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New Zealand: What has happened to real wages since1982?

By Mike Treen

Official data on wage movements in New Zealand point to a real wage decline of around 25% between 1982 and the mid-1990s that has never been recovered.

There have been two series measuring wages in the period – the Prevailing Weekly Wage Index (discontinued in June 1993) and its replacement the Labour Cost Index. I have created a continuous series based on the LCI series back to 1982 (by adjusting the PWWI numbers before December 1992 when PWWI at 1000 was equivalent to the LCI at 868). These numbers are in turn deflated by the CPI index covering the whole period.

What is revealed is that by the mid-1990s real wages had declined at least 25%. There has been no recovery since then and real wages remain 25% below their 1982 peak. This result can be directly attributed to the combination of the massive deunionisation as a result of the anti-union employment laws and the recession that accompanied it in the early 1990s.

The decline in real wages wasn’t offset by a decline in tax rates for middle- to low-income earners at that time. Between March 1982 and June 1991 the tax rate for the bottom 20% of wage and salary earners increased from 15.8% to 18.0%, the middle 20% went from 25.3% to 23.7% while the top 20% went from 38.5% to 28.4%. It seems clear that for the big majority of wage and salary earners the tax changes would have made them worse off (especially including the goods and services tax or GST).

The period from the mid-1980s to mid-1990s also saw a 10% drop in the share of GDP measured as “compensation of employees”. There was a corresponding rise in the proportion measured as “gross operating surplus”, that is profits and interest. In today’s dollars that equals NZ$18 billion from the pockets of workers to the coffers of capital.

Of course we were also told that if the cake was grown we would all benefit. A little pain now for the riches to come. Productivity has increased by 80% between 1978 and 2008. So real wages are 25% lower but our output is 80% higher.

“Average wages” don’t capture the real position of the majority of wage and salary earners because the average has been dragged up by the inflated incomes of the very wealthy in society. Real ordinary time average hourly earnings have risen from $21.08 in September 1996 to $25.06 in June 2009 (measured in June 09 dollars). Even using LCI figures there has been a average of 1.3% difference between the median and mean changes every quarter between June 2000 and June 2009. The only quarter where the median exceeded the mean was the most recent one.

We know from experience in the industries we represent that real wages have declined further than that represented by the average ordinary time wage. These industries were hit by the removal of allowances, penal rates for overtime and weekend work, and casualisation of hours. We estimate the real income of housekeeping staff in major hotels is only 60% what was earned in the 1980s.

More hours

Households made up for the loss in real wages by working more hours (principally more women and young people) and going into debt. A report by Simon Collins in the New Zealand Herald (25/11/06) found that average family income in 2001 in constant dollars was the same as in 1981 despite the fact that the proportion of women working went from 47% to 61% and the percentage of families working 50+ hours a week went from half to two-thirds. The proportion of households spending more than 30% of their income on housing has gone from 11% in the late 1980s to more than twice that today. Twenty per cent of NZ families with children live in severe or significant hardship according to the NZ ministry of social development.

Across the globe as this system seems to produce more goods and services than can be marketed profitably.

Each time it runs into trouble it has sought to expand its sphere of operations. Trade barriers in poorer countries get knocked down while they are maintained in the rich. Industries are privatised. Controls on the movement of capital get lifted. Property rights are entrenched. Wages get cut in one country to get a competitive advantage over another.

Promises were made that if the rich got richer eventually it would trickle down to the rest of us. Greed became normalised as a necessary part of getting ahead. Grotesque salaries were paid no matter what the performance of the companies. Outright fraud became commonplace.

But it was never enough. New crises kept emerging – except now they had immediate international consequences as capitalism was tied together by a thousand threads in every country.

The world’s banks were given even more freedom to create debt on a colossal scale to keep everything ticking over. Personal, corporate and government debt kept on growing. In the US debt went from 163% of GDP in 1980 to 346% in 2007 (Rod Oram, Sunday Star-Times, 5/10/08).

Debt

In New Zealand average household debt went from 60% of GDP 15 years ago to 160% today. This is the second-most indebted in the OECD. This fuelled a housing price bubble as prices doubled since 2000 – as they did in the UK and Australia. We were told not to worry. We were encouraged to use our houses as an ATM machine. Average household expenditure exceeded average income on average about 6% but increasing to 15% in recent years. In the 3 decades before 1980 we saved about 10% of our income.

Throughout the world there was a housing bubble. But in New Zealand it was bigger than most. Writing in the Listener on October 18, 2008, economist Gareth Morgan noted that “average house prices used to be twice a graduates salary; nowadays it is eight times that and the median salary is less than the interest on the average mortgage”. He included a chart which showed that the housing affordability for a 25-year, 80% mortgage went from 20% of average income for decades to 50% in a surge after 2000. Another chart revealed house prices were 45% above the 30-year trend line.

“Median house prices rose from 3.5 times the median household income in 1991 to 4.6 times the median household income in 1997, leveled off until 2001, then rocketed to 6.3 times the average household income last year, roughly double the average in North America. Prices have fallen slightly since then to 5.7 times the median household income last month.”

This was always going to end in tears. The government refused to do anything as it couldn’t “interfere” in the operations of the free market – that is the freedom of big business to rob us blind.

Now the banks worldwide are in trouble as the bloated financial merrygoround comes to a halt and we discover their massive debt creation (which gave them billions in commissions and fees) ended up in the hands of households and businesses who could not repay.

As the bubble deflates in housing prices many working people will be left owing more on their houses than they are worth. A Canterbury University study by Professor Chris Eves reported in the Sunday Star Times (21/12/08) estimates that it is true for 20% of mortgages already.

Everyone will be cutting back on spending – households and businesses. Banks will be intensifying the cutbacks by radically reducing their lending in a desperate attempt to restore their balance sheets.

We are entering a downwards spiral and no one knows how far it will go. Will it be a simple recession with 10% unemployment like the 1990s? Or are we looking at 30% unemployment like the 1930s Depression? No one knows.

Household expenditure

With the recession biting, unemployment rising and banks restricting lending – it seems households are cutting their expenditure and retail sales are falling rapidly. Big ticket items like motor vehicles are seeing their sales hit a brick wall. House sales are down 50%.

Household expenditure in NZ is about two-thirds of GDP. If average household expenditure were to drop in New Zealand from 115% of GDP to just not spending more than current income then that would equal at least a 10% decline in GDP. The 1990-91 GDP decline was about -2% and official unemployment rocketed to 10% (with official rates of 25-30% for Maori and Pacific people). The consequences would be terrifying.

Once the decline started it will be difficult to stop. Just like the seemingly virtuous circle of more debt = more production = more jobs then the reverse will be a vicious circle of debt reduction = production decline – job losses on a massive scale. As Rod Oram wote in the SST: “The danger, though, is that the economy will collapse. If the slowdown starts to bite deeper, we’re risking a vicious downward spiral. Business confidence will crumble then capital spending and employment will drop; a rise in unemployment will wreak havoc on highly indebted households; banks will sell off repossessed properties; and the housing market will tumble.”

The New Zealand economy was kept ticking over these last 15 years on debt. The combination of declining real wages, benefit cuts and overall government expenditure cuts produced a deep recession in the early 1990s driving official unemployment over 10%. We got out of it because the rest of the world started their debt fuelled growth path and we picked up the coat tails.

Going into this recession we are in a much worse situation than 1990. Real wages haven’t recovered and families are under pressure already. There can be no return to debt creation as a substitute to an expansion of real incomes for the big majority. The deep inequality that grew in New Zealand society and the absolute poverty that exists at the bottom of the income ladder must be addressed.

Raising the minimum wage to two-thirds of the average wage is a vital first step giving everyone a fair share of the economic pie.

[Mike Treen in national director of the Unite trade union. Unite is spearheading a campaign for a $15 an hour minimum wage in New Zealand. Click HERE for more details.]

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