Move to high wage economy needs to be better thought through

15 Feb 2019


Successive governments have deployed policies to transform the New Zealand economy.  One transformational policy is to turn New Zealand into a high wage economy.  Those that adhere to this policy, and advise these governments, seem to have adopted what, I believe, is the pure economic fallacy that driving up wages will magically transform New Zealand. They believe this will get rid of low paid and, what they see as unskilled jobs, and create a highly-paid work force that does not have to do what they consider unskilled work. They think those menial and manual tasks can be performed by robots or don’t need to be performed at all. 

The idea of the efficiency wage theory, as I understand it, is that increasing wages can lead to increased labour productivity.  Therefore, if businesses increase wages – some, or all, of the higher wage costs will be recouped through increased staff retention and higher labour productivity.  In theory, higher wages could cause increased labour productivity and wage increases can pay for themselves.

But there are telling and significant differences between economic theory and reality.  The economic history of the world is littered with such examples.  One of the problems facing those who push this theory is that New Zealand will always rely on the primary sector to not only feed New Zealanders, but also to earn a very large portion of our export returns (in excess of 50%).  The primary sector, despite the possibility of automation and economic theory, will always need workers, at all levels of expertise and pay.  To have a forestry industry, for example, requires trees to be planted and for the foreseeable future, those trees will need to be planted by human hands.  This is not an unskilled job, as incorrectly planted trees will not grow into the forestry industry we have today.  The better the tree planter is, the better the end result will be when the tree is mature, and the more that tree planter will be paid.  At the base level there will always be a need for lower-paid, but skilled workers, to enable the industry to survive. 

This is not limited to the rural sector alone.  It applies equally to manufacturing and aged-care.  Where the economic theory may get some traction might be with some high-tech manufacturing; but we have very little of that in New Zealand and, in all likelihood, that will not change by pushing up wages.  A country has to play to its strengths and for New Zealand, that is our rural sector for both growing food and tourism.

There is one other critical problem with the push to create a high wage economy by pushing up wages – New Zealand trades in the world market.  The price that New Zealand receives for what we grow and make is not determined by how much it costs to grow or make what we are selling, but by the price that we can get for it.  This means that wage increases and compliance cost increases cannot be passed on to the consumer.  These costs need to be absorbed by the business growing or making the product.  There will become a point where each business will not be able to absorb these costs any more will go out of business.  A case in point is to ask: how many cars are now assembled in New Zealand and Australia? The world market has meant these cars are now assembled by more efficient producers. 



mrp efficiency wages

The economic theory answer is that businesses will need to automate, use artificial intelligence, and so on.  That costs money and needs specialist staff to implement.  If your margins are being squeezed, you don’t have spare money to invest, you don’t have the time, and you don’t have money to employ specialist staff.  You and your existing staff just work harder and longer.  You do not have the chance to innovate and move to that higher wage economy.  Then what happens is someone, somewhere else in the world, can produce what you grow or make more efficiently. They take away your market and you go out of business. 

Increasing wages is simply not the answer. Increased wages will not result in more workers. In the South Island, there are no people available to do work and where there are people available for work, salary is not the factor, in my opinion. We collectively need to assist these people enter and remain in the workforce, and as their skills increase, so will their wages.  But most importantly there will be employers able to employ them and invest the considerable time required in their development. So let’s stick to the practicalities of the situation and help our unemployed get great jobs.

- Mike Chapman, CEO