Brian Fallow: Something is missing in Govt success story

Prime Minister Bill English, right, and Finance Minister Steven Joyce, announcing the government is to raise the age for national superannuation to 67 by 2040. Photo / Mark Mitchell

As the Government is running for re-election on the basis of its economic record - "Don't mess with success" is the cry - it is timely to look at what has been happening to incomes.

The most recent labour market data, released last week, do not make for cheerful reading on the wages front.

The average wage (average ordinary-time hourly earnings from Statistics New Zealand's quarterly employment survey) rose 1.6 per cent in the year to June. But that was boosted by some pay increases in the public sector that had been a long time coming.

In the private sector, the average wage rose 1.2 per cent, in a year when consumer prices rose 1.7 per cent. In other words, it fell 0.5 per cent in real terms. That was still better than the March report, when annual wage growth was 1.1 per cent and inflation 2.2 per cent.

Reflecting on these numbers, the Treasury says, "Some households may be responding to higher living costs by increasing the number of hours they work, with average weekly paid hours for [full-time equivalent] employees 0.4 per cent higher than a year ago.

"This has helped to lift annual growth in average ordinary-time weekly earnings to 2 per cent, roughly in line with inflation." This at a time when the economy has some decent tailwinds at its back.

Interest rates are historically low. The terms of trade (the mix of export and import prices) are the most favourable they have been for 44 years, boosting national income. The demand pulse from the need to rebuild our second largest city has been followed by the need to respond to the largest city bursting at the seams. Tourism is booming.

In these circumstances, are declining real wages the best we can do?

The Government's defenders, however, are entitled to point out that wages tell only part of the story of what is happening to incomes.

Wages and salaries comprise the lion's share of household incomes, but not all of it. Payments like New Zealand superannuation and welfare benefits are important as well, to say nothing of investment income.

Secondly, the wages data are gross. It is disposable incomes, net of tax and transfers, that matter.

And thirdly, it is really the household, rather than the individual wage- or salary-earner, that is the relevant unit for living standards.

Much the most comprehensive information we have on household incomes comes from the annual reports compiled by Bryan Perry for the Ministry of Social Development.

The most recent, released last month, is updated with results of Statistics NZ's household economic survey conducted between mid-2015 and mid-2016. The more timely labour market data indicate that not too much has changed since then.

If we look at the five years 2011 to 2016, economic growth per capita averaged 1.4 per cent a year. That was the compound average growth rate in gross domestic product per annum, per person in the resident population.

Average household disposable incomes, according to the Perry report, did somewhat better than that. They grew at an average rate of 1.8 per cent a year over that five-year period in real terms.

But the average growth rate is skewed upwards by the fact that higher incomes also tend to grow faster. The median or mid-point increase in disposable incomes was 1.5 per cent per annum.

That is before housing costs. After housing costs, the median annual increase was 1.7 per cent. The fact that it is higher than the increase before housing costs is likely to reflect the fact that people in the middle of the range are more likely to be owner-occupiers with a mortgage and will have benefited from the generally downward track of interest rates in that period.

The lowest quintile, or fifth, of households when ranked by income spend an average of 51 per cent of their disposable income on housing, up from 29 per cent in the late 1980s. For the second lowest quintile it is 32 per cent of income, versus 19 per cent 30 years ago.

When Perry analyses the trend in incomes after housing costs across the whole range, a clear picture of rising inequality emerges.

In 2009, the income of a household at the 90th per centile (that is, 10 per cent down the list of households ranked by income) was 5.5 times that of one at the 10th per centile (10 per cent up from the bottom). By 2016, the gap had widened to 5.9 times.

Between 2009 and 2016, household incomes at the 90th per centile rose 14.7 per cent. This is after inflation, tax, transfers and housing costs. At the 10th per centile, the increase was 9.4 per cent over the same seven years.

The increasing dispersion of incomes after housing costs has not all occurred under the National-led Government, however. It has been going on for 20 years. But the top decile has been pulling away from the rest particularly swiftly on National's watch.

There is another troubling result in the latest labour market numbers, which the Treasury notes. It relates to labour productivity -- output per hour worked.

When you compare hours worked from the household labour force survey in the year to March (a period clear of the one-off level shift in employment and hours worked, which resulted from changes to the survey in March last year) with GDP growth over the same period, labour productivity growth was negative 0.4 per cent.

Looking at the paid hours data from the quarterly employment survey -- a survey of firms rather than households -- labour productivity growth also comes in negative, by 0.2 per cent.

And after adjusting for that level shift the year before, the Treasury concludes that average labour productivity over the past four years has been flat.

Zero growth over four years in what has to be foundation of any sustainable gains in living standards is not encouraging.

Nor is it a record the Government can boast about.