Tuesday, March 08, 2005

Unions demand 5% wage increase.

This week’s New Zealand’s news was about the 5% wage increase demanded by EPMU – the Engineers, Printing and Manufacturing Union. Also in Christchurch, 1000 City Council workers were on the verge of strike when the City Council agreed on 5% wage increase. This latest wage increases is not surprising at all, given that the economy has been expanding for the past 10 years and unemployment at a record low of 3.6% - the lowest among OECD. This also gives indication to the Reserve Bank that the economy has NAIRU (non accelerating inflation rate of unemployment) of 3.6%.Simplyput, an unemployment rate at which more economic activity does not put the economy at a strain, as limited resources (labour and capital) being bid up by the participants in the economy, hence inflation. At an unemployment level below NAIRU of 3.6%, Labour, whether skilled or unskilled become scarce, employers start to offer higher and higher wages to attract labour talents. This has a flow on effect, because higher paid workers will have more to spend, to a higher inflation rate. Remember that production of goods and services do not expand as much because of constraint in labour and capital.
The current minimum wage in New Zealand is NZD$9.50 per hour, with a proposal by the government to increase it to NZD$10 per hour before the end of the year. So a worker on the minimum wage could earn NZD$400 on the standard 40 hour week, less taxes at 19%. If a said worker has a dependent family, each child will be entitled to $50 a week in the form of family support and $15 tax credit (government giving back the taxes to you) for low income families starting from 1st April 2005. Add extra $100-$200 in the form of accommodation supplement a week (yes, the government pays part of your rent or mortgage) depending on circumstances. A worker with a spouse and 2 children may earn $400 before taxes, but he has a spending power of $550 per week.
That is an example of a government who takes an active role in income distribution.

Companies’ coffers have been bloated with good profit figures for the past few years, on the back of longer than expected economic expansion. Wages have not increased much for the past 10 years because of the deregulation of labour market and high unemployment in the 90’s. Most people would view the latest demand by unions simply as workers demanding their fair share of economic pie.
Firms have certain obligations about their earnings and profits:
1. Customers – by providing quality products and services, ploughing back some of their earnings for research and development, hence better products in the future.
2. Government - in the form of taxes.
3. Workers – in the form of wages and salaries.
4. Stockholders – in the form of dividend and growth in share price.
5. Environment and the community – enhancing and not degrading its environment and community.

Back in the 60’s through to 80’s, New Zealand used to have the strongest unionised workforce in the OECD. Every worker in the workforce compulsorily joined a union, with union fees deducted from their pay packet every pay period. A conservative right leaning government put an end to that, union membership becomes voluntary and termination of employment made easier. Adding salt to the wound, a National right leaning government removed minimum wages in the early 90’s, giving way for unscrupulous employers to make their adult full wage employees redundant and replacing them with youth workers under the guise of traineeship. Youth workers cost less in wages, about half of adult wages.
The result - lower level of wages and higher unemployment, not desirable to the workers, or the economy.

Malaysia has never experienced strong union movement in its history. Wages has been slow to keep up inflation. Without strong union movement, workers will not be able to negotiate themselves to a better wage settlement, hence less than their fair share of firm’s profits. An abundant number of skilled and unskilled workers, exacerbated by the number of immigrant workers in the country keep wages low. That is why we see a widening gap between rich and poor in our society. In economic terms, the division of profits between capital owners and labour is skewed in favour of capital owners.
Did you ever see a counter on KLSE giving total annual return in excess of 20% in dividend and price growth combined? Is it normal?
We might argue that it is fair given the risk, but risk premium is low, after all, we have a history of stable governments since independence, and Malaysia is not a dictator ruled African state.
The absence of minimum wage legislation and safety net - income support for the unemployed, the sick and the older generation further aggravate the situation, keeping wages low. Without the safety net, even the sick and the retirees have to find a job to supplement their income. Earning power of workers is smaller in the real terms as years gone by, hardly keeping up with inflation.
Have you ever see an old man, past retirement age and could hardly run ten metres works as a security guard outside a gold shop or a supermarket?

Stockholders get more than their fair share of firms’ profits, in the form of higher dividend and high company growth rates, so does the government, higher profits means higher taxes. As for the environment and the community, that depends on the legislation and enforcement by government agencies. Firms do their best to make profit, sometimes at a cost to the environment and the community they operate in.

Does a low wage keep the country competitive? Yes in the short term, but not in the long term. Poor workers tend to be less skilled, less motivated, overworked (some of them work long hours or have two jobs), less educated and invest less in their children’ education. Firms cannot invest in higher technology with low level of workers’ education (higher technology usually is associated with high productivity).

Noor Yahaya Hamzah has his own blog page at http://nooryahaya.blogspot.com
Email: nooryahaya@yahoo.com

No comments: