Big Read: Hey! Where did my pay rise go?

What about the workers? That old rallying cry has gained new life.

Wage growth - as we once knew it - has gone missing in action.

Its disappearance has, as Reserve Bank governor Graeme Wheeler said at a press conference last month, "been a puzzle".

Economists have noticed that wage growth hasn't been following the traditional pattern - the Phillips Curve, to be precise.

Developed in 1958 by New Zealand's most celebrated economist Bill Phillips, the curve, which describes the connection between low unemployment and rising wages, had become an orthodox way of viewing wage growth.

Put simply, it held that when unemployment was low, the demand for workers pushed wages up.

Wage growth is the missing piece of the global economic recovery. Illustration / Richard Dale.

But as employment levels have recovered from the Global Financial Crisis, wages haven't done the same; the Phillips Curve appears to be broken.

Unemployment in New Zealand is sitting at 4.9 per cent - which economists regard as near to full employment, from a practical point of view.

Our employment rate - the proportion of working-age people in a job - is sitting above 76 per cent, higher than all our major trading partners.

But despite that, wages remain nearly static, rising by just 1.6 per cent in the year to March 2016 and the same again in the year to March 2017.

Look at New Zealand's labour cost index for the past 25 years and the change is clear. Periods of rise and fall tracked our economic fortunes until the GFC. That brought a predictable slump, but from there on it has flat-lined.

What happened? Are we just stuck in long, slow, low-inflation trap? Or has something changed in the way the labour market works?

Around the world, inflation has been low since the GFC. So although wages haven't risen much, that has been balanced by the fact that most prices haven't been rising by much either.

So, as ASB chief economist Nick Tuffley points out, you might feel like your nominal wage rises have been miserly, but real wage growth over the past nine years doesn't look as bad.

When you look at inflation-adjusted wage growth, says Tuffley, we are running at about the same levels as the pre-GFC period.

"You can get a period of optical illusion, you can fool people into thinking their wage increase is worth something during a high inflation period," he says.

"On the other side of the coin, we've seen people benefit from low inflation - fuel price declines, modest food price inflation, slower rises of household rates and electricity and imported goods like electronics."

But now, as inflation rebounds above 2 per cent, ahead of nominal wage growth, real wages are going backwards.

Tuffley believes that is probably a temporary trend and expects continued labour market tightness will help wages catch up.

But he accepts there may be more to it than inflation. Labour supply is the other side of the coin, he says.

Ordinarily, with slower growth in labour supply, we might have seen a more pronounced drop in unemployment.

"We've had to be a lot more mindful of how elastic that labour force has been," he says.

Tuffley is wary of blaming immigration directly, noting that as well as looking for work, immigrants also invest and spend, growing the economy and creating jobs.

"But we might have seen stronger consumer price inflation during past migration booms ... which has been missing this time," he says. "One way or another, more people are attracted into looking for work in New Zealand ... long-time NZ residents, immigrants or returnees from Australia ... that has meant we've had an ability to grow jobs strongly and find the people for them and not yet had a lot of movement in nominal wage pressure."

The inflation trend since the GFC also came on top of structural changes that have been dampening wage growth, says Auckland University professor of economics Martin Berka.

"It's in addition to all these structural transitions we've seen around the world, where a lot of production has been outsourced to China and places," he says.

And there has been the shift in the type of jobs being created.

"Everywhere in the world, including NZ, we have seen a big increase in the service sector," Berka says.

In New Zealand, the rise of tourism jobs has been a big part of that trend.

While you might be doing well if you have rare and specialised skills, many service sector jobs - cafe workers, courier drivers, tour guides - are relatively low paid.

ASB chief economist Nick Tuffley.

We're also starting to see technology that makes it easier to outsource traditionally higher paid professional services jobs to remote - and cheaper - job markets.

Waiting for wage inflation isn't going to help us in the long run, Berka says.

"Especially when CPI isn't really the right deflator, because it doesn't reflect housing costs."

A lot of the impatience about low wages is to do with that rise in housing costs, he notes.

Which is a bit ironic, given that the national obsession with the "unproductive" housing sector is often blamed for our low productivity.

There's a longstanding belief that the productive, business end of New Zealand's economy misses out on investment because we have so much capital tied up in housing.

To be fair, Berka notes that in the current environment, good businesses shouldn't be having too much trouble raising capital.

Regardless, there's very little argument about productivity growth - the amount of output we get from each hour we work - being the real driver of wealth creation.

Put simply, we should be working smarter, not harder - but we're not.

In fact, like low inflation, poor productivity growth has been a global phenomenon since the GFC.

The OECD, in its Compendium of Productivity Indicators 2017, puts the blame squarely on "weak levels of investment".

We've had to be a lot more mindful of how elastic that labour force has been.

Nick Tuffley, ASB chief economist

"This matters because, as an important driver of growth, productivity has also been an important driver of living standards primarily through higher wages," it concludes.

Companies retrenched after the GFC, paid off debts and stopped investing in things like R&D, machinery, new IT systems and worker education.

New Zealand, as Berka notes, was "not exactly a rock star in terms of productivity" to start with.

The OECD again (this time in the Economic Survey of New Zealand, released yesterday) is blunt about our problem: "Labour productivity is well below leading OECD countries, restraining living standards and well-being."

It says we are being held back by a lack of international connections; lack of scale; weak competitive pressures; low rates of capital investment; and meagre research and development.

The OECD's suggested solutions include things like reducing barriers to foreign direct investment, lowering the corporate tax rate, expanding infrastructure funding options to increase housing supply, and increasing support for business innovation.

They aren't too far from the sort of actions that the Employers and Manufacturers Association (EMA) might recommend.

EMA chief executive Kim Campbell maintains that you can't look past the immediate issue of housing affordability.

"If you want to put this in a New Zealand context, then accommodation is such a high percentage of people's income and one way to make people better off is not to raise the nominal wage, but to reduce the cost of accommodation," he says.

Beyond that, Campbell also highlights the need to invest more in R&D and look at education and skills training.

"We need to start to recognise that we are going to be making fewer things and we're going to need to be creating value by doing things that are creative and clever," Campbell says. "You've got acknowledge we have made progress in this area. I'd argue we have seen living standards continue to rise, modestly and tempered by the cost of accommodation."

In the past, the kind of dairy downturn we've just been through would have stopped the economy in its tracks, he says.

EMA chief executive Kim Campbell.

"We'd have gone back into recession. But we didn't, we just ploughed on through."

But Campbell also doesn't believe we can just wait for wage inflation to re-emerge.

"We need real wage growth but it has to be underpinned with productivity in the economy."

From a union perspective, however, behind the wage data there are issues about growing inequality.

CTU economist Bill Rosenberg see deregulation of the labour market and the weakening of collective bargaining as one of the key culprits in reducing wage growth.

He notes the global trend towards workers receiving an ever decreasing share of economic output.

Treasury forecasts suggest labour's share of gross domestic income will fall progressively over the next four years, from 50.5 per cent to 48.8 per cent by 2021.

At a global level, that's backed by the OECD.

In its Compendium of Productivity Indicators, it notes "significant declines in labour's share of income in many economies" which it says are "raising concerns about inequality".

"In the end, this is about fairness," says Rosenberg. "Having a wages system that gives working people a fairer share of the income that they produce with their work."

He'd like to see the Government playing a more active part in that.

Population growth, immigration and an ageing workforce are all taking pressure off employers, he argues.

He agrees that wage growth needs to underpinned by improved productivity, but says there is a "chicken or egg" question about which comes first.

"The conventional explanation is that you don't get a wage rise unless there is improved productivity, but there is also good evidence to show that if you don't have a push on wages, then employers won't invest to bring in better production processes and equipment in order to replace labour."

In other words, they use low wages to drive efficiency, rather than investing in capital and skills training.

That argument is illustrated clearly by the difference in productivity and capital investment between high-wage economies such as Germany, and many third world, low-wage economies.

If you're making good profits and you've got enough funds to reinvest in the business and then you're complaining about losing good workers, which I hear every day, then you might want to think about paying them better.

Kim Campbell, EMA chief executive

There was also the upside that if people felt they were being fairly paid and looked after, they were likely to be more innovative and productive workers, "and go with the flow in terms of changes in the workplace".

So you need to have a plan for wage growth, argues Rosenberg. "We've seen that it won't just happen."

He cites the example of the pay equity case for care workers, which has seen the Government get on board with a big pay rise for public sector workers.

"We think we need national standards in other industries to form a floor for other workers," Rosenberg says.

The EMA's Campbell isn't so keen to see the Government prescribing wage rates: "clearly, you want the market to operate".

But he does agree that employers need to invest in staff and look at wage growth to ensure their own long-term future.

All the economic forces at work mean employers aren't paying more because they don't have to, he says.

"As an employer, you might think, I'm getting away with this. Well, that's OK, except you want your business to grow. You want customers who can buy more and you want them to have more disposable income."

And you need to retain staff.

"If a business has its back to the wall, then it has to do everything it can to survive and that may mean holding wages down or redundancies. But if you're making good profits and you've got enough funds to reinvest in the business and then you're complaining about losing good workers, which I hear every day, then you might want to think about paying them better."

He doesn't believe the low wage trend is just part of the economic cycle.

"I think we have an intergenerational change," he says.

It is going to be fascinating to watch the trend as the cycle turns and the economy continues to grow, says Auckland University's Berka.

"I wonder how wage and price inflation may evolve in the coming year or so. Normally, the two are closely connected, but with the current labour market dynamics, they may diverge. Prices may continue to rise at a faster pace, due to our economy hitting its capacity - and perhaps in part also because of the [house price] wealth-fuelled consumption spending," he says.

"If we end up seeing higher CPI than wage inflation, real wages will decline. This would be bad news for the workers, of course, but also charged politically."

The wage squeezers

What's keeping wages from rising? Here are the usual suspects.

• Low inflation: It's been a global phenomenon since the GFC. If price growth is slow enough, you might still be winning in terms of "real wages".

• Immigration: Its impact is hotly disputed, but record immigration is likely to have had some impact. However, it's important to remember that immigrants also spend and invest, creating jobs and economic growth

• Service sector: All through the Western world, there has been a shift to more people working in the service sector. These are often lower paid jobs and more easily outsourced.

• Globalisation: International outsourcing to cheaper labour markets started with manufacturing in the 1980s and has continued at pace, as technology has enabled professional services jobs to be done remotely

• The decline of unions: For better or worse, less collective bargaining and the casualisation of the workforce has removed upward pressure on wages in many sectors

• Technology: This is the one everyone fears - apps like Uber creating a low wage "gig" economy and robots replacing workers. It has yet to have a major impact on the local job market, but we need to prepare.