Wednesday, February 17, 2010

New Zealand gap versus Australian wages

Reading Gooners post about Aust NZ wage gap and the emigration trend referencing a
table from an article by Brian Gaynor, I got to thinking about the relative growth in wages and what is required to catch up by 2025.

There is a long way to go
The scale of the task is shown below. I used Australian and New Zealand current trend to show there would be an NZ $1381 difference by 2025. New Zealand will have to grow wages at 7.4% pa for the next 16 years (from Dec 2009) with no trend increase from Australia simply to close the gap that has arisen over the last 15 years. From 1994 through 2002 New Zealand and Australia had the same growth but because Australia had a higher base it grew more. It is true that Australia has been riding a commodities boom for the last 8 years. Its growth was negligible from 1999 to 2002 allowing NZ to catch up slightly during a commodity bust.

If John Key and the National government are genuinely serious about closing the gap we will need policy that is a lot bolder than has been shown to date.

Some ideas for changing the playing field
  1. Corporate tax down to Ireland levels (12%)
  2. Allowing 100% depreciation on capital investment in productive plant and equipment in first year
  3. Raise GST to 17-20% to fund the Corporate tax reduction
  4. Raise minimum wages over time to encourage business investment in training and equipment rather than lowest cost manufacture.
  5. Promote New Zealand based shared services
  6. Investing in education.
  7. Investing a portion of Cullen Fund and Kiwisaver in small New Zealand businesses needing capital to grow.
Change the tax base
Reducing Corporate tax and increasing is about the only way that New Zealand will attract sufficient Foreign Direct investment to boost the labour market. Allowing 100% write downs on capital equipment with a 12% corporate tax rate and a 20% GST would provide a fiscally sustainable and stable path forward to a higher wage base economy by making New Zealand a much more attractive place to do business. The tax working group seem to have argued that having equal rates is the most "fair". There does not seem to be any research or evidence to back up the economic impact but it is fair to say that all of the wealthier nations practice some kind of tax differential. Britain attracts a large number of "non-doms" simply by being prepared to tax them little or nothing directly. Their consumption attracts VAT and their inwards investment boosts the economy.

Promote shared services in New Zealand
Australian companies would think seriously about what they would be able to produce in New Zealand. Australian banks and manufacturers would be more inclined to based their shared administrative services in New Zealand to ensure they maximise the benefit of the differential. John Key talked about promoting the administration of pension funds in New Zealand but there is a much bigger market for the provision of shared services. This is the functions like invoice processing and payments and closing the books that can be done anywhere. New Zealand has international accounting standards and the time zone differential is actually a benefit as it means that things can be processed overnight. Much of this work is going to India but there are qualitative differences that mean New Zealand can use technology to compete. US$1000 per day all in for outsourced skilled IT workers indicates there is scope for New Zealand to compete.

Minimum Wages
Unlike many commentators on the right I do not see gradual increases in the minimum wage as being necessarily a bad thing over the long term. Properly signalled to business it will encourage them to invest in capital equipment and training for staff. That makes workers more productive and will assist with the long term goal of catching Australia.

The youth wages minimum rate at the same level as adults is an insanity. Offsetting Behaviour has an excellent demonstration of that. The obvious impact of raising the minimum wage too quickly is that the labour market would suffer the same fate as youth as employment disappeared overseas. By signalling a gradual shift business have time to prepare. For example raising the minimum wage at 1% above CPI (or whatever the prevailing benchmark is) over 5 years.

For those who think wages should be left for the "market" to resolve I point to the 75% of tax paid by 10% of taxpayers. The tax payer is already involved in massive support for low earners. We are not going to catch Australia in a race to the bottom for who can produce the most at the lowest wage. China and South East Asia have a different political system that is not impacted by such generous welfare. It is politically impossible to change that in New Zealand so you can recognise reality and deal with the political market conditions we have or pretend that the sky is green and grass is blue.

Investing in education
I will come back to this one.

Investing Cullen Fund and Kiwisaver in New Zealand for New Zealand business.
This is called backing yourself. I have blogged on this before and repeat it here. Invest all of the Cullen fund in New Zealand over time. The 40% is a start. I do not wish to engage with those who argue for diversification overseas. They have economic theory on your side but nothing more. Entrepreurs would never get sufficient investment if they relied on diversified portfolios. The young farmer has an unbalanced portfolio. It will take time for the money from the fund to be appropriately invested but it is time for us to back ourselves. The investment in New Zealand will produce an economic return. That return has a multiplier effect that will end up boosting the economy more than simply investing offshore. I have never seen any academic research on the subject to assess what differential rate of return would add value to the economy.

The point about raising wages is that is what makes individuals wealthier. I have been somewhat mystified by how politicians think they are going to increase New zealand wages without making New Zealand a more attractive country for overseas investors. With a low 30% Export to GDP ratio it simply wont be enough for home grown organic New Zealand investment to be promoted. We need to encourage inwards investment in something other than residential housing.


Anonymous said...

Immigration reform would help our economic fortunes too.

The number of immigrants who are helping increase New Zealand's exports is minmal but the rest are increasing New Zealand's imports significantly. This wouldn't matter if not for the fact New Zealand's immigration level is incredibly high.

Having much lower but highly specific immigration would be a better direction for New Zealand's economy.

kehua said...

Why not come up with a formula where youth rates are tax free or minimal to ensure a take home pay 15/25% above equivilent Dole payment. Advantage, diminish value of Dole and no extra cost to Employer this would surely make employing youth more attractive to Employers and also diminish unemployed youth numbers.

stephen said...

Isn't it obvious? Nobody is actually serious about "closing the gap" with Australia. It's just propaganda: everytime you want to do something unpopular or awful, repeat the mantra "Oh, but we must close the gap with Orstraylia".

"oh, ok then" mutter the sheep.

Anonymous said...

tax free or minimal to ensure a take home pay 15/25% above equivilent Dole payment.

Why? Why pay bludgers more than they are worth.

Rather, we should just stop the Dole, and stop the minimum wage: then people will get what they are truly worth. If in very many cases that's a sleeping bag at the back of the shop and a bag of potatoes each week, so be it

NZ has hundreds of thousands, if not millions, of people who aren't even worth that much!

ISeeRed said...

20% GST with no income tax reductions? Won't happen, electoral suicide. Cash in the Cullen Fund to cover income and company tax cuts across the board. Aim for rates of 19% or less, under that psychological 20%+ barrier. A flat tax (or a two-tier income tax) with a tax-free threshold of some kind is optimal for wage earners. Cut GST to 10% and also reduce petrol tax to reduce costs on business and consumers.

We won't close the wage gap with Australia in a hurry, but we can at least boost take-home pay, company profitability, employment and investment quite quickly. In the medium/long term, we won't have genuine wage growth unless we create a semi-permanent labour shortage. To achieve this, jig the lower income tax rate and tax-free threshold mentioned above so the minimum wage can be reduced to $10 an hour without those on or near it being worse off in the hand. I'm sure there are lots of manual/factory jobs that are viable at $10, but not the present $12.50.