Monetary policy needs to consider incomes

A guest comment by CTU Economist, Peter Conway

Peter Conway2007 has begun with continued debate about monetary policy. On the one hand, the housing market in particular (and some economists argue the tight labour market also) imply that interest rates should rise, whereas other economists are arguing that the easing rate of annual inflation along with a higher exchange rate and modest GDP growth justify holding the official cash rate at 7.25%.

Monetary policy is about the medium term. The inflationary pressures that concern the Reserve Bank are not about 2007, as we know inflation is falling. There are also financial stability concerns due to the huge increases in debt that households have taken on while house prices have doubled in the last 5 years. Debt levels doubled also in that period as a proportion of household income with over 13% of income now servicing debt). But incomes rose by under a quarter in that period. How households cope with that level of debt if and when the housing market slows is a real issue.

To a large extent the key economic issues are structural rather than cyclical. We have gone through a relatively soft landing and growth is now picking up. But the structural weaknesses such as embedded low wages, low levels of labour productivity and poor levels of savings are the major concerns. High house prices and high levels of household debt combine with repatriation of profits to overseas owned firms based in New Zealand to produce a huge current account deficit. None of these issues are easy to address. Some form of capital gains tax on investment property would help a bit but that would require a very broad political consensus. More could be done to encourage local ownership of firms including more active promotion of joint ventures. A multi-faceted approach is needed to lift wages. Specific attention needs to be given to low pay including in the state sector, but the key is more widespread collective bargaining, particularly at a multi-employer or industry level.

With lower inflation this year there may be opportunities for an increase in real wages and also negotiated employer contributions to KiwiSaver, but in the long run another key to higher wages is improved productivity. Much is being done to address this but the time lags are considerable before we see improved productivity from higher investment in skills, infrastructure and technology. In addition, we have high labour market churn. Unemployment may be low compared with the 1990s but we still have large layoffs occurring, and some 700,000 people out of a labour market of 2 million people start a new job each year. This mobility is a good thing up to a point, but it is hard to build skills and firm specific knowledge when there is such a huge churn.


1 Response to “Monetary policy needs to consider incomes”

  1. 1 Corporate proxy solicitation services Trackback on 20 May, 2019 at 3:45 am

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