Question 1: Won’t an increase in the minimum wage just cause prices to rise even more? Don’t we need to keep wages under control to stop inflation rising?

24 May

Because of the recent increased debate around the issues raised in the booklet “Exposing Right Wing Lies” by Unite National Director Mike Treen. The Unite Blog will be running extracts from the questions and answers dealt with in the .

Question 1: Won’t an increase in the minimum wage just cause prices to rise even more? Don’t we need to keep wages under control to stop inflation rising?

No. Official statistics confirm that over the last three decades wages have failed to keep up with inflation – at least for the big majority of workers. Rather than wage increases pushing up prices, wages have unsuccessfully lagged behind price increases.

Inflation is above all a monetary phenomenon. In the last analysis it is the action of the government and central banks and their impact on money supply levels that determine a currency’s real value and the overall price level. There is no automatic ability on the part of business to increase prices when wages (or other costs) increase.

In a competitive market prices are conditioned by the interaction between suppliers and consumers. An obvious alternative to raising prices is for companies to compensate for the wage increase with greater efficiency and productivity. One of the problems of the NZ economy over recent decades has been the relatively low productivity growth as employers have seen no need to invest significantly in new technology when cheap labour was available as an alternative. They could also absorb the rise by reducing their profit margins.

We were also told that if the cake was grown we would all benefit. Higher wages would come with increased productivity. We all heard the argument that a little pain now would mean riches for all to come. Productivity did increase – by 80% between 1978 and 2008.

But after peaking in early 1982, real wages fell by 25% according to the official wage measures collected by the government. So real wages are 25% lower but our output is 80% higher. Any benefits stayed stubbornly at the top. The “trickle down” theory that if we make some very rich we will all eventually benefit proved to be a lie. (See Graph 1)

The shift in income from wages to profits is recorded in official statistics that measure the share of wages and profits in the economy. The period from the mid 80s to mid 90s saw a 10% drop in the share of GDP measured as “compensation of employees”. There was a corresponding rise in the proportion measured as “gross operating surplus”, that is profits and interest. (See Graph 2)

In today’s dollars that equals $18 billion from the pockets of workers to the coffers of capital. That in turn has been shared among the very rich shareholders and senior executives and is the ultimate source of the gross increase in salaries other benefits of this layer in recent years.



(Part of a series of extracts from “Exposing Right Wing Lies” by Mike Treen, Unite National Director)


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