Wages are important socially and economically, but wages are low in New Zealand. We are in a low wage rut, dependent on low wage industries like agriculture and tourism.
Low wages contribute to New Zealand’s high income inequality which has many negative effects. We have evidence that high inequality can lead to social breakdown as we see happening in the US; it can create excessive indebtedness among wage earners and a bloated financial system risking instability and financial crises; it can worsen economic growth.
The standard answer from employers and economists when people complain about our low wages is: “You can’t raise wages before you raise productivity.” But wages have not followed productivity growth for long periods, here (particularly since the end of effective collective bargaining in 1991) and in other high income countries. And in any case, employers have not been investing, improving their management skills, training their employees and doing the research and development needed to raise productivity. Why not?
What if low wages are the cause and not just the result of poor productivity? Could raising wages trigger a rise in productivity, which in turn (given better collective bargaining systems) could fund further wage rises, with a virtuous upwards spiral, lifting us out of the low wage rut? Rising real wages can raise productivity at three levels.
First, higher wages and fair treatment lead to better motivated workers who put more effort and thought into their work. The body of research on the “Efficiency Wage” explains why.
Second, higher wages encourage employers to invest more in productivity-raising production processes and technology. This is the basis of the “Swedish model” which has created a high wage, high productivity economy and one of the best countries in the world to live in.
Third, higher wages increase spending creating greater demand for goods and services. This encourages employers to invest in their firms, raising productivity and employment.
To start this virtuous spiral needs strong and coordinated pay rises that only the government (such as through minimum wage rises) and widespread collective bargaining can provide.
By themselves, ambitious wage rises are not a silver bullet to high productivity growth: a number of policies need to be aligned. But regarding higher wages solely as a cost to employers, is short term, short sighted and poor policy. Higher wages are an ingredient which produces great social and economic benefits.
Download the full bulletin: CTU Economic Bulletin 195 November 2017