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Will the fruits of economic recovery and an apparent increase in productivity be passed on in the form of higher wages?

Will the fruits of economic recovery and an apparent increase in productivity be passed on in the form of higher wages?
Will the fruits of the better economy flow widely, or stay concentrated as it has done overseas?

By Bernard Hickey

The last six years have been a long, painful grind of job losses and small pay rises for many workers, but 2014 should be the year when the economic rebound's 'rubber' hits the road of higher household income.

Employees looking for ammunition to take to their bosses before pay negotiations, or their next employer, need look no further than this week's Quarterly Survey of Business opinion from the New Zealand Institute of Economic Research (NZIER).

It found a net 30% of employers said skilled labour was hard to find, up from a net 20% a year ago and nearly double the long run average.

Most encouragingly for those on lower wages, the survey found a net 10% said unskilled labour was also hard to find.

Just a year ago a net 8% employers were still saying unskilled labour was easy to find and the long run average is that 15% say it's easy to find unskilled labour.

"Labour is gradually becoming harder to find, suggesting that wage inflation will increase over the year ahead," said NZIER's Shamubeel Eaqub. He is forecasting average ordinary time hourly earnings growth to rise to 3.6% next year from 2.6% last year.

Treasury is forecasting more moderate growth to around 3.1% by early 2015.

Many workers have been waiting a while now for the recovery to pump up their wallets, causing many to wonder if something structural has changed.

Economists and policy-makers overseas are particularly worried about how wages for many on lower to middle incomes have stagnated since the early 1990s, while the share of national income going to the owners of businesses in the form of profits has increased.

New Zealand has not seen the same sharp drop in the share going to wages.

After a slump in the 1990s as the Employment Contracts Act came into force and union power waned, the wage share has stabilised over the last decade. Household incomes have also been bolstered by Working For Families.

But the next couple of years will test that stabilisation.

Will the fruits of economic recovery and what appears to have been an increase in productivity be passed on in the form of higher wages? Or will it be captured, as it has been in America, by an increase in profits?

The NZIER survey showed a sharp increase in employers' expectations for profitability. A net 16% expected higher profits next quarter, sharply up on the 2% who expected higher profits a year ago.

But this upward pressure on wages won't be spread evenly. Areas such as construction, real estate, IT and dairy farming may see a burst of poaching and bonuses that beef up pay packets.

Others, particularly in retailing, media and government, are likely to see only modest wage increases because their sectors are struggling with weak demand and plenty of supply.

Some of the least skilled and unluckiest will receive no wage increase at all.

In the last year 46% of salary and wage rates did not rise at all, up from less than 40% before 2008. These types of jobs in fast-food, healthcare and cleaning are the ones where pressure is building for 'living wages' and a big jump in the minimum wage.

The irony is though, for those receiving Working For Families, higher wages may not flow through to their household incomes as the high marginal tax rates kick in on such wage increases.

Those with special skills on the highest incomes who aren't on the Working For Families teat look set to receive the biggest bump as the economy's 'rubber' hits the road into their bank accounts.

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A version of this article was first published in the Herald on Sunday. It is used here with permission.

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34 Comments

... or , rather than embark on an inflationary spiral of ever increasing wage rises , we could just scrap the idiotic WFF .... and give everyone a hefty cut in tax , particularly those at the lowest and middle ranges ....

 

A saving as no bureaucracy will be required to administer the WFF , and more dosh will be in every wage earner's  pocket ... Every wage earner , not just some !

 

Win / Win !!

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Gasp. A saving as no bureaucracy will be required to administer the WFF. What are you thinking! The purpose of bureaucracy is expansion of itself. It has no predators, it is at the top of the food chain. Eventually the host is weakened and the population of bureaucrats is slightly reduced but it is only a temporary setback - they will be back.

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... I have to confess Roger , that I got a little light-headed myself at the thought of that .... deconstructing some of the surplus governmental bureaucracies ....

 

Thereby increasing efficiencies within the business and personal sectors .... not wasting so much tax-payers' money on uselessness ...

 

... ye gads .... I'm starting to sound like our old friend Tribeless !!!!

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Because New Zealanders don't understand about ownership, we have allowed our economy to be owned by large corporates and overseas interests.  Small enterprises and workers are well down the queue for the benefits as a result.

We need to run the place for the benefit of New Zealanders, own our stuff, and control it ourselves.  We have been sold a false vision and believed it.  Crony monopolies are an example. 

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Hopefully KiwiSaver and high flying shares such as XERO will reawaken Kiwis' interest in business ..... and get them to focus more on productive assets and industries .... and less on flipping  houses ....

 

.... the engine room of our economy is small and medium sized businesses .... but all the stoopid politicians want to focus on is Hollywood studios , mega-cap aluminium companies , and super expensive yacht races ....

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KH - what NZers haven't understood isn't ownership, it's saving and investing. If you want to be a spender then you have two choices, let someone (or country) with the capital be the owner, or have no infrastructure and services etc. The choice is simple, and whilst Kiwisaver might be a good start, it's no where enough in its current non compulsory form to change much in the short-term (not that it won't stop us from complaining about others making profits i.e. owners with the invested capital......insurance companies, bank, supermarkets, etc etc)

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I think we are in agreement Grant.  Save and invest, and you end up with ownership. 

Ownership not only gives you a return, it also gives you control and options.

Now we have lost control in new Zealand, we are paying much more than we should for such things as energy, electricity and (sorry Grant) banking.

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Yes but I'm not sure that we're paying a lot more because of it, but it certainly means that the bulk of the profits and dividends are going to non-NZers. 

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My Dad was one of those who built the power stations on the Waikato in the 1930s.  Hard years and those things were built well but cheaply.

If the users of power still controlled those stations we would have very cheap electricity.   I think the price of electricity should be about 40% of what we now pay.

But what did we do.  We gave away control.  We accepted the narrative that the 'value' of the stations related to the income that could be extracted. And some idea about return for that.  Thus valuation and income figures were ratcheted up by pulling on the bootlaces.

Of course these stations have no real capital value.  They are just there.  We built and paid for them then.   The electricity cost from them should be no more than some minimal running cost, and some provision for eventual replacement.

Imagine the boost to the pockets of New Zealanders, if we paid only the proper price for electricity. 

 

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When we choose to run current account deficits for over 40 years, the only way we can finance that is by borrowing, asset sales and printing NZ $'s which we have elected not to do.

We are right on track to become a nation of sharecroppers vs shareholders - but that's the choices we have made. Raking up huge foreign debts is not without consequences.

Until we manage our external accounts and that includes the exchange rate we will continue to  become ever poorer. Interesting to see Singapores current account running a surplus of over US $ 40 billion  while we  are heading for a deficit of ~ 5 % of GDP ie $ 10 Billion.

At current TWI's exporters will be really suffering if your not into dairy now the NZ / A is so high.

No concern for their incomes I note.

The management of our external accounts could well be a defining issue come November time as Labour has finally discovered that a high exchnage rate equals low manufacturing outputs equal less jobs.

 

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Yes but Labour have stupidly lurched to the loony left with the nasty greens. If Labour actually had any sense they would be copying what Ireland did to escape being a backward agrarian economy - reduce the corporate tax rate to 12%. Google is headquartered in Ireland for this simple reason. We would rather have 25% unemployment for under 25s than actually attract jobs here.

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The more right wingers such as yourself show such fear, the more Im convinced that labour/Greens are doing the right thing.

Ireland is close to a basket case, (more or less) the corps paying 12% in effect dont contribute much to the country.  Irish youth un-emp-loyment as a justification? Well its 30% ish, so if you want to use stats, well thats a case for not having 12% corp tax.

" In Germany, youth unemployment stands at 8 per cent; in Ireland it is 29 per cent; in Italy and Portugal it nudges 40 per cent while in Spain and Greece it exceeds 50 per cent."

http://www.irishtimes.com/news/social-affairs/youth-unemployment-1.1592…

That is also a great case for not being on  a gold standard BTW.

regards

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I obviously offended you with my choice of words there.  Ireland transformed itself from a sad, backward place in the 1960s to a vibrant economy in the 1990s. They then made the mistake of adopting the Euro and thereby ceding their independence to a foreign power. It really did seem like a good idea at the time. Rampant property speculation boom and bust followed. The one thing each Irish Government has defended against the French and Germans is their aggressively low corporate tax rate. The French and Germans think this is the equivalent of under arm bowling.

The point is there appears to be a consensus that the low corporate tax rate is fundamental to Ireland's success. I assume that means that both major political parties support it.

http://www.tradingeconomics.com/ireland/indicators

http://www.tradingeconomics.com/new-zealand/indicators

http://www.telegraph.co.uk/finance/financialcrisis/10514819/Ireland-bre…

http://www.irishtimes.com/news/politics/spd-places-irish-corporate-tax-…

Why have neither of our rather dumb political parties picked up on this as an easy way of getting jobs here?

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Ireland also managed very well as a '3rd world nation' receiving handouts from the EU for companies that did not make a profit. I worked for an Irish manufacturers at the time and all we has to do was sell, the profit margin came later in the year from the EU, meaning we were cheaper than most other companies making outside of Ireland.

Maybe a coincidence, but they srated to go downhill after they became more recognised as 1st world.

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Yes, interesting. Usually that sort of government "help" is destructive since it encourages activity that cannot stand on its own two feet. I was just struck by how Ireland had gone up the OECD rankings whilst we had gone down over the last 30 years or so. Looking for new ideas rather than the stale old ones we seem to keep wallowing about with.

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Some people interpret these sorts of results as meaning people want less government when I think it is not more or less government people want but better government.

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Ah yes, the British "Help to Buy" scheme. helping BMW driving real estate agent sales managers buy houses.

http://www.independent.co.uk/news/people/news/david-camerons-struggling…

 

 

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Not just Texas, eh?

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In my situation I cannot afford higher wages. I have the option of more mechanisation. NZ is already so damm expesive, with the dollar so high money buys more, so wages should be buying more.

The problem is the overpaid elite.

 

http://www.ft.com/intl/cms/s/0/cfc1eb1c-76d8-11e3-807e-00144feabdc0.html?siteedition=intl&utm_content=buffer68819&utm_medium=social&utm_source=twitter.com&utm_campaign=buffer#axzz2qV0SO1Xy

 

commentor

Dr. Hu | January 15 5:13pm | Permalink

The enduring crisis of our time emanates from the radical imbalances in the globalized economy. The Great War shattered the old regime of free trade and the gold standard, but the WTO's architecture has realized the wildest fantasies of the corporate and financial elites, a "free trade" regime in which capital can scour the planet for the lowest production costs on the one hand, and search out the most lucrative consumer markets, on the other. Thus China, with its huge, industrious and low-cost labor force, its efficient infrastructure, abundant cheap capital, an artificially weak currency, myriad export subsidies, an expansive network of engineering and technical schools, and a government eager to sacrifice its public health and environment to the growth imperative, has become the world's workshop, manufacturing everything from cheap toys to iPhones to high-speed locomotives. And they're not yet done moving up the value-added ladder. They have everything, it seems, except the consumer demand needed to monetize their vast array' of comparative advantages.' And the west, especially the US, has generously supplied that. 



Why then, the shrewd capitalist wonders, should I build a factory in Ohio (Spain, Italy, etc.), when my competitors are building theirs in Guangzhou? As a result, the global economy is riven with destabilizing trade imbalances and most western economies remain stagnated by the supply glut emanating from 1.7 billion new workers and tens of thousands of new factories in emerging markets. We are mired in "The Age of Oversupply," as Daniel Alpert argues, a reality mainstream economists ignore while they debate whether austerity or Keynesian stimulus provides the better path out of recession. Keynes would have quickly spotted the fatal flaw in their thinking. When political elites jettisoned first the gold standard, and then the deeply flawed Bretton Woods framework, they abandoned logic to embrace ideology--free trade without any mechanism for balancing accounts (as Keynes' proposed "Clearing Union" and currency basket, the 'bancor'). The predictable result was the unsustainable and destabilizing triumph of what Keynes labeled the "currency hoarders;" nations willing to extend indefinite credit (along with debt and unemployment) to their deficit trading partners in exchange for capital accumulation and full employment.at home. Deeply flawed, indeed, but it's worked all too well for the elite 1%

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Re: "they abandoned logic to embrace ideology--free trade without any mechanism for balancing accounts (as Keynes' proposed "Clearing Union" and currency basket, the 'bancor')"

 

When the GFC hit I thought we needed some sort of global currency reform along the lines of Keynes proposed "Clearing Union".

 

Instead we have muddled though with stop gap solutions like QE. I do not think it will be long before another economic crisis hits.

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Good luck with receiving the 4% cost of living adjustment from the employer.

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Why would anyone want to push more of their income into government superannuation schemes.  The US and European situation is out of control.  Mounting debt, low real GDP, increasing unemployment.  The economies of the world are heading straight for disaster.  Janet Yellen isnt going to taper, she's going to increase QE and devalue your money even more.   After the OBR bail ins, capital controls, wealth taxes, and currency devaluations that New Zealand may be faced with over the next decade, those super schemes will be gutted.  Much better to buy houses.  They're only 2X overvalued compared to the long term NZ data trend.   That's less overvalued than gold.  Or perhaps I'm not seeing things clearly?  

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Z, interesting that Singapores  main  selling point in obtaining the new RR Trent line to build engines for the 787 - a US $ 700 million plus investment was the  200+ PhD's in engineering they graduate every year.

Now have some of the highest paid high value jobs in the world stretching forward at least 40 years. Once these facilities and staff receive FAA and other approvals they become very hard to duplicate.

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Kiwisaver to 15% I reckon ZZ.   And before too many of our wise independent investors expire from rage let me say that 15% is employees and employers combined.

Strangely, even the 3% I now pay for my employees is not taken up by some of them.  Such lack of basic wisdom does exist and says to me Kiwisaver should be universally compulsory.  Because otherwise we all will be paying compulsory tax to support them later anyway.

 

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Can you please provide a source for KS going to 4% for employers? I wasn't aware of this and haven't been able to find any information about it.

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Google Ireland maybe part of a dutch irish sandwich or stew or maybe a burger?

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Yes but it helps pay for the Guinness.

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That is just a great link Andrew

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With regards to Ireland....

It joined the EU in 1973, and started receiving tons of cash. Ireland in the 80's was one of the most corrupt and inefficient countries in Europe - all this cash helped line the pockets of politicians (Charles Haughey...., Bertie Aherne, the 'Teflon Taoisoch", who, famously, as minister of Finance under Haughey did not even have a bank account in his own name....)

The price they paid for the EU hand outs, was the 'selling off' of their territorial waters to other EU members. Spanish and Portugese fleets gleefully came and emptied Irish waters, to the detriment of Ireland's own fishing industry. Which still hasn't recovered by the way.

In the 90's, tax free zones were created in Limerick, and a low corporate tax of 12.5% was established in the rest of the country. This attracted a lot of US companies who were looking for a  foothold into the EU market. For a while the Celtic Tiger roared - the influx of workers to work for these US companies needed to be housed, so building contractors received massive tax incentives from the Irish government to build and build and build. Leading to such a surplus of houses that when the hot potato (pun intended) of sub-prime mortgage bundled products stopped being passed around, it landed in Ireland and crashed and burned the housing market.

Apart from servicing these US companies, Ireland does not have a proper sustainable economy (it did away with its 'backward' agrarian society when it joined the EU - wouldn't want to be the farmer hick at the fancy EU table, now, would we?), which is also one of the reasons it fought to hard to keep its 12.5% corporate tax, even though Brussels demanded it abolished as one of its terms of the bail out....

 

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Yes, if we all 'learn' from Ireland and implement a 12.5% corporate tax rate, suddenly it doesn't work so well.  A race to the bottom like the film industry hand-outs.

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Correct, dtcarter, as a country at the bottom of the Pacific ocean, a low corporate tax is not going to incentivise companies to set up shop, here. What it will more than likely lead to, is companies incorporating themselves in NZ to pay the corporate tax, but still keep their main operations (and therefore the paying of wages, etc...) in a more central APAC location.

Unless a company has as its main market New Zealand, or does most of its business online, it makes no sense to move the HQ over here. Even with a low corporate tax.
 

In my opinion, New Zealand needs to invest heavily in ideas, specifically ideas in the field of energy. Invest in education, attract the best and brightest from around the pacific rim. Then we'll start making a difference.

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