The beast that ate our success

Ever wondered why our economic growth has been so slow for the past couple of years while wage growth has been solid and unemployment low?

How does that compute? How can New Zealand employ more people and pay them more, yet produce less?

The answer can be found in the chart. It shows the premium paid to workers in the public sector, which means local and central government, over people paid in the private sector. It essentially shows that the Government is eating the economy and unless we can turn it around, New Zealand Inc will sink deeper into a foreign debt we can't service.

A large portion of the jobs created in the past five years have been in government or government-owned sectors, such as health, education, infrastructure and justice.

New Zealand has not created a single net extra job in the export sector in the past decade. These government jobs have lifted wages faster than the private sector and, if anything, this trend of a widening gap has worsened, despite the noise about restricting wage growth in government since the National-Act-Maori coalition was elected in November.

It's true that public sector wage growth has slowed, but from a higher base and it has not slowed much faster than private sector wages. Statistics New Zealand figures show public sector wage, salary and overtime costs rose 3.6 per cent in the June quarter from a year ago, which was down from 4.8 per cent growth in the September quarter of last year from a year earlier. Private sector wage growth fell to 2.7 per cent from 3.7 per cent.

This is after years of faster wage growth in the public sector. There are a few reasons for this.

The health and tertiary education sectors are among the strongest-growing parts of the economy. Some of that is demographic and some is technological. The rest is political. Our ageing population and the proliferation of new drugs and medical technology means health sector employment has grown fast.

But so have wages because of the last Government's attempts to keep and woo back staff who were thinking of jumping ship to Australia. Some aggressive doctors' and nurses' unions also helped bully a Labour Government into lifting pay.

Teachers, universities and polytechs have also done well over the past couple of years. There should be a debate about how effective that spending is, given the graduates seem not to be lifting our productivity or staying in the country. Many get cruisy jobs in government, worsening the problem.

Infrastructure employment is also up, as are wages as employers in construction have competed hard to grab workers, many of whom can now argue they can earn much higher wages across the Tasman.

The problem is that there is no market discipline on these wage increases. If a company in the exporting sector caved in to the sorts of wage increases demanded in the public sector, it would soon go out of business.

The public sector has no easy way to measure its output and work out if it's good value for money.

All this employment and wage growth in the public sector has dragged on our national productivity. We should not be surprised when our GDP continues to lag.

The public sector needs a big dose of salts and our Government needs to reform itself to encourage employment and wage growth in the private sector, where competition rather than lobbying decides wage growth levels.