How are wage earners doing?

For the last few years –  probably almost since the economy began emerging from the long recession of 2008 to 2010 –  there has been talk about how low average wage increases have been.   Those lines have sometimes been run in discussions of the general rate of inflation –  all else equal, if inflation had been nearer target, average nominal wage increases probably would have been a bit higher –  but more often it seems to have been a real phenomenon people had in mind; some sense of wage earners being “left behind”.

I’ve been increasingly sceptical of that story, and did a few posts  12-18 months ago to illustrate the point.   Some of the data aren’t updated very often, and there are historical data revisions, so I thought it might be time to take another look.

The first series I’ve been interested in is the labour share of GDP –  as approximated by the share of all the value-added in the economy accruing as compensation of employees. To make this comparison, one needs to adjust out for taxes and subsidies on production (all else equal, a shift from income taxes to a higher GST won’t raise wages –  or leave people worse off on average – but will raise measured GDP).  The data are only available annually, and only up to the March 2018 year, but here is the resulting chart.

labour share 2018

There is a little bit of short-term variability in the series, but if (say) one compares the latest observation (year to March 2018) with the last observation before the recession (year to March 2008), the labour share of GDP is still a touch higher now than it was then.  In both cases, it was higher than it had been at any time in the previous fifteen years or so.   As I’ve noted previously, the trough was in the year to March 2002 (on my telling, this was not unrelated to the fact that the real exchange rate had then been around historic lows).

The other comparison I find interesting is to look at how wage rates have evolved relative to (nominal) GDP per hour worked.   Nominal GDP captures both any productivity gains the economy has managed and any terms of trade gains (as well as general inflation).  Over the longer-term one would expect those variables to be the biggest influence on developments in economywide wages.

In putting together this chart, I’ve used the SNZ analytical unadjusted series of the Labour Cost Index, which purports to be the right measure for these purposes (wage rates, rather than just average wages –  the latter distorted by composition changes, and wages before any adjustments for productivity –  the headline LCI series attempts to adjust for productivity gains).    The series doesn’t get wide coverage but –  absent any serious efforts to suggest the data are of unusually poor quality –  should.

Unfortunately, the analytical unadjusted LCI series is only available back to 1995 (the private sector sub-component only to 1998) but even that is now well over 20 years of data.

In the chart I have:

  • indexed nominal (seasonally adjusted) GDP per hour worked (using the HLFS and QES), and
  • indexed the analytical unadjusted LCI series,

both to 100 in the March quarter of 1995, and then taken the ratio of the wage series to the GDP per hour worked series (so that the resulting series is equal to 1 in the March quarter of 1995).

lci wages vs gdp

There is a fair bit of short-term noise, but the trend is pretty clear.  On this data, wages have been rising faster than the overall earnings capacity of the economy.   That was so in the 00s, and has been so –  albeit to a lesser extent – in recent years too.  For anyone inclined to want to debunk the analytical unadjusted series, note that this chart is not wildly inconsistent with the labour share chart I showed earlier: the labour share of total income has increased since the early 00s, with the biggest change occurring in the pre-recession 00s themselves.

So what is the problem?  There are two.  First, general economywide inflation has been unexpectedly low this decade, and below the target midpoint now for years.   Not surprisingly, against that backdrop nominal wage inflation has been lower than it might otherwise have been.

But the second –  and far bigger –  issue is that lack of productivity growth.   Here is my regular chart, last updated just before Christmas

real GDP phw dec 18

There has been no labour productivity growth for the last four years, and very little this decade.  Sure, the terms of trade have been reasonably good, but you cannot expect strong sustained growth in (real) wages if productivity growth is so moribund.   If anything, real wage growth has been surprisingly – and probably unsustainably –  strong given that feeble growth in the earnings capacity of the economy.    It is all consistent with a story of a high and overvalued real exchange rate  –  domestic demand pressures give rise to wage inflation, but in the process squeeze the outward-facing sectors of our economy.  You’ll recall that exports (and imports) peaked as a share of GDP at about the turn of the century, and are no higher now than they were 40 years ago –  even though successful small economies typically see a growing reliance on two-way international trade.

It would be good if our political “leaders” –  and their advisers in The Treasury –  actually focused on these sorts of imbalances and underperformances.  But nothing serious is heard any longer from the Prime Minister about the productivity underperformance.  Taking it seriously might confront them with hard choices, and I guess vapid rhetoric about “wellbeing Budgets” comes more readily.  New Zealanders –  including New Zealand wage earners –  deserve much better.

 

21 thoughts on “How are wage earners doing?

  1. We don’t seem to have the wit or willingness to tackle the per capita low productivity rate. Unfortunately the Labour Government is the only government that would contemplate serious economic reform but as you say they are off ‘improving wellbeing’.

    The only hope on the horizon is the appointment of a new Secretary to the Treasury who is given or [secretly] works on a single goal of devising policy to genuinely increasing productivity. I have read some of your policy suggestion in the past which in the main adjust macro economic settings for medium term change. I fear there needs to be much more done in rationalising micro economic settings introduced in the last 20 years which work against the market adjusting. I am thinking the massive employer subsidy scheme should be the first to go. There are many more examples.

    The Treasury has lost its sparkle over the last 30years and it is time it regained some lustre, it’s ‘reason for being’ and grew some courage. We only have one Treasury but we have 10-20 social services who can adequately look after ‘well being’.

    Liked by 1 person

    • We may be talking slightly across each other, but I’d see most of the reforms I champion as microeconomic in nature, albeit with economywide effects.

      But re The Treasury, I entirely agree, although I don’t see any reason for hope. These are the top 5 items in the position description “critical success priorities” for the Treasury Secretary job http://www.ssc.govt.nz/sites/all/files/PD%20-%20Treasury.pdf

      Critical success priorities
      • Leading, organising and managing the Treasury so it delivers on the Government’s goal of a shared prosperity where all New Zealanders benefit from the wealth that growth in the economy provides;
      • Refreshing the macroeconomic framework (fiscal, monetary and financial stability) to ensure it is fit for purpose for the next twenty years, including driving the further development of a wellbeing approach;
      • Promoting greater transparency and understanding of the Government’s economic goals through supporting the embedding of wellbeing measures in the Public Finance Act and through the Secretary’s and other Treasury communications and engagements;
      • Providing advice to assist the Government to meet its policy priorities within its Budget Responsibility Rules;
      • Working collaboratively with others, including Māori, to collectively develop and deliver creative solutions to resolve long-term challenges including child poverty, housing, climate change, and freshwater;

      Not a mention in the entire document of doing anything about turning around the disastrous productivity performance.

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      • Unless we reposition our economy towards large scale manufacturing with robots then there is nothing that we can actually do to improve productivity. Large scale migration is the product of misallocation of resources into the Primary sector where 10 million cows and 30 million sheep dominate NZ natural resources including land and water. An aging population together with tourists and international students are services based industries. The best service is of course more people and not less.

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  2. My son and daughter have trouble living on their wages but that has something to do with expectations. However they are not tied to New Zealand – if they get the idea that they would be better off in another country that option is open. Maybe the New Zealanders I met in London 35 years ago were there for the experience; I suspect now it is often for the money.

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      • My daughter will get her 2 years posting to the UK on a wage of 75,000 pounds with her multinational employer. After she completes her 2 year stint she will have no choice but to relocate to Australia as wages are 30% to 40% higher in her profession than in NZ.

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      • GGS your daughter is lucky; she will be getting triple the average UK wage.

        From Google:
        UK “” According to the Annual Survey of Hours and Earnings (ASHE), average gross annual earnings for full-time employees was £27,600 in 2015 “”
        NZ “” Statistics New Zealand shows the average wage annualised would be approximately $49,000 “”

        I’m not troubled by immigrants who earn triple average wage. I’d let them fly in; pay Michael’s $20,000, issue them a work visa for two months and if they can find the job at triple NZ average wage (~$150,000) issue them an IRD number and after police and medical checks an extended work visa. Extra checks for their family. If they pay $20,000 and then earn >$150,000 I don’t care if they are washing dishes or programming computers.

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      • Sure, a $20k application fee is actually very cheap if it is a once only fee and I can go back to paying the migrant employee what the market actually would pay them. In this case it would have been back to $45k instead of the $52k I now need to pay each and every year. Local kiwis expect around $70k for a similar qualified person doing that job and would not work for less so it is still much cheaper getting migrant labour especially migrant labour that gets paid only $10k from where they come from.

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  3. “” It is all consistent with a story of a high and overvalued real exchange rate – domestic demand pressures give rise to wage inflation, but in the process squeeze the outward-facing sectors of our economy.””

    Surely an overvalued exchange rate simply means foreigners want NZ$. Skipping over why that might be it leaves NZ with a long term higher than rational exchange rate. So we have foriegn made goods cheaper and a disincentive for exporters. I don’t understand how it relates to the domestic demand pressure and wage inflation.
    A reduction in exchange rate would instantly result in an equivalent petrol price raise and eventually general inflation which would give more bite to demands for wage increases.
    Maybe ‘domestic demand pressure’ is a technical term but my layman’s interpretation is the public wants to buy more. That means savings go down but I cannot see how that relates to exchange rate, surely Kiwisaver would be a more significant factor. The demand must be for services (mainly NZ origin) and goods (mainly foreign origin) why would the demand for either be affected by real exchange rate? Isn’t a reverse effect more likely – a drop in our exchange rate makes us all poorer in terms of foriegn goods but my children will be wanting to match my generation in cars, clothes, etc so are more likely to stretch their finances.

    Clearly I’m missing something. Does the ‘domestic’ apply to object or the subject? In other words a demand for domestic goods meaning non-international goods or does it just mean the New Zealander public have a demand?

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    • Bob

      Sorry about the shorthand. One can think of the real exchange rate as the exchange rate you see quoted each day adjusted for differences in inflation, but an alternative approach – common in the literature – is to configure it as the price of non-tradables relative to the price of tradables. Tradables prices are typically set in international markets (adjusted for the nominal exchange rate) – thus we can’t set the price of dairy products or logs – but non-tradables prices are set locally in response to domestic cost and demand pressures. High demand for domestic goods and services will, all else equal, bid up the price of non-tradables relative to tradables. Part of that process involves bidding up domestic wages. Non-tradables firms may well be able to pass on those wage increases in higher local prices, but tradables firms typically can’t – they have to compete globally. So if there is intense domestic demand pressure, all else equal the tradables sector of the economy will be squeezed.

      Such demand shocks can arise from a number of sources: big fiscal expansions, perhaps some private market domestic exuberance (eg NZ in the mid 1980s, freed from regulation), or – as I argue in our case – by repeated large waves of migrants, each wave adding more to domestic demand than to domestic supply, having the effect of raising non-tradables prices relative to those of tradables.

      I illustrated some of this in a post last year
      https://croakingcassandra.com/2018/06/26/some-more-real-exchange-rates/

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      • Large waves of migrants is a problem as you point out but what policy settings do you set in the short term to wean the employers off the band aid solution of an imported labour force especially when domestic costs are rising.

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      • Thanks. I now grasp tradables -v- non-tradables. The concept of high domestic demand is still rattling in my head. Everyone with money is thinking what to do with it and the choice is save or spend with savings being a delayed spend.

        Spending I have a choice of domestic goods and services or foreign travel or purchasing items like the washing machine we purchased yesterday where the domestic service element is small compared to the ‘tradeable’ international market price for washing machines.

        If the govt did as you suggest then the exchange rate would drop and we would all be poorer; you are convincing me but it is a hard sell.

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      • It is a short-term vs long-term thing. Yes, a lower exchange rate does mean the cost of consumption here increases (in that sense we are poorer), but it also means more businesses are likely to be competitive operating from here, encouraging more firms (domestic and foreign) to invest and innovate here. Those higher prospective earnings, and stronger productivity growth, are the foundation for greater long-term prosperity.

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      • Given that the NZD trades at a discount of 0.67c against the USD and 0.58c against the Euro. I certainly did not feel whilst on holiday in both those countries recently that the NZD was over valued. I went to a BurgerKing outlet at the Vegas airport and a Crispy chicken burger combo costs around US$12. In NZ a equivalent Crispy chicken burger combo costs around NZ$12. The only difference was their burger buns was more sugary and sweet and their medium drink size was the size of our large size. Their large was like walking away with a pail of sugary coke.

        It is therefore an economists Trumplike lie that our exchange rate is overvalued.

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  4. They will take the option while it is left open to them. I’ve previously proposed a model that would involve something like limiting all work visas to no more than three years in total, and charging an annual fee to employees for using work visa labour: something like $20000 per annum or 15% of salary whichever is higher. That sort of approach appeals for several reasons: first, it gets bureaucrats out of the business of deciding who should and shouldn’t be allowed to hire short-term immigrants, second, it produces direct revenue for the Crown, and third (not unrelatedly) it forces employers to think very hard about whether it is really so vital to have a foreign worker and (if it is in the short run) to invest in reducing that dependency (whether by raising wages, training, changing working conditions or whatever). It also ensures that in those cases where there really is a genuine need – a very short-term lift in demand for some skill, or something v v specialised, the system is sufficiently flexible to produce sensible results.

    Remember also that my analysis (which was the standard econ analysis in NZ for decades) says that reducing immigrant numbers will reduce net/overall demand pressures and labour scarcity. That isn’t so for every indiv employer (esp those in sectors that have been allowed to become heavily reliant on migrant labour), but it is a pretty result for the economy as a whole.

    Sadly, of course, there is no appetite for any of this anywhere on the political spectrum (and the proposal the govt is consulting on at present involves an even greater role for bureaucrats – and for lobbying).

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    • Your proposal makes sense. It is not brilliantly original or dramatically noval and is successfully used throughout the sane world.
      Note the 15% of salary is similar to student loan.
      The minimum is essential because it would be a weapon against our current widespread immigrant worker exploitation; the amount of the minimum is debateable and could be adjusted but to be fair in reasonable steps and with reasonable warning.

      The three years is open to debate. Certainly a work visa should be for a fixed period without unlimited renewals.
      The PI fruit picking scheme involves short term stays that benefit both NZ and the island of origin, they don’t stay long enough to count as immigrants. To run such a scheme you need PI supervisors to smooth cultural differences and it makes sense to have the same supervisors return year after year.
      A melanesian relative arrived on a work visa as a highly qualified consultant electrical engineer for the rebuild of Christchurch. Several other engineers were recruited from Sri Lanka and the Phillipines. The NZ consultancy that employed them could not be expected to find or train a half dozen experienced Kiwi engineers. It would have made little sense to send them back when the rebuild of Christchurch was only half completed. They are on salaries that will enable them to apply for permanent residency if they wish.

      “” bureaucrats out of the business of deciding who should and shouldn’t be allowed to hire short-term immigrants “” Totally correct. If communist regimes using very highly educated bureaucrats couldn’t plan an economy why do we think our INZ officials are better at deciding what is a ‘skill’. Visit Auckland and you will find both highly productive immigrants benefitting NZ but many more immigrants performing low grade chores.

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    • The skilled migrant numbers are already way down and this seems to be perceived as a problem rather than the solution.

      Immigration Minister Iain Lees-Galloway says he is looking at ways of encouraging more skilled immigrants to become residents – after a drop of several thousand in one year.

      Overall new resident numbers fell from 47,684 to 37,948 in the last financial year and almost three quarters of the change was down to a decrease in skilled immigrants.

      https://www.tvnz.co.nz/one-news/new-zealand/national-blames-dark-hand-nz-first-sharp-drop-in-skilled-immigrants?variant=tb_v_1

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      • Not too sure why Woodhouse is blaming NZFirst as it was National’s tweeks that is creating this fall in skilled migrant numbers. I adjusted my staff pay to $51k from $36k thinking that would be the minimum requirement for skilled migration accountants. I now find out it is $52k. Poor thing still can’t get her residency application completed and have to wait until her pay scale goes to $52k. Immigration has gone completely bonkers. I am under a lot of pressure from my boss to outsource the work to the Phillipines where accountants can do the work for an annual wage of $10k.

        Liked by 1 person

      • Correction: From $36k to $45k initially due to minimum wage increments and then to $51k to Nationals tweeking of immigration skills migrant salaries and now need to get to $52k.

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      • Woodhouse should keep his mouth shut about immigration. GGS is right, the only significant change was done by Woodhouse and in my opinion a move in the right direction but not far enough – we will still have ‘retail managers’ and ‘chefs’ qualifying as skilled and paying a back hander to their corrupt bosses. BTW a chef or manager can be skilled and when they are they earn over double the average wage.

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