Tim Hazeldine: It's time for higher pay to filter down

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The explosion in the top salary rates has left too many in the lower income brackets searching for a living.

Andrew Ferrier was paid $8 million when he stepped down as chief executive of Fonterra. Photo / Dean Purcell
Andrew Ferrier was paid $8 million when he stepped down as chief executive of Fonterra. Photo / Dean Purcell

It's a tale of two extremes. The news is coming in almost daily. This week we find out about a million-dollar payout for a retiring civil servant. The week before it was a cool $8 million for the departing CEO of Fonterra. The top 0.1 per cent of income earners now pluck pay packets totalling about 5 per cent of the country's wage bill. That's one person in a thousand taking one dollar in 20, and this share has just about doubled over the past 20 years.

Now, it mightn't matter so much if we were getting value for money. There was no public outcry a few years ago when young Sam Morgan sold out of Trade Me for hundreds of millions of dollars. We could all see what he had created, and that it made us better off. We admired his chutzpah in seizing the first mover advantage in internet trading, thereby keeping the American giant eBay out of our market - a unique accomplishment in the English-speaking world.

Sam Morgan made his money the old-school way: coming up with a great idea; scrabbling together some financial backing; taking on the risk of failure; working extremely hard with his team; creating wealth.

But nowadays many able and ambitious men and women find it simpler to slide into a smart tailored suit each morning, cruising off to climb the corporate office towers and game the executive compensation system.

But surely they too create wealth. Don't they? Well - at least outside the finance sector - CEOs and their subordinates do do useful work. Corporations and government departments have to be run properly. But that's always been the case. It was true when management hierarchies were much smaller than they are now and the people in them were paid much less.

So the issue is this: has the increase in the top-pay bill paid for itself in terms of better outputs - more market value created in the private sector; superior performance from government? I can't yet prove that it hasn't, but I can tell you there is no convincing scientific evidence at all that the relatively weak economic performance of New Zealand and other English-speaking countries over the past quarter century would have been even worse without the bloat in management bureaucracies and explosion in rates of top pay.

Simply put, it's been a great grab: a successful scramble by the elites for a bigger share of an economic pie that has itself most likely shrunk as a result of the diversion of so much talent from more productive activities.

And this takes us to the other extreme that is in the news. Last Friday, a team in the Auckland University Economics Department released research results showing that the rate of abuse or neglect of very young children whose parents or parent were on welfare was around 10 times the overall average. Welfare beneficiaries are, not coincidently, lowest of the low in terms of incomes.

Another study, a few weeks ago, reported that a prime source of child poverty in families with a parent in employment was - wait for it - low wages. Of course, with kids, moral issues are paramount - our duty of care. But investing in happy, healthy children is smart economics, too - they are our future workers and entrepreneurs.

Inequality doesn't just bite at the bottom of the income distribution. A fortnight ago the current affairs TV show Close Up ran a documentary featuring a young Auckland family of which the father earned $70,000 a year as a skilled, hard-working linesman. This was clearly a happy, well-run household, but the parents did not mind admitting that they struggled to make ends meet. And $70,000 is well above the average annual salary in New Zealand. No wonder many such families are upping sticks for the higher wages offered in Australia.

Our earnings structure has got seriously out of balance and we need to do something about it. It is all connected to other imbalances. On Friday a "Jobs Summit" bemoaned the pressure on our crucial job-creating manufacturing sector of the high kiwi exchange rate. We have a high dollar because we import so much foreign money - borrowing to finance home loans. We import money because we don't save enough ourselves. We don't save enough because we can't afford to on the incomes most New Zealanders take home. And incomes are low because that's basically been the policy in this country: laissez-faire for the rich and very rich; low wages under the euphemism "flexible labour markets" for everyone else.

We need to reverse this. Low wages are a problem for productivity and competitiveness, not the solution. We need the Government, not to raise taxes - that doesn't work - but to start dismantling its own high-wage structure whilst putting upward pressure on low pay. The private sector must be on side, of course, as they are in some other countries, so that hard-working people at all levels can bring home an income that will grant their family a decent standard of living. The "living wage", it's being called. That's our true duty of care - to our children and each other.

Tim Hazledine is a professor of economics at the University of Auckland.


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