Employment in New Zealand is governed by one thing. Low wages. Following the deregulation of employment markets in the 1990’s union membership and employee rights have been gradually eroded. New Zealand’s response to the call for deunionisation has been overwhelming. This resulted in the sharp decline in real wages and a dramatic increase in income inequality.
Over the past two decades New Zealand has found itself well adrift of its OECD peers. By 2002 New Zealand was paying its workers the lowest share of the national income, the amount of income allocated to wages, out of any country in the OECD (the Labour Share). Economists use the Labour Share as an indicator of income distribution. Since the introduction of legislative change in the Employment Relations Act in 2000 the slide has been abated.
Many argue that this change in the Labour Share is brought about by changes in technology, increased globalisation and the rise of SME’s. This is somewhat negated by examples of other small countries with high rates of SME’s, like Finland, which leads the OECD in the Labour Share. It also does not explain the below Figure 3 which shows the above trend is exacerbated for large publicly owned companies.
A 2016 assessment of average wages found New Zealand 18th out of 36 OECD countries. This placed New Zealand wages up to 50% less and consistently 25% less than its piers. The glaring differential is always drawn with Australian wages which were 32% more than New Zealanders. The former government argued that this was a benefit for exporters competing in the Australian market. This is hard for employees to grasp in the face of static wage growth over the past two years. With wage growth limited to 1.6 per cent it places wages behind the rate of inflation. Treasury forecast in the May 2017 Budget that real wages are protected to rise just 0.6 percent in total over the five years from 2017 to 2021.
One of the major issues for providing reliable insight in this area is that the CPI does not make allowances for housing costs. Whilst arguments are employers should not be bearing the brunt of New Zealand’s run-away housing market that fails to recognise the change in the Labour Share which shows that New Zealand’s labour laws have substantially weakened employee bargaining power. This has resulted in real incomes for the bottom decile of income earners less than they were in the late 1980s. Treasury statistics show that the this will continue as the Labour Share is forecasted to decrease to 48.8 per cent by 2021.
This leads to increased worker dissatisfaction as the worker sees an ever-decreasing share of the income they produce from their work. The stark reality is that employers use low wage costs as a method to drive business efficiencies rather than investing the capital needed to build the business.
The market therefore needs intervention. The most dramatic example of this is the recent pay equity disputes. The reliance on the market to set the wage rates has resulted in decades of underpayment by those in the most vulnerable sectors. The current high rates of immigration and the use of migrant workforce have seen a flood of employment case of workers bound to employers in slavish conditions.
This enlivens the debate for a “living wage” to be introduced that calculates factors such as rising house prices in setting a minimum wage. The comments by Prime Minster Ardern that wages rates will increase to $20 per hour by 2021 has resulted in a debate in the media. The living wage is a function of many factors including the costs of housing, food, health care and transportation. Adoptees of the living wage include Christchurch City Council, Wellington City Council and (under a two-staged increase) Auckland City Council.
Employers perennially argue that a rise in wages will be worse for workers in the long run. Increases in costs to businesses will result in job losses. However, this has been repeatedly debunked by overseas research for over a decade. The research has shown that a properly remunerated workforce is motivated, has greater dignity, are less prone to sickness and are likely to stay in the business long term. This is particularly apt as New Zealand employees change job faster than 85 per cent of workers in other OECD countries. Turnover of staff is also shown to be concentrated to those on low wage jobs.
Low wages should be properly recognised as a hand break to growth. Rather than the focus on productivity which argue that employees share culpability for a low wage. Proponents of this argument say that New Zealand employees have low productivity, and hence low wages, because they do not put in the effort necessary. The adage is that low productivity leads to low profitability which leads to low pay.
I believe that the resolution of this issue is the strengthening of labour laws, the rebalance of bargaining powers in favour of the employee and minimum rates of pay that encourage a vibrant high wage economy.