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It's time for business to take responsibility for low wages

 It is no myth New Zealand has low wages.

Last week Business NZ boss Kirk Hope claimed a myth about our low wages had been left unchecked and that myth had been allowed to snowball, and had become accepted as a fact.

He quoted some data from the OECD to bolster his claim that New Zealand wages are actually in the middle of the pack, ranked 16th place out of 35 countries in terms of average wages, and argues that this proves our wages are not low.

I don't know which OECD study he is got his data from, but presumably he is talking about average pre-tax wages translated into, say, United States dollars. As Hope notes, that isn't really a useful comparison, as tax rates vary and currencies have different buying power.

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The value of money is in what it can buy, so assessing wages in terms of purchasing power parity is an appropriate scale. Purchasing power parity is a measure of a currency's buying power – like the Big Mac index but for a wider basket of consumer goods.

International wage comparisons are made on after-tax income so we don't have to worry taxes affecting comparisons.

A 2016 OECD study on average wages in purchasing power terms, in which New Zealand ranked 18th out of 36 countries, gives detail about the gap between New Zealand's wages and the countries above us.

These gaps are not small – being in middle might seem fine from a relative position, but the subjective impact is huge.

Ten of the 36 countries we are comparing with have average wages that are 25 per cent more than average New Zealand wages, and a further three countries earn wages a full 50 per cent more.

You can't tell me 50 per cent more is not worth noting or barely a statistical blip.

That's a significant amount of money, and any worker would, of course, immediately recognise that as a whole lot more in the bank.

To bring it closer to home, in 2016 the Australians earned on average 32 per cent more than New Zealanders, taking their buying power into account, and after tax.

Hope rightly points out that among OECD countries our low purchasing power parity is a factor, and that we're part of a group of countries where wages don't buy as much as they could.

Our purchasing power measure is close to Australia's, in fact somewhat better. So their wages go nearly as far as ours but they get a lot more in their pay packets, no matter how you look at it.

Yet Hope argues the secret to increasing our wages is to increase our dollar's buying power – which is the pretty much the same as Australia's – and that can only be fixed through productivity growth and improved economic performance.

What determines a currency's buying power is complex and includes things like taxes and tariffs, transport costs, the size of the market, domestic production – the list goes on.

Yes, productivity increases could reduce the cost of certain domestically produced items (provided there isn't a global demand for it – think cheese or butter) but it is hardly going to shift the dial to the point where our wages feel like Australia's.

It is a myth that productivity growth, as has long been argued, is needed to support higher wages in the private sector.

At this stage of New Zealand's economic development, wages growth is as much an equity issue as a productivity issue.

If wages are increased without redundancies happening, and an increase in productivity, those wages will need to come from business owners' share of the profits.

This should only happen if the shift is equitable.

There is evidence the current situation is not equitable, and business owners are getting a better return on capital than workers get for their labour.

One piece of evidence for this can be found from looking at GDP (gross domestic production) figures standardised to purchasing power.

GDP is like a measure of profit before tax, so GDP per capita includes the average wage.

The IMF, World Bank and the CIA estimate GDP in terms of purchasing power regularly, but it's not an exact science and the numbers vary.

The 2017 numbers put Australia's GDP standardised to purchasing power at 27 per cent, 15 per cent and 30 per cent higher than New Zealand, respectively.

These numbers are all less than 32 per cent, so the gap between what New Zealand and Australian business owners get is smaller than that, possibly much smaller.

It is time for businesses and their shareholders to take some responsibility for New Zealand's low wages, and stop hiding behind our lamentable productivity or blaming regulations.
It's time for business to take responsibility for low wages Reviewed by Akande Boluwatife on July 23, 2018 Rating: 5

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