Wages and salaries (henceforth just ‘wages’) have a number of functions: providing income to households, distributing the income generated by the economy, providing incentives. None of them are working properly.
Providing income to households
The most important function of wages is that they are the primary method of providing income to households.
On average around three-quarters of the income received by prime working age households is from wages: 76% for all households with at least one person aged 18-64 according to the 2013 New Zealand Income Survey, and it is increasing. According to Perry (2014), “The two factors that impact the most on the incomes of two parent with dependent children households are average wage rates and the total hours worked by the two parents.”
While retired people naturally rely much less on wages (though over-64s have the fastest growing participation rate in the labour force of any age group), the adequacy of their income depends heavily on savings from the wages they earned during their working lives. Work by Statistics New Zealand on the distribution of GDP between households (Cope, 2013) found that in the year to March 2007, households whose main income source was from wages and salaries had a negative average savings rate. Only those whose main income was from self-employment or from wealth were saving, with the latter far ahead, creating an intensifying cycle of wealth and income inequality.
The working poor are the most urgent demonstration of the inadequacy of wages and salaries for many of those dependent on them. Two out of every five children in poverty are in households where at least one adult is in full-time employment or is self-employed (Perry, 2014, p. 26). Easton (2013, p. 23) reports that “The majority of the poor are couples with jobs, with some – but not a lot of – children living in their own home albeit with a mortgage”.
But while poverty demands urgent attention, there are many more wage and salary earners living on incomes that are unsustainable for themselves and inadequate for a country of New Zealand’s income level. They cannot save adequately for a house or retirement – let alone an occasional trip to visit the increasing number of their relatives who live overseas – and they and their children cannot participate fully in their communities and society more generally. The Living Wage movement was formed to address this reality and in 2013 set a Living Wage at $18.40 an hour (since updated to $18.80) on the basis of a one-and-half wage earner household with two children (King & Waldegrave, 2012). The aim is a modest but adequate standard of living: “A living wage is the income necessary to provide workers and their families with the basic necessities of life. A living wage will enable workers to live with dignity and to participate as active citizens in society.”
A Treasury report (Galt & Palmer, 2013, p. 2) found that about 30 percent of households with dependants earn wages below $18.40. While dismissing the concept of a Living Wage for often spurious reasons, it estimated that 45% of wage earners earned less than $18.40, of whom 56% earned between the then minimum wage of $13.75 and $15.00, and it included 60% of Māori and Pacific workers. “Over half of the sole parents with dependants who are working have wage rates below the Living Wage, and most of these earn less than $15 per hour. In 25% of households with two adults and dependants, the principal earner of the household is on a wage rate below the Living Wage.” Other earners in the household generally “will have an even lower wage rate if they are earning wages or a salary” (Galt & Palmer, 2013, pp. 7, 8).
This is another symptom of the sharp rise in income inequality between the mid 1980s and mid 1990s, which remains high. Most discussion is about disposable income – after taxes and transfers such as benefits and Working for Families tax credits. But “market” incomes including wages and investment income are distributed far more unequally. Another Treasury report (Aziz, Gibbons, Ball, & Gorman, 2012, fig. 2) found that the market incomes of the lowest income half of households had essentially remained static in real terms between 1988 and 2010. This is in spite of a marked increase in the number of earners per household. Stillman et al. (2012) found wage inequality grew, particularly at the top of the distribution, between 1983 and 2003 with those at the bottom working longer hours to make up their income. Many families worked harder or borrowed to stand still. The shortfall between the median and average wage has grown since 1996 according to the New Zealand Income Survey.
At the other end of the scale, Inland Revenue Department data on wage and salary income shows the top 1% and 0.1% pulling further away from the bottom 90% between the 1994 and 2012 tax years, even though it excludes top executive payments such as shares or share options (Rosenberg, 2014b, p. 4).
Distributing the income from the economy
Wages are also a fundamental mechanism for distributing the income generated by the economy. Neoclassical economic theory connects wages to productivity. But wage rises fell well behind productivity increases during the 1990s following the passage of the Employment Contracts Act, the severe cuts to welfare benefits, opening the economy and deep industry restructuring. There has never been a catch-up, and the only time when wages have appeared to match productivity growth since then was in the late 2000s, cut short from 2009 by the Global Financial Crisis. Then came further reductions in employment rights and undermining of collective bargaining alongside rising net immigration and increasing pressure on beneficiaries to find work amidst high unemployment.
Since the 1980s there has been a severe fall in the share of New Zealand’s income that goes to wages. Our labour income share is exceptionally low: higher only than Chile and Mexico among OECD countries in United Nations comparisons. So by a number of measures, New Zealand has low wages for a developed country.
Finally, economics puts a strong emphasis on incentives – arguably too strong, underplaying many motivations that drive individual and social behaviour. Those favouring more parents and other adults working, and working longer hours, congratulate themselves on the high proportion in the labour force and long work hours. In a vicious circle, low wages and the high participation rate (too often forced by low income), have encouraged employers to pursue business models which rely on low wages, low investment and hence weak productivity growth. There is little in New Zealand’s labour market which incentivises them to do otherwise. It is sobering that two of our largest export industries, agriculture and tourism, have among the lowest wages. Qualifications, particularly vocational ones, are poorly rewarded in higher wages (Crichton, 2009; Crichton & Dixon, 2011; Zuccollo, Maani, Kaye-Blake, & Lulu Zeng, 2013), contrary to the rhetoric that education is the way out of poverty and inequality.
Working for Families is a wage subsidy but is increasingly inadequate. It presents high marginal effective tax rates to low income workers, muffling wage increases. Its inadequacy has been intensified by the Government’s decision not to adjust its thresholds: the 2014 Budget forecast expenditure on it falling in real terms by 25 percent between 2010 and 2018 (Rosenberg, 2014a, p. 3). Even at $2.5bn per year it is small compared to the $19bn annual loss in labour income share.
It is therefore extraordinary to see Treasury advice that wage rises, such as through the Living Wage, are “not well targeted at the intended demographic of low income families”. Much better they say would be greater targeting of existing support: Working for Families, early childhood education subsidies and “service interventions” for children under five, along with yet more pressure on beneficiaries to work 3-5 days a week. While acknowledging that “the return to tertiary education is comparatively low”, rather than advocating policies to raise wages for those gaining qualifications, it opposes raising low wages saying “lifting low wages without adjusting top wages risks reducing the premium for skills even further”. The same arguments could be applied to any increase in low wages. In this view, wages apparently no longer have a purpose of providing decent incomes. Instead we must have a system of increasingly complex, targeted subsidies and penalties which force people into low paid, insecure jobs inadequate to provide a sustainable and dignified existence for adults and their children.
This thinking represents a breakdown of the wages system. In its view we cannot afford wages that provide a dignified living because it might compromise the viability of firms which depend on low wage business models or compete directly against products from low wage countries. Homage is paid to raising productivity in order to allow higher wages to be paid, but in practice the mechanisms are not put in place to ensure that higher wages actually follow productivity growth. Mechanisms to connect wage growth to rises in productivity must include government support for re-unionisation and stronger collective bargaining alongside changes in economic and welfare policy. For many people, even education and training do not provide a way through: the financial rewards are low.
If indeed New Zealand’s economy cannot provide wages that give its people a dignified existence then either we accept depopulation, low skills and continuing high levels of poverty, or we take seriously the need to underpin earnings by considering a universal basic income to cut through the Gordian Knot of increasing complexity in the current welfare system whose “safety net” mesh traps and demeans.
But we could have a much improved wages system. There are three key elements: encouraging and broadening the positive impact of collective bargaining; industry policy that supports investment and diversification of our economy into more productive industry; and a social security system that genuinely provides security of income plus training and support for those who lose their jobs.
Aziz, O., Gibbons, M., Ball, C., & Gorman, E. (2012). The Effect on Household Income of Government Taxation and Expenditure in 1988, 1998, 2007 and 2010. Policy Quarterly, 8(1), 29–38.
Cope, J. (2013, May 29). Measuring the Distribution of Household Income and Outlays within a National Accounts Framework. Presented at the Statistics New Zealand seminar, Wellington, New Zealand.
Crichton, S. (2009). Does workplace-based industry training improve earnings? Wellington, New Zealand: Statistics New Zealand and the Department of Labour. Retrieved from http://www.dol.govt.nz/publications/research/publication-view.asp?ID=318
Crichton, S., & Dixon, S. (2011). Labour Market Returns to Further Education for Working Adults (p. 99). Wellington, New Zealand: Department of Labour. Retrieved from http://www.dol.govt.nz/publication-view.asp?ID=380
Easton, B. (2013). Economic Inequality In New Zealand: A User’s Guide. New Zealand Sociology, 28(3), 19–66.
Galt, M., & Palmer, C. (2013). Analysis of the Proposed $18.40 Living Wage (No. T2013/2346). Wellington, New Zealand: New Zealand Treasury. Retrieved from http://www.treasury.govt.nz/publications/informationreleases/livingwage/pdfs/lw-2726820.pdf
King, P., & Waldegrave, C. (2012). Report of an investigation into defining a living wage for New Zealand. Wellington, New Zealand: Family Centre Social Policy Research Unit. Retrieved from http://www.livingwagenz.org.nz/files/embargo%20file/Living%20Wage%20Investigation%20Report.pdf
Perry, B. (2014). Household incomes in New Zealand: trends in indicators of inequality and hardship 1982 to 2013. Wellington, New Zealand: Ministry of Social Development. Retrieved from https://www.msd.govt.nz/about-msd-and-our-work/publications-resources/monitoring/household-incomes/index.html
Rosenberg, B. (2014a, May). Are we in for big spending cuts if National wins? CTU Economic Bulletin, (157). Retrieved from http://www.union.org.nz/economicbulletin157
Rosenberg, B. (2014b, July). Wages and income inequality. CTU Economic Bulletin, (159). Retrieved from http://www.union.org.nz/economicbulletin159
Stillman, S., Le, T., Gibson, J., Hyslop, D., & Maré, D. C. (2012). The Relationship between Individual Labour Market Outcomes, Household Income and Expenditure, and Inequality and Poverty in New Zealand from 1983 to 2003 (Working Paper No. 12-02) (p. 78). Wellington, New Zealand: Motu Economic and Public Policy Research. Retrieved from http://www.motu.org.nz/publications/detail/the_relationship_between_individual_labour_market_outcomes_
Zuccollo, J., Maani, S., Kaye-Blake, B., & Lulu Zeng. (2013). Private Returns to Tertiary Education – How Does New Zealand Compare to the OECD? (Working Paper No. WP 13/10) (p. 53). Wellington, New Zealand: The Treasury. Retrieved from http://purl.oclc.org/nzt/p-1568