Posted in Life the Universe and Everything.

Higher yearnings

Everyone agrees New Zealand needs to become a high(er) wage economy. Where there's not much agreement is how we go about achieving that.

Making a dollar has become a tougher proposition for New Zealanders in paid work. Put simply, our wages and salaries are not at a level you might expect from a developed country that has a strong education system, keeps the world in milk (our exports account for 60% of the global milk powder trade), produces wine that can be found on the lists of the world's great restaurants, and has created its own Oscar-winning film industry from a standing start.

Our meagre pay phenomenon has been particularly noticeable over recent years, with a median drop in real household income of 2.7% being recorded between 2010 and 2011.¹ However, the overall trend goes back several decades. It is mirrored by the country's dramatic slide down the Gross Domestic Product (GDP) per capita rankings. (GDP per capita is a commonly used indicator of standard of living). In 1966, we were ranked in the OECD's top five. By 2008, we had been outstripped by some Asian economies and others from eastern Europe, to languish in 23rd place.²

Perhaps the starkest illustration of the decline is the difference in earning power between New Zealand workers and their Australian counterparts. In 2009, the wage gap between the two countries was 35% in Australia's favour 2 and has been a chief motivation for the ongoing exodus of workers from New Zealand to the wide brown land.

In this way, Australia has acted as a pressure release valve, taking in large numbers of New Zealanders seeking higher incomes. If that option wasn't there, this issue would no doubt have far more prominence in this country.

As it is, every political party, the country's unions, most economists and – of course, most wage and salary earners – want the situation to change. Their prescriptions differ radically, however.

After carrying the 2008 election, the National and Act parties sought a solution by setting up the 2025 Taskforce. The taskforce was headed by former National leader Don Brash, and was charged with coming up with a plan to close the income gap with Australia by 2025.

The taskforce's recommendations were released in 2009. Brash stated that for the 2025 goal to be reached, New Zealand's annual growth rate would have to be 1.8% higher than that of Australia. To achieve that he proposed some radical changes which included drastically lowering taxes (to have a top tax rate of between 20 and 25%), changing the age of entitlement for national superannuation and cutting back other benefits, and slashing government spending.

Prime Minister John Key immediately distanced himself from the report. He noted that New Zealand's radical economic reforms in the 1980s and 1990s were not wholeheartedly adopted by Australia, which took a more incremental approach and certainly didn't suffer as a result. "In that regard, I am not convinced that absolute big bang radical reform is the right way to go," said the PM.³

But while maintaining it is committed to increasing New Zealanders' incomes, the Government does not appear to have a plan to make that happen beyond a strong focus on returning the Crown accounts to surplus.

There was something of an outcry last year when Finance Minister Bill English enthusiastically greeted the announcement that Imperial Tobacco and Woolworths were transferring jobs from Australia to New Zealand because of cheaper wages here.

Stephen Blumenfeld, Director of the Industrial Relations Centre at Victoria University, commented that "taking the low road... by first being a low wage economy and offering lower working conditions... isn't really sustainable."⁴

Labour's finance spokesperson David Parker was more direct, saying that English had all but given up on his party's stated commitment to close the wage gap. "We don't have to be Australia's Mexico4," he said.

Parker's own solution to the low income conundrum was short on detail. "We need to improve our savings," he said. "We need changes to monetary policy, we need some pro-growth tax reform. Those are things we need to change the economy."⁴

For some other commentators, as important as it is to get the macroeconomics right, the problem is also one of income distribution.

Council of Trade Unions economist Bill Rosenberg points to the decline in the 'labour share' – wage and salary earners' share of the income generated by the economy as a whole.⁵ In the 1970s, the labour share in New Zealand averaged 63%. This had declined to an average 53% in the period 2000 to 2007.⁶

"Australia's labour share was higher than ours for almost all this period," said Rosenberg. "It has thrived with more of its income going to wage and salary earners than in New Zealand."7 He also cites the fact that Australia has maintained stronger employment relations legislation as a reason for their workers' higher incomes.

For Tim Hazledine, Professor of Economics at the University of Auckland, income inequality also needs to be addressed. "Low wages are a problem for productivity and competitiveness, not the solution.⁸

If you're getting the impression there's no easy answer to this situation, you'd be absolutely right. For New Zealand is not alone. The same pattern has been seen in other developed economies as globalisation has changed the way the world works and is paid for that work.

If any solution is found, you can be sure it will make headlines around the world.

Last updated on 25 October 2017.