The danger of Key’s low wage economy

Written By: Marty G - Date published: 8:24 am, July 14th, 2009 - 47 comments
Categories: employment, unemployment, wages, workers' rights - Tags: recession

As you know, things are tough in the job market at the moment.

The firm figures won’t be out until later this month but unemployment has grown by probably well over 50,000 so far this year. The number of the dole has shot from 37,000 in March to 50,000 now and is growing at 1200 a week. That’s not only a loss of income for the people losing jobs, it creates a drag on the wages of those who still have work – competition between workers for fewer jobs means they’ll take lower pay.

Add to that the miserly minimum wage increase earlier this year that amounted to a couple of cents an hour after inflation and the decision not to budget for public sector wage increases (including for medical professionals and teachers who between them make up over 10% of the workforce). Top it off with Key’s government’s complete failure to come up with any sizeable policy that will keep people in work.

That’s a lot of downward pressure on wages. Treasury expects real wages per hour to grow just 0.7% this year, fall 0.7% the next year, then stall at 0.0% at 0.1% in 2011 and 2012.

That’s not a recipe for closing the wage gap with Australia (remember that? Key doesn’t talk about it so much anymore) It’s a recipe for a low wage economy, and that’s very bad news for our economic outlook. When labour is cheap and plentiful employers don’t bother to invest in capital. It becomes cheaper just to hire someone than buy tools and machinary that make workers more productive. If you’ve ever been to a developing country and seen the sheer number of men employed in jobs that in New Zealand would be done by one person with a machine, you know what I’m getting at.

That’s not a route we want to go down if we want to be a more productive, wealthier society. The challenge, then, to government is to keep wages growing, not falling. To do that, it has to create jobs. This is an area where Key must provide leadership. Only government has deep enough pockets, and the direct economic incentive (each person going from the average wage to the dole costs the government $20,000 a year), to undertake the kind of job creation and protection schemes needed.

It’s not too late to start, even if it’s pretty damn late, for the Key government to really do something meaningful (no more Jobs Summits) to protect Kiwis’ jobs and wages.

47 comments on “The danger of Key’s low wage economy ”

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Tim Ellis 1

14 July 2009 at 8:37 am

Marty, what are you actually saying?

You seem to dislike the idea that people are losing jobs, and you seem to dislike the idea that wages aren’t increasing more rapidly.

Do you have some secret solution to provide for job growth and wage increases during a time of recession, without incurring crippling debt and/or significantly raising taxes?
Marty G 2

14 July 2009 at 8:44 am

Why not raise the top tax rate back to 39 cents? The world didn’t end. That would give us more cash for job creation. We could handle a little more debt.

Anyway, the cost to the government of unemployment is huge. Better to be at the top of the cliff, keeping people in jobs, than the ambulance at the bottom, paying the cost of lost tax and benefits.

I look to Australia where unemployment has barely increased since the start of the recession. Why? Rudd’s policies
- cocamc 2.1
  
  14 July 2009 at 8:48 am
  
  MArtyG
  Ok – raise the tax to 39 cents. What are these jobs the government will create that are long term and sustainable in the economy to meet some as yet undiscovered demand?
  
  Australia is still reliant on the continuing burgeoning growth of India and China. Not much has changed in that regard, i.e. supplying steel, etc. What transformation has Australia undertaken?
  - Marty G 2.1.1
    
    14 July 2009 at 9:04 am
    
    They’ve invested hundreds of millions into jobs rich areas. try google.
    - cocamc 2.1.1.1
      
      14 July 2009 at 9:16 am
      
      MartyG
      I have already looked through the Australian plans previously. Again I think they, like the rest of the world, are tinkering around the edges. so they improve GDP and have some growth in the next few years, then what. what happens when the roads, schools, etc are built.
Tim Ellis 3

14 July 2009 at 8:54 am

Okay, Marty, how much more debt is acceptable to you?

How much extra tax do you think the government should raise?

What jobs will the government create with this extra money, and how?
Marty G 4

14 July 2009 at 9:02 am

What jobs could the govt create?
– it could invest in public transport
– it could invest in research and development
– it could improve pupil teacher ratios (like Labour had planned)
– it could hire more medical staff
– it could invest in a larger home insulation programme targeted at rented properties this time
– it could invest in renewable power generation
– it could build more state houses (giving more training to apprentices too)

A lot of this would actually be revenue neutral but if more moeny is needed putting 1 cent tax back on the top bracket will not even be noticed (who noticed it coming off – even if you earn $100,000 you’ve had a grand total of $100 less tax so far). A billion extra debt is nothing in the long term.
- cocamc 4.1
  
  14 July 2009 at 9:11 am
  
  MartyG I’d argue a lot of those things you’re suggesting are already in place. Power Companies are investing in renewable Power Generation such as wind farms but it takes time for those to come through the RMA.
  
  The concern I have is sustainable job creation – not just jobs for a short period. so we insulate all the houses in NZ – that takes 3 years – what then – we’re back where we started with no demand for the skills gained building more state houses and insulating homes.
  We need transformation for the long term. I not saying National is doing enough, in fact I think they are too scared to actually make the structural changes the country needs.
  - Draco T Bastard 4.1.1
    
    14 July 2009 at 11:28 am
    
    About the only job that’s permanent is cleaning toilets so stop asking for them.
    
    R&D – creates new jobs
    Invest in sustainable power – allows for those jobs to be powered
    We have a growing population so more medical staff is long term
    Building more state houses is a great idea and then selling them off at cost. Build at a rate greater than demand and the number of people living in poverty due to the failed economic policies of the last 1/4 century will go down
    Insulating homes is also sustainable because it results in less cost later
Tim Ellis 5

14 July 2009 at 9:08 am

Fair enough, Marty. Those are jobs that the government will create, I agree. Have you got an analysis of how productive they will be?

What sort of cost do you have in mind? If they’re going to have a significant impact on employment, then you are talking about billions of dollars of extra spending, rather than a couple of hundred million. We’re not talking about a small debt increase, here.

How much do you want to spend, and where is your evidence that the spending is productive?
- So Bored 5.1
  
  14 July 2009 at 9:35 am
  
  Tea break time, hello Tim, I see you are still spending all day doing this, oh for that luxury, how productive.
  
  You keep harping on about investment and productivity…I just read the best evidence that capitalists can bend the rules of physics if they have to…Goldman Sachs are paying $18 billion in quarterly bonuses to employees..on the back of a corporate guarantee scheme from the tax payers, $13 billion from AIG and the hoarding of zillions in “securitized ” debt (it appears as a positive in the ledger but is in fact worth zilch). This is legalised larceny on a grand scale. It has its mirrors here too.
  
  A simple statement Tim, we are part of that financial system. And its totalled. So trying to extract the last cent of “productivity” from the wage slave class for the benefit of those who have already taken most of the rest seems slightly obscene.
Craig Glen Eden 6

14 July 2009 at 9:16 am

Tim Ellis National should build the 650 state homes as Labour had planned and budgeted for. Instead what did National do, was it 60 from memory. Stop firing public servants that would help unemployment Tim. Reinstate the 6 million dollars that has been taken from the disabled Kids at public schools that pays for therapists wages.
Then he should start looking at the structure of the economy, carryout the select committee review of the Banking industry to see if their arguments stack up. If he started with just these things Tim it would be a bloody good start, instead of doing nothing like he is currently doing.Key is a bloody disgrace! The fact that you are still defending him and Nationals media lines is quite astounding. Key talked himself up now its time to deliver,but he cant because National have no policy he sold you bullshit and you bought it. What Marty is saying Tim is the Government should adopt policy that protects and creates jobs, instead of taking jobs away.
- mike 6.1
  
  14 July 2009 at 9:30 am
  
  “Government should adopt policy that protects and creates jobs, instead of taking jobs away”
  
  You don’t get it – Its not Govt’s that create jobs – its their job to create an environment that fosters growth, something labour reversed but the Nats are doing a fine job fixing.
  - Craig Glen Eden 6.1.1
    
    14 July 2009 at 9:43 am
    
    In part thats right Mike, but jobs in the public sector are real jobs . So Governments do create jobs as well as private business. Whats National doing to create that environment Mike. Research and development investment maybe????????? or reducing company tax rate, shit my company could do with a break right now.
- Swampy 6.2
  
  16 July 2009 at 12:12 am
  
  How about getting public servants to do some real work instead of sucking off the taxpayer.
  
  Just because Labour has built a huge increase in the bureacracy doesn’t mean it is all necessary or worthwhile. I can’t for the life of me see what benefit the Tertiary Education Commission has achieved for example.
  - BLiP 6.2.1
    
    16 July 2009 at 12:51 am
    
    Public servants sucking off the tax payer – like the Police, you mean? Or doctors, or teachers, or John “The Goober” Key?
    
    The fact that you can’t understand the work of the Tertiary Education Commission is abundantly apparent.
illuminatedtiger 7

14 July 2009 at 9:34 am

I remember before he came PM and was asked in one particular interview what his vision for New Zealand was – he had one word, “Singapore”. I found this interesting considering he would go onto campaign on his “Ambitious for New Zealand” slogan of which higher wages were a component.

Anyone who knows anything about Singapore will know that it largely got to where it is today courtesy of cheap labour from South East Asian nations. While we do hire in a lot of seasonal workers from the Pacific for next to nothing I think Key’s plan is to make cheap labour out of New Zealand citizens. Hell, while we’re at it why not adopt some of that dictatorships medievil law and order policies too?
- snoozer 7.1
  
  14 July 2009 at 12:17 pm
  
  “while we’re at it why not adopt some of that dictatorships medievil law and order policies too?”
  
  Crusher’s way ahead of you
jason 8

14 July 2009 at 9:41 am

Craig Glen Eden. I wholeheartedly agree with you well put.
Key should start a company that trains people to smile in the face of impending disasters. He’d be perfect at it.
I watched last night on the news an article in regard to cutting adult education funding. Anne Trolley came across as a right tosser; pun intended. The news actually critiqued a national policy. Un- b-fuckin-leavable. Great analysis too. They costed the current policy and it amounted to piss all to the government purse and a whole lot of good to our social fabric; which after all has, as right and left will agree, other benefits to lower crime rates and health increases.
Come on right whingers lets get together with the left whingers and find some common ground. What do we both agree on?
So Bored 9

14 July 2009 at 10:13 am

If there is a glimmer of hope for the common working person it is that some creative thinking has been done by the Greens to stimulate the economy. Labour need to keep up. The unfortunate thing is that we have a government that reflects the populace, backward thinking and incapable of seeing the impending train wreck of energy depletion, cliamte change and financial meltdown..

To criticise National is unfair and unproductive. Its the equivalent of accusing an amoeba of being incapable of writing the works of Shakespeare. Perhaps NACT might try creative thinking and be criticised fairly for some kind of political Mills and Boon.
Draco T Bastard 10

14 July 2009 at 11:38 am

Penal Rates need to be brought back. In the short term it improves employment as 50 and 60 hour weeks get dropped and in the long term forces business to invest in capital. Neither Labour nor National will do so though – they’re still too tied in to the failed neo-classical economics and capitalism in general.
Tom Mathews 11

14 July 2009 at 2:03 pm

The reason that we have high unemployment is precisely because wages aren’t dropping – they are somewhat ‘sticky’. This means the labour market doesn’t clear, and there is an oversupply. With the marginal product of labour staying constant, either you have an increase in wages or an increase in employment. To think you can force both with a minimum wage or higher spending is just wrong (in most cases).
- Daveo 11.1
  
  14 July 2009 at 2:16 pm
  
  See, this is what’s wrong with neoliberal economists. The problem is that workers have protections, the problem is that there’s a minimum wage. Why if we could let wages drop to $2.50 an hour we’d all be saved.
  
  Did it ever occur to you, Tom, that the problem is capitalism? That the problem lies with a system that is so inherently unstable that it routinely collapses in on itself and throws 10% of the workforce out on its arse for no reason?
  
  No, of course not, because your models are framed entirely within a capitalist market economy. You’re incapable of thinking outside of it, so you demand workers pay the price for capitalism’s failures.
  - Swampy 11.1.1
    
    16 July 2009 at 12:15 am
    
    Capitalism, isn’t that what keeps the workers employed in Communist China these days?
- Bright Red 11.2
  
  14 July 2009 at 2:28 pm
  
  “This means the labour market doesn’t clear, and there is an oversupply.”
  
  You’re talking about families’ livelihoods scumbag. We shouldn’t want people’s jobs to be like so many bags of rice in a marketplace.
  
  All you’ve revealed is the utter debasement and inhumanity of your economic ideology.
  - Tom Mathews 11.2.1
    
    14 July 2009 at 2:45 pm
    
    Goodness me.
    
    The reason we study labour economics is to a large extent to determine what determines income and employment levels. Once we know these things, we can come up with policy prescriptions to improve them. That’s what I am trying to do here.
    
    If you find it distasteful to consider the labour market as a market, that’s your business. I agree that wages are important to people’s lives, obviously. But if we are discussing or formulating policy, looking at the market analytically is exactly what we should be doing, so we know what gets positive outcomes. What could be more humane than that? Certainly not what appears to be your preferred approach, which is just going with your gut and not bothering to think about the effects on people’s lives.
    
    And Daveo, it’s not just right-wing economists that use supply and demand models.
    - Bright Red 11.2.1.1
      
      14 July 2009 at 2:58 pm
      
      except that your analysis only analyses people as units of labour and input costs to businesses. You don’t consider the social and psychological importance of work. You don’t consider the impact on crime, education, health of unemployment. You don’t even consider the impact on the government’s books.
      
      There’s no use saying ‘the problem is wages are sticky so it’s workers’ problem that’ there’s unemployment’ because any price that is not determined unit by unit is sticky. Unless you want to go to a system where wages are under constant renegotiation, which as a practical collary would actually mean total control of wages to the employer = lower wages, and would be totally impractical anyway.
      
      The narrow school of economic thought that you are championing has simply failed to deliver for society. It just delivers ever greater concerntration of wealth, bubbles, and crashes.
      - Daveski 11.2.1.1.1
        
        14 July 2009 at 3:03 pm
        
        Agreed. Look at how many people are fleeing the US to live in Cuba.
        
        I think the pragmatic view is that people fail, economic and political theories are always perfect.
        
        Bright Red 11.2.1.1.1.1
        
        14 July 2009 at 3:10 pm
        
        But the point of a theory is to have predictive power in the real world. It’s pointless to say ‘my theory’s brilliant but reality keeps getting it wrong’.
        
        Ultimately, the problem with economics is it is trying to reduce human motivations and needs to simple mathematical formulas, and in that process the people doing the simplification must make judgement calls on what weightings apply to different things.. that’s where the political ideology slips in and you’re left with nothing more than ideology dressed up in the respectablity and seeming objectivity of maths.
      - Tom Mathews 11.2.1.1.2
        
        14 July 2009 at 3:15 pm
        
        You’re reading a bit too much into what was really quite a simple observation – increasing wages and increasing unemployment are contradictory goals, when you have close to zero growth (or recession) like we do now. I think that’s a relevant consideration for readers of this post. I didn’t say which policy we should prefer, I didn’t even hint at that. If you disagree that there’s a tradeoff, feel free to explain why.
        
        Otherwise you’re just talking to yourself, essentially.
        
        Tom Mathews 11.2.1.1.2.1
        
        14 July 2009 at 3:20 pm
        
        Also, while I agree that lots of economics is highly maths-y and theoretical, it certainly does have practical tests, the whole field of econometrics is devoted to this!
        
        Bright Red 11.2.1.1.2.2
        
        14 July 2009 at 3:31 pm
        
        “increasing wages and increasing unemployment are contradictory goals, when you have close to zero growth (or recession) like we do now”
        
        Not so. The portion of GDP going to employee compensation could be increased (offset by a decrease in returns to holders of capital) allowing for both an increase in wages and employment.
        
        The problem with saying ‘we’re in the crap, wages have to drop or more of you will lose your jobs’ is that reducing wages does cost jobs, by lowering consumer demand, and ultimately hurts the economy by encouraging low-value use of labour and discouraging capital investment.
        
        Also, you’re percieving of the economy as if it’s a one-off market. It’s not, the events now have reprecussions in the future.
        
        Econometrics is by and large crap too… the behaviouralists are on to it because they’re looking at what studies of actual humans teach us, rather than maths and the ideologies of a fewe rich white men do.
        
        Zaphod Beeblebrox 11.2.1.1.2.3
        
        14 July 2009 at 6:50 pm
        
        Economic theory is a subset of social theory, unless you appreciate the social context you operate in (and biases you have) your theories are going to be limited.
        The greatest improvements in human condition did not really begin until after the 1930s- what happened then? We started paying proper wages. The Welfare state was created. Governments invested in public infrastructure, schools, universities, health care and science.
        Look what happened in the 1950s. Henry Ford made a fortune because the middle classes finaly got paid properly and was able to buy his product.
        what happened to government debt? I twent down because higher wages meant a higher tax take. What happened to productivity? It increased.
        Since the 1980s when the crazy ideas of Reagan and Thatcher infested the world, average GDP has dropped. Unemployment has skyrocketed worldwide, real income and wges have dropped.
        I reall don’t see the downside of paying people more at all.
- Draco T Bastard 11.3
  
  14 July 2009 at 3:26 pm
  
  Or it could be that the market function just doesn’t work. Which is more likely considering that since we installed the market system 320 years ago it’s never worked.
  
  Steve Keen has a good look at the product of labour and capital in his book and comes to the conclusion that capital gets over compensated and labour under compensated.
  
  Here’s a couple of excerpts:
  http://img.photobucket.com/albums/v235/draco1337/Debunking_Economics2.jpg
  http://img.photobucket.com/albums/v235/draco1337/unmarket_incomes.jpg
  - Tom Mathews 11.3.1
    
    14 July 2009 at 3:45 pm
    
    Draco – the market obviously isn’t perfect, but aren’t we better off than we were 320 years ago?
    Obviously this doesn’t mean we couldn’t be better off had things gone differently, but saying it has simply ‘never worked’ overstates your case.
    
    Red: What decreases consumer demand more? Wage cuts, or unemployment?
    I’m also a little confused as to your denunciation of econometrics, which is basically just statistics for economics. I can assure you that regression analysis knows no ideology. Econometrics is used in behavioural economics just as it is used in neo-classical economics. Many famous behavioural economics papers include substantial econometric components.
    - snoozer 11.3.1.1
      
      14 July 2009 at 3:55 pm
      
      “the market obviously isn’t perfect, but aren’t we better off than we were 320 years ago?”
      
      Post hoc ergo propter hoc eh Tom?
      - Tom Mathews 11.3.1.1.1
        
        14 July 2009 at 4:09 pm
        
        Not if you have an underlying model 😉
        
        So Bored 11.3.1.1.1.1
        
        15 July 2009 at 12:09 am
        
        Tom, your faith in economics, markets and econometricians amazes me. This underlying model of which you speak, is it level, does it correlate in any form with reality, is it moral or humane, in fact has it got any veracity at all? If its been constructed by modern economic theory then it is demonstrably a failure, just look at the current state of the economy. Economists have never learnt to place value on doubt and scepticism, it just doesnt come in lowly materialistic measurable units, very unlike those abstract rational consumers who are supposed to align with you and me. Liberate yourself from these feeble constructs….get rid of the high priests who exist merely to justify why the rich have the money….
        
        old woman 11.3.1.1.1.2
        
        16 July 2009 at 12:10 pm
        
        What if the model is flawed?
        
        …and how do you know it isn’t?
        
        oops. This was meant to be a reply to Tom Mathews. Haven’t yet worked out the intricacies of changing it. Sorry.
        
        But the questions stand.
    - Bill 11.3.1.2
      
      14 July 2009 at 4:24 pm
      
      “…but aren’t we better off than we were 320 years ago?”
      
      Depends on the ‘we’ that you refer to.
      
      In India we are probably not better off than we were 320 years ago. Probably the same would be said of Bangladesh.
      
      What about the ‘better offness’ of ‘we’ all over the continent of Africa?
      
      How about we, the indigenous populations of N. America, Central and S America?
      
      Others can expand on the list as they wish. The point is that the only ‘we’ who might be better off is ‘we’ of the Anglo Saxon imperialist powers. But even that is contentious depending on how you want to measure ‘better offness’.
      - Pascal's bookie 11.3.1.2.1
        
        14 July 2009 at 7:21 pm
        
        Other things that have been glided over in accounting for this 320 yrears of awesome, are the contributions made by the labour movement, transfer payments, public health and education, and a myriad of other things that run counter to the ‘ it was neo classic economics wot dunnit’ thesis.
    - Draco T Bastard 11.3.1.3
      
      14 July 2009 at 8:47 pm
      
      We’re better off than we were but that doesn’t mean that capitalism is the cause. Considering the fact that we’ve also moved to a more socialist/democratic system since there’s reasonable evidence to say that that shift in society is the cause of us being better off and not capitalism.
      
      In 1688 less than 5% had the vote, some two hundred years later we finally got round to accepting that women should be voting as well. Fifty years after that we changed economics because the classical theory we were operating under had just resulted the in Great Depression. This, of course, after suffering economic collapse every generation or so. Keynesian economics was implemented (but not to the full) and we saw a massive increase in living standards but, then, capitalism collapsed again. This ushered in the neoclassical school under Reagan, Thatcher and Douglas. Under that system we’ve seen a decrease in living standards and a return to economic collapse every generation or so.
      
      Capitalism is a socio-economic system that is only one step removed from feudalism. It’s better than that but it still retains everything that made feudalism a failure – namely poverty and control by a rich elite.
Bill 12

14 July 2009 at 3:17 pm

The only ‘problem’ with Key’s low wage economy is that enough people might finally get sick and tired of being shafted via paying over the top prices thanks to speculative bubbles (oil and food staples last year) and then having taxes diverted from social spending to bail out the ‘too big to fail’ bastards who keep on inflating the bubbles from the pool of shit that Capitalism floats on.

How much longer?
jarbury 13

14 July 2009 at 4:22 pm

Setting aside spending money on public transport instead of roads (because it generates 40% more jobs per dollar spent) because I really have argued that point to death in the past, I think the government could spend money on one very important thing that will help us a LOT in the years to come.

Houses.

If there was anything that created the bubble that popped last year it was over-priced housing. And why was housing over-priced? Because there was a significant lack of supply (along with some stupid tax benefits like reverse-gearing) of housing.

I strongly believe that the housing development market is very poor at responding to natural demand and supply changes. It seems like the ability to raise funds has a greater effect on whether or not housing ends up being built than whether or not it is actually needed. In the past few months our net migration levels have increased dramatically (people who were on OEs coming back home I suspect) while our population continue to grow. Added to that, changing demographics means that household sizes are getting smaller as the population ages – which means that the number of required houses is growing at an even faster rate than the population.

Due to all of this, I strongly believe that the government should ‘step-in’ and stimulate the housing market by significantly adding to housing supply over the next few years. For a start, this generates a HUGE number of jobs in a variety of sectors that are really suffering at the moment. The Green New Deal looked at spending around $2 billion over the next three years on building more housing – and calculated that would save around 28,000 jobs.

Yes, twenty-eight thousand jobs.

Furthermore, if the location of this new housing is done cleverly – by that I mean that we intensify around development nodes and train stations rather than sprawling out everywhere – then we can support far more sustainable transportation systems in the future. The new housing would obviously be built to a high standard insulation wise, so we would get significant health benefits there.

But the main benefit I think would be that we would make housing more affordable again. Throughout much of the rest of the world we have seen house-prices decrease significantly over the past year or so, but in Auckland especially they’ve barely moved due to the huge amount of “supressed demand” that high prices in the last few years created. There are significant long-term benefits of improving housing affordability, such as reducing the likeliness of another property bubble and also responding to the inter-generational equity issues that are locking out younger people from home-ownership.

So investment in housing has both significant short term stimulatory benefits, and in the longer run has significant social, economic and environmental benefits. It’s a no-brainer surely?
Swampy 14

16 July 2009 at 12:09 am

And blah blah blah blah blah, all negative and miserly.

And I started a new job this year taking home $450 gross and I’m loving it.
- felix 14.1
  
  16 July 2009 at 12:34 am
  
  So this whole “recession” thing that Key and the Nats are blaming everything on, that’s just a myth?
  
  Just as I suspected. Thanks for clearing that up, Swampy.