 2006 (compared with imports which rose by 7%), the monthly trade balance remained in deficit at $833 million (33.7% of exports). On an annual basis the trade balance for the January 2007 year was a deficit of $6.0 billion (17.3% of exports). This compares with a deficit of $7.1 billion for the previous January year. Commodity prices are up by 11% over the last year. Most commodities are doing well except for sheep meat.

Government Accounts

The first 6 months of the financial year show the Government is tracking almost $1 billion ahead on the operating surplus which is at $4.47 billion for the half year. However, the OBERAC (Operating balance excluding revaluations and accounting changes) is a more modest $97 million higher than forecast and stands at $3.59 billion. The cash figure is $437 million higher than forecast at a deficit of $423 million. The reasons given for the higher operating balance are investment returns being ahead of forecast in the NZSF ($355 million), ACC ($254 million) and GSF ($92 million). In addition there were higher than forecast foreign exchange gains ($301 million). But the higher surplus in the operating balance does continue a pattern of recent years (this time last year the operating balance was at $4.4 billion which was $1.6 billion above forecast) although we are now seeing a deficit in the cash position compared with a cash surplus of $234 million this time last year. Also note that the government's net worth has been re-valued upwards by $11 billion to $86 billion, following a revaluation of the rail network.

Retail Sales

Retail sales were up 1.8% in volume terms in the December quarter and 3.9% in the year. In value terms, retail sales were up by 5% overall for the last year.

Migration

Net permanent and long term migration was 14,600 in 2006, up from 7,000 in 2005 but well below the high net inflows of 38,200 in 2002 and 34,900 in 2003. In 2006, there was a net outflow of 20,700 to Australia, but a net inflow of 10,900 from the United Kingdom. There was also a net inflow of 11,400 from countries in Asia, led by 2,400 from the Philippines. A key reason for the decrease in net migration from the 2002 peak was a drop in arrivals from Asia, which more than halved from 38,900 in 2002 to 17,700 in 2005, before going up to 20,500 in 2006. China (down 11,700) and India (down 4,100) contributed the majority of the decrease between 2002 and 2006. The decrease from Asia was partly offset by more arrivals from Europe, Oceania and the Americas. There were 22,700 arrivals from the United Kingdom in 2006, compared with 18,800 in 2002. Professionals recorded the largest net inflow of any occupation group in 2006, at 2,100. There were also net inflows of clerks (200) and technicians (100) in 2006, but net outflows of plant and machine operators (500), elementary occupations (300), agriculture and fishery workers (200) and service and sales workers (100).

Departures to Australia increased from 24,600 in 2003 to 34,800 in 2005, before decreasing slightly to 34,000 in 2006. In the past 25 years, departures to Australia have been highest in 1988 (45,100) and 2000 (38,200), and lowest in 1983 (14,500) and 1991 (15,400).

Oil companies continue to rake it in

The world's largest oil company, Exxon Mobil, has reported the highest-ever annual profit by a United States business. Its 2006 net profit totalled US$39.5 billion, a 9% increase on US$36.1b in 2005.

Notes

1 The consensus is made up of the average of forecasts from NZIER, Berl, ANZ- National Bank, ASB Bank, BNZ Bank, First New Zealand Capital, Deutsche Bank, UBS, Westpac, Reserve Bank of New Zealand and Treasury. Because the consensus forecasts are done only every 3 months, some of the more recent forecasts will be more accurate.