Brass in pocket
Shamubeel Eaqub on the low wage puzzle
The jobs market is in good health. There are more jobs and fewer unemployed. But wages are not rising very much.
Standard economic models don’t explain this divergence. The reason may be the level of competition in the local labour markets. Better wages may be more influenced by the Ministry of Commerce than other branches of politics and policy.
There are 2.6 million people in paid work. That’s 68 per cent of the working age population, a first in modern history.
There are still nearly 120,000 people looking for a job, equivalent to an unemployment rate of less than 5 per cent, which is a historically low level.
Firms are finding it hard to recruit, as the pool of qualified job-seekers who are not already employed is so small.
We can quibble about the quality of some of the jobs and hours, but the overall trend in the job market has been positive since 2013.
The recession hit jobs hard in 2009 and the market stayed depressed for four years but the recovery of the past five years has been a little unusual.
Wages haven’t risen in tandem. Wages have been increasing in some sectors such as construction, but have been stagnant in others.
Standard economic theory suggests that wages should be increasing. Firms are demanding more staff, there is less supply of available labour, so the price of labour – wages – should rise.
But this is not happening as uniformly as theory would suggest.
One explanation for this may be a lack of competition in a local labour market.
If there are not many
In a bizarre standoff, firms find it hard to find staff, but aren’t willing to pay higher rates or to train people up.
employers in a particular industry, then there is a benefit in exercising that power to pay relatively low wages, because there isn’t much risk of losing staff to other businesses. There are also more profits for the business owner.
It also means that those firms don’t really want to pay higher wages for new staff, as it would risk raising wages for existing staff, which would be costly.
This effect tends to be smaller when there is collective bargaining through unions. In contrast, in industries where there is plenty of market competition, gains in profits and productivity are more likely to increase wages.
Unions and collective bargaining in concentrated industries can also give a bigger share of economic gains to wages.
In some parts of the economy, we are seeing pay increases. For example, the pay equity deal which increased wages for care workers, who otherwise had little bargaining power.
The increase is from a low level and evidence from the US on minimum wages suggest such increases don’t cost jobs, but improve incomes for the working poor.
This is in contrast to the traditional economic narrative that higher wages will cost jobs. More likely, many industries paid what they could get away with, but will pay higher if they need to.
Labour shortages increasingly become a feature of the labour market. In a bizarre standoff, firms find it hard to find staff, but aren’t willing to pay higher rates or to train people up.
But this is more a reflection of the level of competition in the local labour market.
The focus of increasing competition and productivity is the domain of the Commerce Commission and perhaps the Productivity Commission.
Strangely, the commerce portfolio, which oversees competition law, is not usually seen as a heavy hitter in Government.
Yet more competition is one way Kiwis can really benefit from their employer’s economic gains, by virtue of their pay packets.