Transforming New Zealand’s low wage economy

This commentary is an edited version of a recent speech, “Transforming New Zealand’s low wage economy”. Whether we look at international comparisons, or look at whether employees are getting a fair share of the income that their work generates, New Zealand is a low wage economy. New Zealand wages adjusted for the cost of living have fallen from middle of the 23 countries in the OECD in 1990 to 5th lowest. Part of the reason is the poor productivity performance of firms. But wages have failed to keep up with even that weak productivity growth. If real wages in the market economy had risen at the same rate as labour productivity since 1989, the average hourly wage would have been over a quarter or almost $8 higher in March last year. Similarly, we can look at the share of the nation’s total income going to wages: the labour share of income. If it was the same as in 1981, average annual wages would have been $11,800 higher in the year ending March 2018. We have among the lowest labour income shares in the OECD – 7th lowest in 2017. It is sobering that two of our largest export industries, agriculture and tourism, have among the lowest wages.

What are the possible causes? It’s not laziness (we work longer hours than most of the OECD), nor because of lack of skills or qualifications. Low productivity is a factor but far from the full explanation as we have seen. When wages are low, there is less incentive for employers to improve productivity. Technology is unlikely to be a significant cause but offshoring of jobs to lower wage countries, or the threat of it, likely is. Reduced employment protection, , insecure working conditions such as labour hire, casualised, “Uberised” and contracted work, and low income support when people lose their jobs, are other contributors.

But one of the most important is the weakened bargaining power of wage earners when negotiating with employers to set wages and other working conditions. Even conservative institutions like the OECD are now recognising the importance of collective bargaining, and particularly sector collective bargaining, to counteract that: “collective bargaining contributes to a broad sharing of productivity gains by promoting wages and working conditions.” Sector collective bargaining is currently non-existent in New Zealand unlike most European countries.

What can be done? There are three broad areas that need improvement: First, we need to develop a well-designed and effective industry policy to increase productivity by producing higher value goods and services, reducing our reliance on commodities like milk powder, logs and low value tourism. Second, we need to ensure that working people benefit fairly from New Zealand’s productivity, and an important step towards that would be sector collective bargaining such as through the proposed Fair Pay Agreements, and growing the number of workers who benefit from it. Third, we need much better support for people as they and New Zealand go through change, whether it is due to technology, globalisation, climate change or employers restructuring or going out of business.

Download the full bulletin: CTU Economic Bulletin 208 – March 2019

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