Facts on wage rises

The Minister of Finance has again taken up the line that after-tax wages have risen more than inflation during their period in office.  We have previously pointed out the weakness of this analysis. Here is an update.

It is important to remember that the government is using the average weekly wage for its comparisons. About two-thirds of people earn less than the average wage, and the tax cuts which the government says produced these take-home pay rises were not fairly distributed. A person on less than the average wage got a smaller proportional tax cut and is likely to have felt a greater effect from the GST rise because people on higher incomes tend to use a larger proportion of their income for things which don’t attract on GST such as overseas trips and saving. The government uses the weekly (not hourly) ordinary time wage which rises if people work more hours. It of course rises if peoples’ pay rate goes up – but also if more low paid New Zealanders lose their jobs, boosting the average of those still in work.

The government says that “The real after-tax average wage increased 2.5 per cent in the year to March 2011, after accounting for all consumer price increases including food prices and the one-off rise in GST last October.”

Our calculation is that it increased only 2.2 percent when the ACC levy is included. Before taxes it fell by 0.5 percent after CPI inflation. The average hourly wage (which isn’t affected by hours worked) rose only 1.2 percent after tax and before taxes fell 1.8 percent after inflation.

The government goes on to say: “"This means that since September 2008, after-tax wages have increased 17 per cent in nominal terms and 10 per cent after adjusting for inflation.”

We make it only 16 percent in nominal terms (that is, after tax but before inflation is taken off) and 9 percent after inflation. The average hourly wage rose only 7 percent.

But like last time, the government is being cheeky in taking their comparison back to September 2008. They weren’t in office then, and it conveniently makes it look like they were responsible for the 1 October 2008 tax cuts. A more honest comparison is with December 2008 shortly after they took office. Before tax, average weekly wages have risen only 0.6 percent in real terms (that is, after inflation) in those two years and three months. After-tax nominal wages have risen only 12 percent in nominal terms, and after tax and inflation they rose only 5.0 percent. The average hourly wage rose only 3 percent (and fell 2 percent before tax over the period).

So of their claimed 10 percent growth in wages after tax and inflation, 4 percent was under the previous government, one percent went in rising ACC levies and 5 percent they can claim. If they had used the average hourly wage they could have claimed only 3 percent.

However any real increase is almost entirely due to tax cuts rather than increases in real wages. That is unsustainable: we cannot tax-cut our way to higher wages. Tax cuts are a large part of the reason for the increasing government debt.