Crisis? What Crisis?

In January 1979, the British Prime Minister, Jim Callaghan, returned from a Summit meeting in the Caribbean to a Britain suffering the serious industrial unrest that became known as the “winter of discontent”. Interviewed at Heathrow airport, Callaghan’s relaxed attitude to talk of chaos was translated by The Sun the following morning into a headline reporting the Prime Minister as saying “Crisis? What Crisis?” The electorate’s reaction led directly to Mrs Thatcher’s election victory later that year.

John Key, returning from Hollywood this week, was equally dismissive of talk of a crisis in manufacturing. Our Prime Minister was in some ways even more insouciant than Callaghan; faced with Statistics New Zealand figures showing 40,000 manufacturing jobs lost in the last four years, he airily asserted that our expert official statisticians had simply got it wrong.

But the Prime Minister’s denial of the facts reveals more than just a surprising and mistaken reliance on his own expertise in handling statistics and a confidence that he will be believed, however improbable his assertions. It reflects a deliberately relaxed attitude by the government to the whole issue of unemployment.

The Prime Minister resists talk of crisis because he believes that people are out of work because that is what free-market theory dictates. That theory takes a very simple view. If the supply of a particular commodity exceeds the demand, the price of that commodity will fall – which is certainly true for most commodities, such as, say, sugar or coffee. Where the free-market ideologues part company with common sense, however, is in insisting that labour is just such a commodity.

Unemployment happens, they say, because the supply of labour exceeds demand. This should mean that the price of labour will fall – in other words, wages should come down. The government takes the view that the remedy is therefore in the hands of the unemployed themselves; they can correct the situation by accepting lower wages.

The first objection to this view is that the theorists are looking at only one side of the equation; by concentrating only on the supposed excess supply of labour, they take a completely static view of the demand for labour and of how a market economy really works.

The demand for labour could easily be raised, but that would require a change in policy – and that won’t happen for as long as the government insists that wages must come down, since lower wages and lost jobs mean lower spending, and therefore no stimulus to demand in general and demand for labour in particular.

True to the theory, the government continues to pin its hopes on forcing down the price of labour, as though it were just another commodity. After four years, we can say with some confidence that the policy has failed. Unemployment remains stubbornly high. The economy has stalled. But the government is not deterred.

Ministers dare not say so publicly, but they use economists’ jargon to explain why unemployment remains high. Labour costs are “sticky” – that is, they have not fallen in order to clear the market, as the theory says should happen. Their conclusion is, therefore, that the market must be helped by “unsticking” labour costs to force them down.

It may be hard to credit that our government wants to bring wages down, yet that is what they have set out to do. How else to explain why workers’ rights at work have been significantly weakened, so that workers can be taken on, and then thrown back on the scrap heap without any redress? Why else are young workers to be paid less than the minimum wage, if not to remove the floor placed under wage levels? Why was a modest rise in the minimum wage voted down while top salaries zoom upwards?

Why have benefits been removed and reduced so that even solo mums with young children are forced back into the labour market, whether or not there are jobs? Why is covert support lent to big employers like Oceania or Talleys as they cut the real wages paid to already low-paid employees?

These measures are explicable only if the intention is to force the lowest wages lower, so that downward pressure will increase on wages across the board. We can now see that “closing the gap with Australia” was only ever so much pie in the sky; far from encouraging New Zealand wages to match Australian levels, the government is intent on using high unemployment to force them lower.

While Bill English occasionally lets the mask slip by touting lower New Zealand wages as a competitive advantage, the government is unwilling even to engage in debate about improving our competitiveness through changes in exchange rate policy. A lower exchange rate would at least give us a fair way of reducing our costs across the board, and provide a platform from which we could begin to grow the economy again. The government, though, would rather see the whole burden of reducing our costs in international terms borne by working people. Little wonder that the share of national income accounted for by wages has fallen.

Bryan Gould

9 October 2012

This article was published in the NZ Herald on 11 October.