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Monday, November 12, 2012

Unemployment benefits the wealthy

I almost relented on submitting this blog post because of the in depth analysis to be found elsewhere, and being a layperson on the subject I had my reservations about making certain claims, so what I’ve done is included references for anyone wondering where I got my information from and am unapologetically stating my opinion. 

The question I wanted to ask is why are we (apparently) all surprised at the high unemployment rates disclosed late last week? Maybe because the government proposed to create around 170, 000 new jobs. But did we really believe it? I was doubtful, as were many commentators at the time the government made the claim. In short, if you didn’t already know, NZ’s monetary policy relies on certain levels of unemployment. Any government that is unwilling to change our monetary policy, then is lying through their teeth when they assert that their objective is full employment or high employment. Bold claim, I know, but instead of looking at why we have this spike in unemployment I was more interested in the role of unemployment in our economy so this post is a brief and probably over-simplistic look at monetary policy in NZ.

Inflation. As defined by the Reserve Bank of New Zealand (RBNZ) is ‘the term used to describe the average rise in prices through the economy, and it means that money is losing its value’. It is usually caused by high employment and subsequently high demand for goods and services, which enables businesses to ‘charge more (inflate prices) for the same goods or services’. Its also caused by higher prices for imports. In short, if there is too much money circulating and ‘too few goods and services’ then money loses value.

If high employment causes inflation, then the logical step is to reduce employment or alternatively, to increase unemployment to reduce inflation levels. When there are not enough jobs, workers compete for those positions, putting employers in advantageous positions such that they can drive down wages. This drags inflation down because there is less money circulating in the economy when unemployment is high and people are competing for jobs.

Another benefit is that low wages create an economy where workers have less so they spend less which helps control inflation, while business owners have more so they demand for the more luxury items are for the privilege of those in positions that pay higher wages because there is less competition for those more specialised roles. Say Hello to the wealth gap. The assumption was that the benefits would trickle down. Yet to happen. Its been almost 30 years and we still have a massive gap between the rich and the poor.

So what happens when people are working considerable hours for wages that provide little more than welfare benefits? Welfare looks more attractive and disrupts the labour competition required for this neoliberal monetary policy to work. The answer then, was firstly to create an arbitrary poverty line then cut that by 20% and make that the welfare entitlement, care of the good old economists at Treasury (In a Land of Plenty link at bottom of page). The next step was to create campaigns demonise beneficiaries as welfare dependents. Pause here. Remember, people are forced into unemployment through redundancies or non-renewal of contracts (to name a few methods) and then made to compete for jobs at lower wages in order to control inflation so that those in positions of privilege could retain the value of their assets, that high employment and subsequently high inflation adversely affects. Another tactic to demonise those who required state assistance, was to introduce penalty programs where those who refused to take on low wage work risked their benefit being cut. 

Why would someone refuse to take on low wage work? For multiple reasons.

Low wages do not provide enough to support individuals let alone families. Working brings with it additional costs if you have children, that is, child care costs for those under 5 and before and after school care costs for those with school aged children. Extra petrol costs if the parent/s work far away from home, parking costs if there is no parking at the work site. There may be moving costs associated with new employment so rent may go up, change of school zones can result in extra school uniform costs. The list is endless for additional costs, especially for those with children. I accept that welfare is not the answer but neither is forcing struggling families and individuals into low wage work. The answer, in my view,  is a change in monetary policy.

I need to quickly address interest rates here and the effect on inflation. In short, the RBNZ raises interest rates when inflation is high. It does this for the follow on effects. Firstly, people borrow less. Secondly, companies make cutbacks so that they can repay the debt. This results in less money circulation and helps control inflation. Cutbacks are usually in the form of staff reductions. Or restructuring. Interest rates are lowered when the RBNZ want to stimulate the economy.

When interest rates are lowered, then employment levels will rise again and economic growth occurs, that is, more spending. 

In summary, the unemployed are forced onto benefits to survive when monetary policy drives up interest rates that cause employers to make cuts to repay debt. They are then forced to look for work in conditions designed to put the unemployed at a disadvantage. If they refuse to take work that pays less than what is livable, they are penalised by the State for conditions created by State monetary policy. Sounds fair enough, for merciless right wingers.

I just want to mention the minimum wage, because it is important. The National Party have refused to increase the minimum wage citing its bad for business. Yet, contrary arguments suggest that the more money people have the more they spend, thereby making at least small to medium business profitable (see Frankly Speaking blog at for a more in depth analysis on the unemployment strategies of neoliberalism). However, what does that do to inflation? It drives that sh* up. See the circularity? If people are spending more, then businesses are making more money and can afford to employ more people but as demonstrated above, higher employment leads to higher inflation rates.

So what is the real problem? It is money and the policy used to convince the public that the conditions within which we live are fixed and that there is no alternative. The value of money is determined by the market, and therefore so too is the value of an asset. A good or service is worth as much as you are willing to pay for it. The mistake is in thinking that money has an intrinsic value. It doesn’t. It’s a piece of paper with a number on it and what you can trade it for depends on what the market thinks it’s worth. I mean we can quantify money in terms such that $1 equals 100 cents and so on, but what it is worth is qualitative. As long as society believe that money has value based on a qualitative assessment of its worth, then the only logical outcome is to accept this neoliberal model that creates poverty to enrich and sustain those already privileged members of society. Corporate’s. The best example I’ve read about understanding the value of a bank note is that it is simply an IOU from the bank (In Ian Wishart's 'Daylight Robbery'). Fake credit. So the unemployed are pawns in a game designed to protect the value of capital that doesn't exist? Society, this is messed up.

A good documentary on monetary policy and unemployment is “In a Land of Plenty” and is available to watch free via the NZ On Screen website at .