New Zealanders get low wages

18:34, Oct 20 2011
office worker
HARD WORK: New Zealand workers get low pay and addressing it needs to be about fairer distribution of wealth.

New Zealanders get low wages.

"Yeah, I know we're not as rich as Australia and not growing as fast. Tell me something new," you might say. In fact, even taking the gap with Australia into account, our wage levels are low.

Wage levels are important. Almost three-quarters of the income that households depend on before retirement comes from wages and salaries. Wages and salaries are how most New Zealanders share the income this country generates. Low wages and salaries contribute to the high levels of income inequality that have grown during the past two to three decades. We have far too many children living in poverty  and two in five are from households where at least one adult is in fulltime employment.

How can we tell that our wages are particularly low? For a start, we can look at their share of the income the economy generates  the "labour share". The rest is "operating surplus", the interest, dividends and other income going to owners of capital.

In New Zealand, wage and salary earners lost about a quarter of their share of the income the economy generated between the early 1980s and 2002. The fall wasn't because employers had invested aggressively to make their firms more productive. Growth in capital intensity was weak, and weaker than Australia. It began to rise again, but by 2010 was still well below 30 years earlier.

Australia's labour share was higher than ours for almost all this period. The share did fall between 1975 and 1989, but bottomed out at a much higher level than in New Zealand.


Australia has thrived with more of its income going to wage and salary earners than in New Zealand.

That's one way to see that our wage and salary earners have been dealt a bad deal. Another is to look at how they fared against productivity increases. Dominant neoclassical economic theory says that, after inflation, wages should rise at the same rate as labour productivity. Treasury assumes this in its forecasts.

New Zealand's wage rises have fallen far behind productivity growth. In the private sector, where labour productivity can be reliably measured, it rose 52 per cent between 1989 and 2010. But, average hourly wages rose just 16 per cent after inflation. From 2000, the gap was less, but still large: labour productivity rose 13 per cent but wages rose only 9 per cent after inflation.

Why? There have been similar trends in most high-income countries. In September, the conservative International Monetary Fund came up with an answer after years of denials: international supply chains  the way multinational companies spread their production around the world, searching for the lowest cost  are intensifying the effect of new technologies, leading to the hollowing out of "advanced" economies. The result is many workers have been forced to move from medium productivity, middle-income jobs, largely in manufacturing, to low productivity, low-paid service-sector jobs.

This loss of higher value-added production has been documented in New Zealand since the opening of the economy in the 1980s. So has the growing income inequality.

In part, however, it is also because the bargaining power of employers greatly outstripped that of employees.

The rapid opening of the economy encouraged employers to move jobs to low income countries, or threaten to. That was reinforced by the 1991 Employment Contracts Act which made the most effective form of bargaining for employees, union-backed collective bargaining, extremely difficult.

At the same time, the minimum wage was allowed to fall well below current wage levels. The Employment Relations Act, which replaced it in 2000, was an improvement, but only a small one and has been further weakened by the present government. Collective bargaining is still very difficult, and less than 10 per cent of private sector employees are covered by it.

Meanwhile, Australia maintained much stronger employment relations legislation.

The IMF and the International Labour Organisation agree that loss of employee bargaining power is a cause of growing inequality internationally.

Can New Zealand afford higher wages and salaries? It is not about affordability, it is about fairer income distribution. But higher wages could have beneficial economic as well as social outcomes. Employers would have a strong incentive to invest more in increasing productivity rather than relying on low wages for competitive advantage. If they invested in better technology and raising the skills of their employees, then many more would be able to compete internationally  on the basis of quality rather than low wages.

Bill Rosenberg is the Council of Trade Unions economist.

The Dominion Post