Houston, we have a wage growth problem
August 20, 2019
Spending money to make money is a cliché, but pertinent for New Zealand businesses if Kiwi wages are to increase, writes Oliver Lovell.
Kiwi businesses need to invest more money into productive assets like machinery, equipment, and software which would make workers more productive and simultaneously lift wages, experts are saying.
“New Zealand is capital shallow,” said New Zealand Council of Trade Unions economist Bill Rosenburg.
Rosenburg believed the relationship between wage growth and productivity had become disconnected in New Zealand. One reason for the disconnect was businesses had not invested enough into technology which would improve the productivity of workers.
The Productivity Commission released a report in February which outlined how New Zealand’s “capital deepening” had fallen since 1996. Capital deepening is the process of increasing the amount of productive assets like machinery, software and equipment per worker.
Between 2008-2018 the amount of productive assets per worker fell to 0.6 percent, this was well below the 1.7 percent seen between 1997-2000.
Kiwibank senior economist Jeremy Couchman, said as the New Zealand economy had recovered from the global financial crisis businesses had added to their staff headcounts during a period of time when labour was cheap – as opposed to investing in productive assets.
Couchman also believed New Zealand was “capital shallow”. He cited the recently proposed capital gains tax as being one way to deepen capital markets in New Zealand and give businesses access to cheaper local funding which would have enabled them to invest in much needed productive assets.
Douglas Pharmaceutical global general manager Jo Copeland, said his business observed a link between investing in productive assets and wage increases, especially if the assets would give a competitive edge which enabled workers to do “true value add work” and not manual processing.
For example, last year Douglas Pharmaceuticals installed a Laboratory Information Management System (LIMS). Before its instalment everything was written on paper and double-checked by a supervisor. The data was then entered by a staff member into a database.
However, the LIMS checked and stored this information automatically and as a result Douglas Pharmaceutical lab workers had spent more time working on projects which drew on their degree skills rather than doing time consuming administrative jobs.
There was a strong link between investment in productive assets and the skills required to operate more advanced technologies and equipment. “Sometimes it means bringing in new skills. At other times it is possible to upskill our own people.”
Levin-based Swazi Outdoor Apparel, recently invested in a cutting machine which enabled the business to cut up to six-times more product.
Swazi owner Davey Hughes, said there was a strong relationship between investing in new productive assets and increased wages. Swazi was “a little socialist” in that it paid staff increased wages across the business when productivity which resulted from investment in productive assets occurred. As opposed to upskilling a small number of workers to operate the new machinery and only pay those workers more.
Hughes outsourced a small amount of Swazi’s production to Thailand earlier this year to meet demand for easy-to-make base and fleece layers. He said doing business in Thailand was cheaper across the board, but his business still needed good workers to operate machinery.
He also said there was value in reinvesting profits from increased productivity into research and development and not just machinery and people. He felt the trifecta to juggle for long term productivity growth was machinery, people, and research and development.
A report written by Australian economist Saul Eslake in December last year titled Productivty is up why not wages?; outlined how since 2000 labour productivity had risen by 23 percent in New Zealand but real wages had remained unchanged.
Because wages had grown less than productivity employers substituted workers for productive assets. This substitution is one reason why productivity growth had been slower since the 2000s versus the 1990s. This supports the productivity commission’s findings that New Zealand’s capital deepening has diminished.
Eslake claims New Zealand needs to find ways to ensure the rewards of productivity growth are fairly shared between employers and employees. A failure to do so would see a swing towards the populist politics we are seeing in the US and Europe.
Rosenburg believed New Zealand needed better ways to ensure workers got more of the labour income share, such as sophisticated collective bargaining structures and to give people better income replacement when they were retraining for a new industry or were out of work.
He cited the European Union’s active-labour market policy which gives workers a generous income replacement when they are out of work. It also provides a package to help people find new jobs through training and upskilling.
Rosenburg said the print industry in New Zealand was a good example. It had changed and some print industry workers needed retraining, help with thinking about future careers if they need to change industry and, if needed, help with relocation.
“It is a conversation people aren’t really having,” said Rosenburg, in reference to the disconnect between wages and productivity in New Zealand. “The neo-classical economic model assumes it [the disconnect between wages and productivity] won’t happen, but it has.”