When demand outstrips supply, prices are supposed to go up, so how come New Zealand has a tight labour market and falling wage growth? Low wage growth has become a headache for many industrialised countries and the reasons behind it are hotly debated.
The answer may lie in the growing burden of household debt, particularly housing costs. When an increasing portion of a household’s paycheck is being sucked into debt repayments, people are more likely to stay put and not risk their job tenure by asking for a pay rise. This is especially important in small countries like New Zealand where, as pointed out in the latest OECD Economic Survey, there are “low job-to-job flows”.
New Zealand is technically in a state of full employment where everyone who is willing and able to work is in employment. Despite this, and a growing economy, wage growth is running at an annual rate of around two percent. If you take into account the inflation rate of 1.7 percent, real wages only grew a measly 0.3 percent over the previous year.
We are not unique in this respect. The US unemployment rate is only 3.7 percent, which is the lowest it has been since December 1969. Inflation has also fallen, to 1.6 percent, and wage growth is sitting at 3.2 percent. This means US workers are only making 1.6 percent more than they did a year ago, after adjusting for inflation.
The reason why unemployment rates and wage growth has uncoupled is not known, but there have been many theories. Looking at some of these in the NZ context:
- Falling labour force participation
People are counted as unemployed only if they are actively looking for work. One theory for unemployment rates being so low is that people have simply given up looking for a job and have dropped out of the workforce.
This doesn’t seem to be the case in New Zealand. The labour force participation rate in New Zealand is currently sitting at just over 70 percent, only slightly off its all-time high of 71 percent in the third quarter of 2017. The labour force participation rate averaged 66.64 percent from 1986 until 2019.
2. Disappearing middle-level jobs
People may have a job, but it is not a level of job that matches their skill and experience. The argument here is that globalisation and automation have led to a “coring out” of the middle classes and middle-level jobs. So many traditional white-collar middle managers are now being forced to take jobs, and wages, below what they had previously enjoyed.
While the USD has undoubtedly experienced the “squeezed middle” phenomenon, New Zealand has not fared too badly, at least according to a Ministry of Social Development analysis which shows that “middle class” income growth has been solid over the last 20 years and has risen more since the Global Financial Crisis than those in the US, UK and parts of Europe.
3. Drowning in debt
Household debt levels are very high in many OECD countries, mainly due to the house price bubble. Add in poor wage growth and many people find themselves in a debt trap.
New Zealand households are heavily debt-burdened, mainly due to the price of houses relative to incomes. Household debt now exceeds the OECD average and is growing faster than incomes. As a result, many New Zealanders are irretrievably locked into the value of their homes to fund their retirements.
4. The jobs with the most labour demand are in low-paid sectors:
Low paying jobs are on the rise because of demographics i.e. the increased demand for personal care and home health assistants. These roles tend to attract females and older workers — not known for their wage bargaining power.
New Zealand is a low-wage economy compared to other OECD countries and workers receive among the lowest shares of the nation’s income in the OECD. The reasons behind this are complex, but it is clear that New Zealand’s exports are mainly land-based commodities and tourism, industries which pay close to the minimum wage and increasingly rely on low-skilled immigration. Low wages are also often linked to the next issue — New Zealand’s declining labour productivity.
5. The productivity puzzle:
Many advanced economies have seen declining productivity since the mid-2000s. The exact reasons for this are also unknown, but consulting firm McKinsey suggests it is a related to the shift towards automation, coupled with financial sector boom and bust cycles, growth in employment, and declining investment by businesses.
New Zealand’s productivity rate has been steadily declining compared to its fellow OECD members, which is thought to be one of the reasons that average earnings are being held back.
6. The rise of the gig economy
Over the last decade there has been a rise in unstable, part-time gig jobs which tend to be low-waged and precarious.
There are no estimates of the size of the gig economy in New Zealand, but according to the latest data underemployment (or part-time workers who would like to work more hours) is relatively high. In comparison with other OECD countries, New Zealand ranks 21st, just above Germany. According to Stats NZ, as of 2017, one in five part-time workers wanted and were available to, work more hours.
7. Technological advancements and automation:
Where labour is being replaced by machines, supply is abundant. This has led to calls in some quarters to even the playing field by taxing the machines.
The estimates for job losses in New Zealand over the next 20 years range from 10 to 35 percent, but it is not clear at this stage of the extent to which jobs have already been lost or scaled back because of automation.
Economists around the world are convinced that there is a range of factors at play that has firmly tilted the scales in favour of capital rather than labour. In New Zealand, it seems that the standout factors are that are suppressing wage growth are high levels of household debt coupled with the country’s heavy reliance on low-wage industries. It seems reasonable to assume that if incomes are not keeping up with the pace of household debt, people are going to be inclined to hold on to their job, even if it is not commensurate with their skills and experience.