Why We Need Higher Wages. Paul Goulter

Article by Paul Goulter, secretary, New Zealand Council of Trade Unions, published in Employment Today, May 2003.

It is reasonably well accepted that the pathway forward for New Zealand is a high value added export economy with high skills and high wages.

We are seeing important steps being taken to transform the economy along the growth path set out in the government's growth and innovation strategy.

These are focused on moving businesses up the value chain and helping them develop an export strategy.

We are also seeing a long overdue focus on skill development at all levels including the workplace. The CTU and Business NZ are working together on projects designed to promote skill development amongst workers and their employers.

However - there is a sticking point. The bit that is sticky is the 'high wages' part of the equation.

The CTU has long argued that wages in New Zealand are too low. Wage increases, even under the Employment Relations Act only marginally track above the rate of inflation - even in a period of acute labour (or more properly - skill) shortages.

Leaving aside for one moment, the important social issue of improving standards of living that arise from higher wages, there is in our view important economic arguments that demonstrate the negative effects of low wages in New Zealand.

One result of continuing low wages is that there is little incentive for employers to invest more in plant or technology as they can hire cheap employees instead.

The effects of this show up vividly in our productivity statistics.

As pointed out by the Governor of the Reserve Bank, in terms of labour productivity, New Zealand's performance in respect of physical capital per worker is low.

In fact it is so low that the Reserve Bank identifies the need to address this as one of the economy's highest priorities. Our performance in terms of human capital per worker is rated as average and with high room for improvement.

Low wages are a disincentive to invest in physical capital. Why spend more on plant when you can get the job done using cheap labour?

This is another manifestation of the short term focus of business. The problem is that the productivity leaps that we need either directly in labour productivity or through total factor productivity will not occur without this investment.

The situation worsens when employers also reduce investment in human capital as happened throughout the nineties. These are not outcomes that the New Zealand economy needs.

On this argument there is every reason to significantly raise wages as this acts to disincentivise this short term focus and underinvestment.

This may also explain the current phenomena of low wage rises in a tight labour market. Instead of significant wage rises for workers, we are seeing significant lifts in employment. While wages remain low, the incentive again is to expand employment rather than paying more to the existing workforce.

On the one hand, more employment is to be strongly welcomed. However we need to look a little deeper. The issue is the quality of that employment.

If it is low quality employment (typically marked by low wages) then it is not sustainable employment. Sustainable employment is built on high skills and high wages.

Low wage jobs get hit first in any downturn. They also symbolise low investment in both training and in the plant or technology.

A further feature of low wages is they motivate New Zealanders to work overseas. We hear plenty about how bad it is that so many New Zealanders have left taking all their talent, skills and investment with them.

All sorts of reasons are commonly given. One reason we hear very rarely is many New Zealanders simply leave because they can earn more overseas.

We estimate a 25% average wage differential between New Zealand and Australia. In a common labour market, naturally New Zealanders are going to move and stay in Australia.

We hear plenty from business on the need to align our corporate tax with Australian corporate rates.

We do not hear anything about aligning wage rates - except of course when senior management advance self serving arguments about the global nature of their jobs to justify their salaries.

The CTU is strongly encouraging unions to be more assertive in their wage bargaining.

We believe that it is time that workers started to more fairly share in the benefits of growth.

There are significant distribution issues for New Zealand workers and collective bargaining, through the Employment Relations Act provides opportunities for workers to recover some of the ground that they have lost.

We also believe that the country's future cannot be based on low wages. If the high skill/high wage economy is to mean anything then workers need to start to see the wage side of the equation improving.

ENDS