How would a lower currency change real wages?
In a recent select committee meeting, Bill English made the comment when discussing calls from manufacturers and exporters to bring down the exchange rate; “What they’re telling you is they want to cut the real wages of their workers, because that is the other side of the equation.”
This comment ignores many of the highly negative effects that the currently high exchange rate is having right now on jobs in the manufacturing and export sector and what this does to future investment, employment and wages. As it reads, Bill English implies that if we choose to lower the dollar to benefit exporters, there will be an equivalent individual impact through higher import costs. This is not the case, exchange rate impacts are focused on relatively few exporters and higher import prices are diffused across all consumers. It is a matter of survival of export jobs against almost imperceptible cost increases for everyone.
In the long run, wages reflect the level of labour productivity, which is the level of output each worker provides. As labour productivity is improved, wages can also rise. Productivity is a function of investment which is increasingly absent as the overvalued currency ruins margins on export efforts.
How can labour productivity be improved? In the manufacturing sector, historically this has been achieved by moving away from basic unskilled, labour intensive production, to more automated machine and robotic processes, which require high levels of investment.
As a result labour demand in the sector has changed significantly over time. Manufacturing needs a much higher skilled and educated workforce, to correctly run the new production processes, design cutting edge products and systems, manage export markets and supply chains as well as provide the innovation to stay competitive. This suggests labour productivity in manufacturing is now relatively high compared with other sectors, as demonstrated by higher median and average wages in manufacturing when compared to that paid by our total economy.
What is the real effect of the exchange rate on our consumer prices?
A recent Reserve Bank of Australia (RBA) report entitled “The exchange rate and consumer prices” explores the level of pass-through the exchange rate has on import prices, manufactured good prices and consumer prices. This found that a 10 per cent appreciation of the Australian dollar reduced overall consumer prices by around 1 per cent; an effect which was spread out over around three years.
It is reasonable to expect New Zealand would show similar results. If the exchange rate was to fall, and take the pressure off our exporters, the relative effect of this on consumer prices would be small. This means the real wages, which are measured on how much you can actually buy with the wages you receive, would only see small possibly imperceptible decreases.
The three graphs come from the RBA report. The top graph shows how the exchange rate has, as would be expected, had a direct and immediate effect on import prices; a 10 per cent appreciation lowers import prices by around 8 per cent.
The second graph shows the same effect on manufacturer goods, where a 10 per cent appreciation tends to lower prices of manufactured goods by around 2-3 per cent.
Finally overall consumer prices show little impact from the 10% exchange rate appreciation; this would be expected as overall national consumption is many times the level of imports.
To repeat, the impact of an elevated exchange rate is focused on very few firms and the benefit and penalty is diffused across many consumers. In New Zealand only 1000 firms export more than $2 million.
The appreciating dollar directly affects the margins of the businesses selling into other countries. Government and the Reserve Bank have shown no intent to address the issue, and while they acknowledge the challenges for exporters they have no policy response. This creates an environment of uncertainty, so exporters are unwilling to reinvest, as trends indicate returns will continue to be squeezed.
Investment drives research and development, design, machine tools, systems and innovation along the supply chain and allows us to stay up with the global competition. As this dries up our future competitiveness withers and we will see more exporters close down or pack up to move offshore. This means more jobs will be lost in the sector, many of which are highly skilled, high paying jobs, dragging down average earnings in New Zealand.
Bill English’s comment is entirely political, setting one group against another. We need to see politicians do better than this, and get into policy for the long haul. A lower dollar would allow New Zealand to develop a more robust, diverse and thriving export sector. This would create many well paid jobs, and provide innovative jobs sufficient to prevent innovative and skilled individuals from leaving. We cannot expect our labour productivity and wages to improve in the long term if the current settings starve margins and investment; slowing innovation and the skill accumulation of our workforce. Without investment, which fuels innovation and research and development, labour productivity will not improve. Absent of any real structural improvements, any momentarily enhanced purchasing power is a delusion.
Manufacturers do not want to see the real wages fall; we want to see purchasing power placed on a sustainable basis and then improved. A realistically valued currency is what it is but it puts the economy on a sustainable path, rather than driven by the illusion of wealth through cheaper TVs and foreign holidays. A lower dollar will make imports more expensive, but in the long term, a thriving manufacturing and export sector is what will provide higher employment while raising wages and living standards for all New Zealanders.
The RBA report is clear that the exchange rate has a relatively small effect on overall consumer prices. This means a fall in the exchange rate would vastly help exporters and have a comparatively small effect on purchasing power.
We cannot rely on debt and cheap imports to survive; we need to support our export sector so we can pay our way in the world.