The recent Budget was a useful antidote to some of the mythology about wages.

It pointed out that total gross earnings have risen by an average of 6.1% per annum over the past six years, driven equally by growth in employment and growth in average hourly earnings.

Thus "the benefit of the strong labour market has been evenly split between more people working and higher earnings for those in employment."

If unions think a higher share should have gone to their employed members, they should say so to those who would have missed out on jobs.

The Budget also noted that labour's share of national income has been relatively steady at an average of 42.5% of GDP. In other words, it hasn't been squeezed at the expense of profits.

Finally, the Budget reported that real wage growth has been positive over the past six years and has broadly reflected productivity growth.

This continues a longer trend. According to the National Bank's April Business Outlook, nominal wage growth over the last decade has averaged 3%, inflation 2% and labour productivity 1.2%.

Clearly the statement "The value of Kiwi wages is falling" in the full-page advertisements of the Engineering, Printing and Manufacturing Union in support of its 5% wage claim is misinformation.

Moreover, unions have been defending the huge increases in health and education spending - which they call the social wage - and the mushrooming tax take that has funded them.

They have also lobbied for employment benefits such as parental leave and enhanced holiday provisions.

All these things come at the expense of more money in the hand for workers, which many might prefer. Just the move to four weeks annual leave in 2007 may mean wage increases around 2% less for affected workers.

In competitive labour markets, wages are fundamentally determined by supply and demand for labour of a given productivity.

In aggregate they are not closely related to company profitability, which fluctuates around normal levels. Diversified investors generally absorb profit fluctuations; firms do not typically cut wages when profits are below their cost of capital.

Nor are wages much influenced by unions, which only represent some 12% of private sector workers. Globalisation and deregulation have meant wages are now set competitively - as they should be if full employment is the goal. When the labour market is tight, firms have to pay more to recruit and retain people with the skills they need, whether they like it or not.

Most workers today want to be valued as individuals. Their circumstances vary greatly, as do those of the firms they work for. The idea of a flat, across-the-board wage increase should have gone out with the ark.

The key to rising gross wages is faster growth in productivity. And the key to higher net wages is tax reductions that leave more money in workers' pockets and stimulate effort and skill acquisition.

Those with workers' interests genuinely at heart should be joining with business and other groups in calling for the removal of the many obstacles to productivity growth that have been erected in recent years and for much lower taxes - nearer the levels workers in fast-growing countries in our region enjoy.

For more information, contact:

Roger Kerr
Executive Director
Ph: 04 499 0790
Email: rkerr@nzbr.org.nz

Web: www.nzbr.org.nz