The productivity lie

Written By: - Date published: 10:29 am, February 8th, 2011 - 21 comments
Categories: wages - Tags: ,

So the Nats have upped the minimum wage by 25 cents. An increase of 1.9% that doesn’t even keep up with inflation of 4% and is thus a minimum wage cut. Just like last year. Way to close the wage gap with Australia John! Not.

Of course no one realistically expects anything different from a National government. Improving the lot of low income earners is not now and never will be their goal. We have the government that we voted for. Ain’t it grand?

What annoys me almost as much as the wage cut itself is the rent-a-quote nonsense that is used to try and justify such callous disregard for low income earners. TV3 piped up with a prime example here:

To bring some clarity 3 News spoke to ASB’s Chief Economist Nick Tuffley.

Clarity from an economist? Ummmm…

Mr Tuffley says at its core, setting a national minimum wage is an argument about where a society places most weight – “do we want more jobs or do we want a higher pay rate and better conditions”.

Both please. What makes you think they are mutually exclusive? What makes you think that raising the minimum wage costs jobs? And then we get to the bit that really annoys me:

Productivity is the key to raising wages without harming business according to Mr Tuffley. “If we have high productivity, wages will reflect that,” he says. “The reason Australia has higher wages is that Aussie workers are more productive on average.”

High productivity levels are achieved by injecting capital into the economy. Mr Tuffley uses an analogy of a man digging a six foot hole. If he has a spoon it might take him a week. If he is equipped with a digger he could dig the hole in five minutes and move on to digging more holes. The more that worker is able to do – the higher the value they represent to the company, and his wage level should rise as a result.

… “For higher wages to be sustainable, they need to happen after increased productivity.

Ahh, the great “productivity” lie! Where to begin? The main problem with the great productivity lie is that over decades productivity has increased significantly, and wages have not followed. In this piece from 2008 the CTU made the case:

For this analysis, the most appropriate statistics available to use are the average ordinary time wage and the salary and ordinary time wage rates part of the Labour Cost Index (LCI). The LCI is the most relevant but only goes back to 1992.

First – real wages. The real average ordinary time wage has increased, but only just, since 1980: by 18 percent or a rate of about 0.6 percent per year. Looking in terms of governments of the period, it fell by 6 percent between 1980 and 1984 (1.6 percent per year), rose by only 4 percent over the remaining six years of that decade to 1990 (0.7 percent per year), and then by just 8 percent from 1990-1999 (an average of 0.8 percent per year, though falling between 1990 and 1996). From 1999 to 2008 it rose 10 percent, by a small margin the fastest growth of the three decades at 1.1 percent. …

But what about recognition for productivity gains? Despite national gnashing of teeth over our productivity record compared to Australia and other high income nations, productivity did grow. Between 1980 and 2008 (the latest data available) labour productivity grew by no less than 82 percent – while the average ordinary time real wage grew by just 18 percent. Between 1980 and 1984 productivity growth was 9 percent compared to a 6 percent fall in wages. From 1984 to 1990, productivity rose 17 percent while wages rose only 4 percent. From 1990 to 1999, productivity gained 22 percent, but wages only 8 percent. And from 1999 to 2008, productivity rose 17 percent and wages only 10 percent.

So if we look at the average ordinary time wage (the story would be even more compelling using the LCI), if wages had reflected the increase in productivity we would be looking at an average ordinary time wage of around $38.60 in 2008 if it had received its share of the productivity gains since 1980, and $31.60 if it was only since 1989. Instead it was $24.47. See the accompanying graph.

If wage increases followed productivity increases then wages in this country would be much higher. But they aren’t, because the increased profits are swallowed up by the employers, while wages stagnate. And yet they still have the bare faced cheek to argue that future wage gains depend on yet more productivity! It’s a blatant lie. It’s economic mumbo-jumbo designed to placate us while they keep wages artificially low. Like the carrot on the stick it’s an eternally moving target — no productivity increase will ever be enough — more will always be demanded. How long do we want to keep on running faster to stay in the same spot?

(The CTU report contains many more interesting details – a good read.)

21 comments on “The productivity lie”

  1. randal 1

    according to j.k. galbraith the purpose of economics is to make astrology look good.
    meanwhile back in the jungle the national party say they are the party of business but where is the new business?
    the answer is that they are a party of rentiers, compradores and wannabe simon legrees who never had an original new idea or took a real risk in their lives.

    • And the graph neatly shows that the marginal increase in real wages represent a declining proportion of total value produced i.e. bosses cream most of the productivity gain, workers a tiny share. This is a rising rate of exploitation.

  2. Colonial Viper 2

    Yep. Economists are included in the university system only because they use more technical words than fortune tellers and taxi drivers. Each has the same probability of answering correctly what unemployment or inflation is going to be like in 12 months time.

    Oh R0B, would you also like to point out if workers’ wages went up by only 18% while economic productivity went up 82%, WHO TOOK THE 64% DIFFERENCE?.

    • RedLogix 2.1

      From a cash-flow point of view there are just three principle actors in any economy, workers, business owners and bankers.

      Ask most small business owners and most of them are not feeling too flash either. Certainly not for the level of effort and risk many have had to take on in order to build their business.

      The answer is that most of that increase has been captured by the bankers/financiers and global corporates….those whose normal service role acting as credit agents for day to day real-world transactions…. has metastasised into suited hordes of parasites sucking money from the face of humanity.

      • KJT 2.1.1

        All of the mantras from the Neo-Liberals that have been proved false.

        “Decreasing tax rates will increase overall tax take”.
        Only if taxes on middle incomes were excessive and the tax payments were being wasted. Like under Muldoon with social welfare for farmers and business. As we have seen recently decreasing taxes to the wealthy drops the overall tax take.

        “Decreasing wages will free up business capital to invest in making business more productive”.
        In fact investment in productive business in NZ dropped to 1/3. Savvy business people know that low wage earners cannot buy much. SME’s have been feeling the pinch every time NZ incomes have dropped.

        “Letting the very wealthy keep more of the money will result in wealth trickling down and all of us being better off”. Like feeding the cow more grass and hoping for better fertilizer.

        “Privatising public services will result in cheaper and better services”.
        Yeah right. Like the US health system. Our rapidly dropping power prices.

        “Running State owned enterprises like corporates will make them more efficient”.
        See above also refer to ports and railways. Managers are multiplying like fleas as they cut services and staff.

        “Labour productivity needs to be increased before wages can increase”.
        Rob and CV have just covered that one. 82% increase in productivity. Skilled wages have dropped. Average up 18% only.

        Globalisation and free trade will make everyone better off because of comparative advantage”.
        Wall street and some multi-national corporates get better off. The world pays through the nose to keep them in riches.

        “Pay huge salaries to managers and you get the best”.
        UK research shows the higher management salaries are in relation to the rest of the staff, the worst performing the company. Germany and Japan get good managers while only paying about 4 times a workers salary.

        “Taxes are a drag on the productive economy”.
        Well actually the USA economy was at its most productive when top tax rates were 91%. The best performing economies at present are the most taxed.

        “The State sector is non-productive while the private sector is productive”.
        So Doctors, Teachers, Universities, public research, Regulators don’t contribute to the economy while finance houses, beer advertisers and gamblers in financial derivatives do. Yeah right!

        “We will all have to accept austerity and a lower standard of living now for gain later.”.
        The majority of the population must accept less so the top 0.5% can continue to steal the results of our work from us. Waited 35 years so far.

        “Selling income earning assets we already own will make us richer”.
        New Zealand’s rich have spent the money they made from stealing our assets in the 80’s and asset stripping. After burgling the share market as well they have proven so inept at adding value they need more public assets to play with.

        “Tax cuts to the richest stimulate the economy.”
        No. extra income to the low paid and beneficiaries does because they spend it locally.

        Lunacy is expecting doing the same thing again and again to have a different result.

    • r0b 2.2

      Read on in the CTU piece for your answer CV. I know that you are going to be shocked, stunned and amazed at the answer:

      Is there any reason workers should not have benefitted in their pay from the productivity increases? What they don’t get, their employer does. Perhaps if the proceeds had been reinvested in more jobs and higher productivity, it would have been justified. As we know though, the record of New Zealand business has been of relatively low capital intensity, and poor productivity growth. Much of the difference has in fact gone into profits and interest payments…

  3. Good post.

    Of course we could go to the least productive industries and make everyone redundant and the productivity figures would be way better, even though society would not. Like low inflation, productivity should not be the be all and end all of economic indicators.

    For those who may post here and refute the analysis please do so by addressing the data.

  4. Would also point out that productivity is likely to raise when a person is paid higher wages because it greatly reduces the amount of stress they feel.

    • Blondie 4.1

      Good point. More money = less financial stress = greater productivity.

      Plus, people feel more inclined to perform when they feel appreciated. It’s difficult to feel appreciated when you’re paid peanuts. But when you know you’ve got a good employer, who looks after you, treats you fairly and appreciates you – you’re a lot more likely to respect and appreciate them too.

    • Colonial Viper 4.2

      Yep, fewer sick days. Nothing better for the soul than feeling valued.

  5. Roger 5

    “High productivity levels are achieved by injecting capital into the economy. Mr Tuffley uses an analogy of a man digging a six foot hole. If he has a spoon it might take him a week. If he is equipped with a digger he could dig the hole in five minutes and move on to digging more holes. The more that worker is able to do – the higher the value they represent to the company, and his wage level should rise as a result.”

    I cannot believe an economist would come up with this nonsense. It is true that injecting capital into the economy does raise productivity. But businesses only do this if the cost of injecting capital is lower than the wage rate multiplied by hours to do the same job.

    Rising wages represent rising costs. This problem for business owners is what drives innovation and injection of capital to manage costs and raise production. Increased wages and innovation as a reaction leads to a shift of the budget constraint towards investing in capital.

    The worker is able to do more with the added capital but they cannot command a higher wage because of their added value to the business. With the example of the digger, he will not get paid more. His pay will be set by the market and based on the number of digger operators qualified and the number of holes needed to be dug with a digger and industrial factors including union strength. The worker can do more with the digger but if the worker wants a higher wage reflecting that the company can just say no, let him leave, and hire someone that can do the job for less.

    • Draco T Bastard 5.1

      I cannot believe an economist would come up with this nonsense.

      It’s what they teach at university. It’s complete nonsense of course but, hey, that doesn’t stop them teaching it as if it was gospel.

      • Roger 5.1.1

        I have a degree with economics as one of my majors (the other political studies) and I don’t remember any sort of economic reasoning quite as bad as this. I must admit that doing it as part of an arts degree rather than a pure business degree allowed me to develop the analytical skills to equip my bullshit detectors when dodgy stuff was taught (mostly in the first year papers).

        • Draco T Bastard 5.1.1.1

          Really? Damn, they used exactly that reasoning at the uni I went to.

          • Roger 5.1.1.1.1

            Which one, when? I graduated Auckland Uni last year. Perhaps with the weight of empirical evidence against Mr Tuffley’s assertions the message has been modified slightly. Alternatively I was taught this but thought it was rubbish and switched off.

    • Colonial Viper 5.2

      Economics as a trade should be considered, along with crystal ball gazing, light hearted amusements.

      Don’t do anything of import based solely on what they say.

    • KJT 5.3

      There has been very little capital investment in the NZ economy. Most of the productivity increases have been in reducing staff numbers and making the remainder work more hours.

      In my own industry manning has been reduced by half.
      Over the same period pay dropped 40%.

      Immigration is used to cover the fact that the companies have not trained anyone for decades and they pay less than half the rate overseas.

      That will not work for much longer. Immigrants come here either to get entry to Australia or for the social wage that NACT are trying to remove.

      • Roger 5.3.1

        Exactly, and that’s my point. Wages here are too low to work as an incentive to invest in capital. Hence the solutions companies come up with involve making the labour more “flexible” by eroding worker’s rights and equity. It’s not just working longer hours either. The hours are more commonly being set at nights and weekends, split shifts, and irregular rosters to get more out of workers and generate turnover when people are less likely to be at work and can spend quality time as customers. If wages are higher then that provides the incentive for investing in capital. That is why Australia has high wages and invests in capital while New Zealanders work harder and longer. Wages need to rise first THEN capital investment and innovation will be focused on more strongly.

  6. JonL 6

    The great productivity swindle…in the US from 1965, productivity doubled, yet real wages have dropped 10% !
    yet they still trot it out…..
    Go figure.

  7. orange whip? 7

    Mr Tuffley uses an analogy of a man digging a six foot hole

    Of course he does. Six feet deep and six feet long.

Links to post

Recent Comments

Recent Posts

  • Swiss tax agreement tightens net
    Opportunities to dodge tax are shrinking with the completion of a new tax agreement with Switzerland, Revenue Minister Stuart Nash announced today. Mr Nash and the Swiss Ambassador David Vogelsanger have today signed documents to update the double tax agreement (DTA). The previous DTA was signed in 1980. “Double tax ...
    2 weeks ago