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BusinessSeptember 25, 2017

Why is New Zealand a low wage economy?

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The Aussies earn on average one-third more than Kiwis, and in some countries the gap is even wider. Data scientist and mathematician John Holt crunches the numbers.

New Zealand is a low-wage economy compared to other OECD countries. When a currency’s buying power is taken into consideration, New Zealand ranked 18th out of 36 OECD countries in 2016.  And the gap is not small: 10 of these 36 countries have average wages that are 25% more than New Zealand; three countries have 50% more; Australians earn on average 32% more than New Zealanders.

Comparing like with like, and looking at 40 OECD countries in the last 20 years, NZ industries consistently rank in the bottom half for salary and wages as a proportion of value-added profit. That’s profit after expenses but before labour costs, depreciation, and taxes.  This proportion is itself a measure of productivity (turning lots of profit from relatively small labour costs) – it is just a shame that this “high productivity” is associated to low wages.

Sizeable New Zealand industries where labour gets more of the profits than the same industries overseas are iron and steel production, real estate, electrical machinery and apparatus (such as electric motors, or toasters, and their repair), and food, beverage and tobacco products. This may be more an indication that we approach these industries in very labour-intensive ways, or that our wages, though low, are higher than in the countries where this sort of production is commonly done.

Whatever the reason, employees in these industries are getting more of the available profits than most of their international counterparts, whether their wages are low or high.

At the other end of the spectrum we see a bunch of utilities industries like water supply and electricity and gas distribution. These are followed by research and development, education, machinery and equipment manufacturing and computer and related activities. Workers in these industries earn a smaller proportion of the available profits than most workers in those same industries overseas.


How to interpret this? The utilities figures raise questions that aren’t about wages being artificially low. We have a minimum wage, so it is hard to imagine that water and sewage employees are paid worse than 97% of the water and sewage employees worldwide, and it’s the same for electricity and gas distribution. So perhaps the figures are due to profits being much higher. Are we being charged too much for water and energy?

And how do we interpret the figures for these other industries? Can we conclude these industries are underpaying their employees? Are the profits going to the shareholders, or are they being retained or invested back into the business? It isn’t clear, and there are a number of possible explanations.  

To begin with, the figures are not precise – obtaining international benchmarks is fraught as every nation records their numbers in different ways, so work has to be done to sort it all out so that like is being compared with like. And national accounts data can be imprecise as well. But the higher and the lower numbers are still likely to be amongst the highest and the lowest, respectively.

In some instances, companies in other countries have higher wages because they are producing more sophisticated products and services and need more highly skilled staff, or are investing in-house in innovation.

In addition, New Zealand is a nation of small to medium enterprises, and smaller owner-operators may compensate themselves through dividends rather than a salary. Nevertheless, most small nations tend to be full of SMEs, and many of them (such as Finland) lead the world in labour’s share of value-added.  

Revenue in New Zealand could also be more irregular, with bad years unexpectedly following good years, and businesses might retain profits in order to operate during the lean times. Again, this would afflict a lot of small nations – so are we just more risk averse than most?  

It is a comparison with Finland. Red bars are <=33rd percentile. Yellow are between 34th and 66th percentiles. Green are over 66th percentile.

Whether or not greed is to blame, none of the causes outlined are particularly promising for the New Zealand economy. In short, many of us are working in companies which, if they are not being guided by short-sighted avarice, are lacking in innovation and allergic to risk.

Apparently, the problem is productivity – which was very much in the news this election, with charges by Jacinda Ardern that it is “flat lining” countered by Bill English’s claim that it is “growing pretty well”. Why is productivity important? The official view is that if we were better at turning labour, capital and inputs into products, businesses could pay people more. As the Productivity Commission says, “the higher the productivity of a country, the higher the living standards that it can afford and the more options it has to choose from to improve wellbeing.” Increases to productivity will lead to higher wages only if business owners share the gains with their employees, and the evidence is that this doesn’t happen in New Zealand as often as it does overseas.   

As this country continues to engage with the issue of productivity – and the prosperity it could bring – it’s important to make sure that increased productivity doesn’t increase inequality.

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