Working harder to get less

New Zealand has one of the lowest wage and salary shares of the country's income in the OECD. Pic Getty.

People are working harder and earning less, and although the trend can be traced back to 1978, it has been gathering pace since 1996.

Using a measure called the Labour Income Share (LIS), the New Zealand Productivity Commission says that between 1978 and 2016 the LIS fell by 8.3 percentage points, and between 1996 and 2016 fell by 2.5 per cent. It means workers have lost income worth thousands of dollars a year.

The report concludes that real wage growth (money in your pocket) is falling behind the growth in productivity.

This trend in low wage growth is routinely attributed to increased technology, such as robotics and smarter software etc. Other contributors often cited are economic and political influences as well as globalisation (standardisation) and economic shocks such as the GFC (the effects of which continue with low interest rates being just one indicator).

However, the commission's report, Labour Income Share by Huon Fraser, references the International Labour Organisation which found (in 2013) that just 10 per cent of the decline in the labour income share across OECD countries was due to technology change and that 25 per cent is due to the loss of employee bargaining power, de-unionisation, and falling government spending.

One driver to lower wages might be that companies listed on stock exchanges need to demonstrate ever-higher profits to analysts and investors, and that is achieved in two ways; selling more and driving down costs. Pushing costs lower could mean paying staff less or driving down the costs of raw materials (in which case, suppliers might need to pay their people less to remain profitable). You could call it the trickle-down affect.

An economist at the Council of Trade Union (CTU) says changes are needed to address the imbalance.

Bill Rosenberg says: "If wage and salary earners received the same share of the income generated in 2017 as they did in 1981 they would on average have been $11,500 better off.

"Their share of the total income generated dropped over that period from 58.7 per cent to 48.7 per cent. This means their annual incomes, plus benefits such as employer superannuation contributions, would on average have been 21 per cent higher in 2017 if their share had kept pace."

That $11,500 a year works out at $5.52 an hour for a standard 40-hour week, and if added to the minimum wage of $16.50 the country's lowest paid workers would be paid $22 an hour — way above the living wage of $20.55 (as suggested by the Family Centre Social Policy Research Unit).

Rosenberg says: "In the smaller sector of the economy the Productivity Commission looked at, workers including self-employed people would on average have been $8400 better off in 2016. Their share of the total income generated dropped over that period from 65 per cent to 55.5 per cent.

"This means annual incomes, plus other benefits such as employer superannuation contributions, would, on average, have been 17 per cent higher in 2016 if it had kept pace.

"The falling labour income share shows that real wages have not been keeping up with income growth."

Rosenberg says the largest falls in income can be attributed to wage freezes in the early 1980s, commercialisation and privatisation, which "boosted profits while cutting wages in the late 1980s", he also points to the Employment Contracts Act (ECA) in the 1990s.

"The effect of the ECA on labour share of income lasted until employment law changes in 2004 allowed a little of the share to be regained," he says.

"The positive changes were put into reverse by the 2008-2017 National Government, which led to another steep fall starting in 2009."

He concedes that technology may have played some role in wage growth lagging productivity, along with companies making "excess profits" due to lack of competition.

"But we need to look at the evidence in New Zealand and it is hard to dismiss the impact of government policies over a long period since the early 1980s," says Rosenberg.

"Labour share of income — the proportion of the total income of a country that goes to working people as distinct from the owners of capital — has been dropping for decades as a direct result of government decisions.

"The Productivity Commission asserts that New Zealand has not experienced the significant falls in the labour income share seen in other countries over the past two decades. That ignores the longer run of evidence and the effect of the changes in employment law. New Zealand still has one of the lowest wage and salary shares of the country's income in the OECD."