The impact of rising wages

02 Jul 2018

Cash

New Zealand’s economy is in good shape and growing. In the past, when the economy is growing, workers have gone after wage increases. The flow-on effect of this is that businesses put up their prices, inflation increases, the exchange rate increases making exports less profitable, and the Reserve Bank tightens up on lending. We all end up in much the same relative position, paying more for goods and services, but earning more to pay for those goods and services. For this traditional spiral upwards to continue businesses need to be able to increase their prices, employ less workers, or replace paid workers with robotics or artificial intelligence. Neither robotics nor artificial intelligence are developed enough to take on such a prominent human replacement role, but in only a few years they may well be able to. The problem businesses face today is if a consumer cannot get what they want, at a price they are prepared to pay, they will go on the internet and order what they want from somewhere else in the world. Once businesses competed with other businesses in their own country only. Today business is truly global. How many books, music and all manner of goods are purchased via the internet from offshore businesses? That puts New Zealand businesses who cannot compete out of businesses. While this may be good for the consumer, it is not good for those workers who lose their jobs when companies go out of business. It seems that a new cycle has begun, and one where globalised trading rewards only the most efficient producers, or the ones with a premium or different products.

New Zealand is able to produce premium natural products, giving us something that the rest of the world wants and will continue to pay for. The disadvantage is that businesses in New Zealand that do not have that advantage will, unless they can work out a way to increase wages, go out of businesses. It looks like more and more New Zealand will be reliant on the primary sector for its continued wealth. The Government is therefore, doing what is needed to keep us competitive by negotiating more free trade agreements so that we can sell our natural products. As EU’s Trade Commissioner Cecilia Malmström commented when in New Zealand recently: “Jobs in industries that produce exports, or rely on imports, are generally better paid and higher skilled”.

New Zealand’s economic growth has however, encouraged a number of workers supported by their trade unions to seek wage increases and, in support of their case, go on strike. The Government is also progressively increasing the minimum wage. Previous wage increase cycles would have followed the pattern of previous years and resulted in increased prices, inflation and so on. But if businesses cannot afford to pay their workers more, then their options are limited as discussed above. The Government’s moves to increase unionism across New Zealand businesses with its proposed labour reform will not only pit employer against employee, but could have significant and disastrous results for New Zealand if union muscle is used to force greater wage increases.

In a global marketplace, traditional wage-inflation cycle is over. Globally, wages will not rise significantly and, if they do, workers will lose jobs to robots and artificial intelligence. The ultimate consequence for New Zealand will be businesses that simply cannot compete on costs will go out of business. Across the developed world, recent wage rises have not been large and inflation has remained very low. The questions for New Zealand are: Will the wage rises now being asked for and the Government’s programme to increase union power have a negative effect on the New Zealand economy? Or, will New Zealand transition into a higher wage economy based on our exports?

- Mike Chapman, CEO