Income trends in New Zealand: the root cause of widespread resentment
New benchmark and less flexibility are necessary for supporting salaries
Thomas Piketty would celebrate his thesis if he followed the income trends in New Zealand. His pivotal formula, the return on capital (r) is greater than the overall performance growth of the economy (g), is strongly confirmed by the New Zealand data. For the analysts who are aware of Piketty’s argument, it is still shocking to see how the growth of corporate profits outpaces both the performance growth of the economy and the growth of labour productivity. However, this piece does not focus on the depressing trends. It is an attempt to present how the Piketty thesis could be resolved.
It is crucial to understand the graph above. Let’s start by explaining why the GDP on current prices is relevant for any political discussion. Public discourses often use GDP growth figures; however, those calculated on constant prices measure the growth of economic output and the quantity of goods and services. However, the GDP on current prices shows the actual monetary value of the produced goods and services. This measures the cake made by the economy that can be distributed among the population. Or, paraphrasing an accidental classic by Nicola Willis, the GDP on current prices is “the size of the sausage.”
The inflation figures, the consumer price index (CPI) and the minimum wage are data that do not need explanation. However, the productivity index requires clarification. In the graph, productivity is calculated by using the GDP growth on current prices, and the figure also considers the growth of the active labour force. By defining productivity this way, we get a figure that would indicate the growth of the value of people in the active labour force. This figure should be applied when wage and salary negotiations occur. The calculation of this formula is presented in the following equation:
Finally, the trend of corporate profits seems to be self-explanatory, too. The curve in the graph is based on the corporate income tax revenue of the New Zealand government. Understandably, it is not a perfect figure to estimate how the return on capital has evolved over time; it still provides a reliable approximation for this index. A better estimation could be based on cash-flow data. However, the collection of such a figure would be quite tedious. However, in the long run, corporate profits should reflect the return on capital. Therefore, the corporate tax figures are useful for our analysis.
Relevant trends
What is necessary to highlight first is that the minimum wage has been growing quicker than what the overall productivity growth could have justified. When the employment relations minister Brooke van Velden announced the 2% increase in the minimum wage for this year, she emphasized that the minimum wage increased quicker than inflation during the Labour government. She was right. Nevertheless, her professional skills are still problematic. First, she does not seem to know that the minimum wage should be raised according to the change in overall productivity, and second, the minimum wage has been increasing quicker than productivity since 2014. During the last three years of the Key-English government, the minimum wage has grown faster than the country's productivity.
Besides the quick increase in the minimum wage, the most important trend is the explosion of corporate profits. Since 2010, corporate profits have grown by almost 2 and a half times. This means that despite the quick growth of the minimum wage, corporations managed to increase their profits faster than the growth of the GDP on current prices. So, it is fair to argue that corporations benefit more from productivity growth than their employees. Corporates do not increase wages and salaries according to the productivity growth, they reap off this effectivity advantage. The wage statistics confirm this anyway. I found wage inflation figures since 2017, so there was no option to include them in the graph. However, during the last seven years, the hourly rates have typically increased quicker than inflation, but overall wage costs have not increased at the pace of inflation. So, when employees get more effective, they get fewer working hours, so their salaries do not reflect the possibility of what their productivity improvement might make possible.
This is the Piketty phenomenon: corporate profits grow more than wages and salaries.
Recommendations to make the income distribution less unequal
Piketty recommended the introduction of a global wealth tax. Notably, he noticed that the wealth tax should be global because if it is introduced only locally, wealth assets might escape the country. Therefore, it is not a good prospect for New Zealand to introduce any form of wealth taxes. Furthermore, there is a more significant problem with Piketty’s recommendation.
The unequal distribution of incomes necessarily leads to the unequal distribution of wealth. This is an expected consequence of unequal income distribution. However, taxing wealth does not address the root problem. It works in a similar way when a doctor prescribes medicine to reduce blood pressure but does not treat the core problem that leads to high blood pressure.
What might governments do then?
First, it is essential to make workers, trade unions and policymakers aware that the economy does have the capacity to increase wages and salaries more than the inflation rate. As this opinion piece defined it, the rate of productivity growth should be the new benchmark to increase wages and salaries. This is affordable for the economy, and corporations can still increase their profit at the rate of the growth of the GDP on current prices. This rate might still be higher than the growth of salaries, so there would be no room for businesses to complain.
Second, it seems rational to adjust the minimum wage to reflect the country's economic performance. Even though it may sound tough, there is a way that may still be acceptable. Because overall productivity growth is usually higher than inflation, it is possible to raise the minimum wage more than inflation but at a slower pace than economic productivity might suggest. The minimum wage could be adjusted to the economy’s capacities within a couple of years.
Third, the compensations that organisations pay as wages or salaries should be set on a yearly or at least weekly basis. The practice that allows businesses and even governmental organisations to modify the weekly working hours (and incomes, too) is unacceptable. This practice means that the business risks are transferred to employees. Businesses should be responsible for their commercial success, and the owners' failure should not cause income volatility for employees. The chances that salary increases may be lower than overall productivity growth will be smaller if compensations are paid as salaries rather than wages.
Unions and employees could bargain more effectively for salary increases if the compensation is set on a weekly or annual basis. This bargaining would be supported by collective bargaining, which was about to be implemented by the Fair Pay Agreement Act. After the repeal of this Act, employees face more uncertainties and fewer chances to achieve salary increases to the extent they deserve.
Nevertheless, there is an additional option for the next government that would replace the current Blue-Black and Pink-Yellow coalition. Salaries and wages might be adjusted by an increase of 15-20%. That would be the fair share of the labour force of all the incomes the New Zealand economy generates if we intend to restore the income distribution of 2010.