No clean path to a higher-wage economy
Low pay continues to be a matter of much debate. A recent column of mine published on Stuff suggesting New Zealand is not a low-wage economy drew hundreds of comments, both in agreement and against.
Evidence would suggest we are not a low-wage economy. But it’s true that we do have a number of lower-paid occupations and sectors.
Low pay is certainly a matter of great concern. Distress over low pay lies behind recent strike action, and is no doubt weighing on the Government’s mind as it considers how to lift incomes.
Its options are limited. Higher pay cannot be commanded, as pay is mostly determined by supply and demand in commercial markets. Skills are linked with productivity, since higher-order skills are usually required to increase the productivity of a business.
The supply of candidates is another factor – often jobs are low paid because there are many candidates available. A cleaning company may not feel much pressure to pay more because it can always find more cleaners.
Whether the cost of higher pay can be passed on to customers is another factor. A pay rise for fruit pickers could push up the cost of apples sold in Japan or elsewhere. A key question will be how far the price can rise before Japanese or other customers decide to buy cheaper apples from elsewhere.
In these instances markets are simply signalling what customers want and how much they will willingly pay, and there’s not much a government can do to directly influence these. But governments can provide indirect help.
They can run a wellfunctioning education system that lets people easily train or retrain to gain higher skills.
They can create a good environment for business, reducing unnecessary regulation so that companies more easily innovate and create high-value products, where higher labour costs can be more easily passed on to customers.
Directly raising wages is harder. Direct government interventions on wages include the minimum wage and Working for Families. However, these raise their own problems.
The minimum wage does lift incomes of the lowest-paid people, but it also sets off relativity bargaining by employees on higher wages.
The resulting inflationary pressures cause higher costs of goods and services and higher interest rates – which impact most heavily on the lower paid.
Working for Families does subsidise incomes in the short term, but its abatement levels reduce the value of later wage rises, making it less attractive for employees to upskill or take more responsible jobs.
In the longer term it may actually reduce the motivation for employees to gain skills or increase productivity.
Unfortunately, governments have no silver bullet for lifting wages. But there are things that individuals and businesses can do that will definitely help.
Businesses can focus hard on innovation, producing highervalue goods and services that will command higher prices.
Individuals can focus hard on improving their productivity and skill levels in areas that are valued by businesses.
The key thing for everyone is to increase the value of the work done rather than the cost, as this will pave the way for higher pay.
Growing skills and productivity in our people – and innovation and competitiveness in our companies – is our best way to grow wages.