Future wage rises could get workers up dancing

Wage growth is tipped to have hit a 10-year high. Two cheers for that. We’ll find out if it got there later today when StatsNZ releases labour market data for the September quarter. But it’s not a record that’s likely to have workers dancing in the streets. Westpac senior economist Michael Gordon made headlines when he noted in his preview that a 0.6 per cent lift in wage inflation for the quarter would take us to 2.2 per cent for the year — the highest in a decade.

It’s a point unlikely to be lost on most wage earners, that this peak is hardly Everest-like.

Since the Global Financial Crisis, wage growth has been mired in the swamp of low inflation and slow economic growth. What has perplexed economists is that this is despite unemployment dipping to historic lows.

New Zealand’s jobless rate was just 3.9 per cent in the June quarter (it’s tipped to rise to 4.1 or 4.2 per cent in today’s data). It has been below 5 per cent for nearly three years.

According to the traditional economic model — the Phillips Curve (developed by Kiwi Bill Phillips) — demand for skilled labour ought to have pushed up wages. Has something structural — such as the gig economy — changed the nature of work? Or is this simply a longer and flatter economic cycle?

As lacklustre as the latest wage data might be, it offers hope the dial may be shifting. However it is also being shifted with government help. ASB chief economist Nick Tuffley notes: “Legislated minimum wage increases contributed over a third of last quarter’s increase in the [labour cost index] and will impact wage growth figures until 2022”.

Market purists will argue artificially inflated wage growth is not real growth — at least when it comes to creating new wealth. Putting aside ideological views about fairness, they have a point.

Long-term, a nation can’t legislate its way to greater prosperity. New Zealand needs to do better at boosting productivity per worker. We need to upskill our workforce and move up the value chain.

Ultimately, getting more workers out of lowskilled labour is a better solution to the low-pay issue. But timing is everything.

At this point in the economic cycle, legislated wage rises are timely. Politically, they address fairness issues and social imbalances that have grown in the past decade. But economically, they also provide some of that fiscal stimulus everyone keeps saying we need more of.

As much as wage inflation worries businesses concerned about rising costs, it can also stimulate consumer spending. That may put some more healthy inflation back into the economy, allowing businesses space to expand.

If we avoid recession in this current slowdown, we’ll head into a second decade of sustained growth. With that will come renewed opportunity to educate and invest our way to more meaningful wage growth.