Want a stronger economy and higher pay? Then get out and hustle

The root of our problem started long before the rest of the world woke up to the post-Covid inflationary surprise. Our circumstances were different. At the centre was our decision to drive up wages.

In 2017, the minimum wage was increased to $15.75 an hour. Since then, it’s been lifted six times. What was once a 50c or 75c increase each year, quickly became $1.20. The last increase was $1.50. On April 1, the minimum wage increased to $22.70 an hour.

That means we’ve increased the minimum wage by $6.95 an hour or 44 per cent, in just six years. When you’re employing a young painter or someone to fill the shelves at your retail store for 40 hours a week, that’s another $278 per worker, per week. And so it goes for the restaurant worker and the delivery van driver, the young lady in the bookshop and the office cleaner – all of whom get paid a bit more

Driving up the minimum wage can be a good thing. But it needs to correspond with an increase in productivity. Otherwise, you end up paying more for the same result. If anything, our productivity per person has gone down, not up.

As the minimum wage goes up, the pressure goes on employers to raise the wages of those receiving a few dollars above the minimum. That’s a fair enough argument – not to do so would see pay-scale relativities get out of whack. And the same goes for the next level up.

And so it goes on. An upward wage spiral.

When Covid came along, we lost a lot of our workforce, as people here on working holiday visas left the country. By some reports, that was as many as 200,000 workers. As a result, we had the Covid-initiated worker shortage.

Workers are like any other economic factor: scarcity leads to cost increases. So, with the Covid-enforced absence of workers, wages went up as employers fought to attract the staff they needed to stay in business.

Meantime, in parallel to all of this, the government went on a hiring spree, before, during and after Covid, often paying above the market to attract the workers they needed.

It’s been a perfect storm. Drive up the minimum wage. Lose a large number of workers overseas. And exacerbate that scarcity by increasing the number of government workers. The result? A massive wage bubble.

One of the challenges for a new government trying to get on top of inflation is that wages are built into the cost of everything. If we increase the pay of the guy driving the van to deliver the apparel to the clothing store, sooner or later the cost of the clothing will go up. It will go up again if the shop assistant gets an increase as well. If the guy mowing the grass for the council is paid more, your rates have to go up.

“It’s been a perfect storm. Drive up the minimum wage. Lose a large number of workers overseas. And exacerbate that scarcity by increasing the number of government workers. The result? A massive wage bubble.”

And the coffee and scone are more expensive because the person behind the counter is getting another six bucks an hour over what they were five years ago.

Here’s the thing. Wages don’t go down. Once pegged at a certain level, they are either destined to stay there or continue to rise. But they never go down.

In a service economy, our biggest costs are people. So with the increases locked in, the $15 pint of beer and the $7 cheese scone are here to stay.

Instead of driving up wages on the back of a strong economy, we are left with a need for the economy to catch up, so we can afford the wages. Normally, you would look to grow your economy so you can increase wages as a result. We’ve done the opposite. We grew wages without the corresponding growth in our economy. As previously covered in this column, our projected GDP growth over the next 12 months is among the lowest in the world.

In order to grow our economy, we need to make more and sell more. That’s getting harder because, as a result of wage costs, our cost of sale is higher than it was. So being price-competitive just became harder, too.

And the pain isn’t over yet. Because we’re in a spiral that isn’t easy to stop. According to Stats NZ, the cost of living has gone up by 7.2 per cent in the past year, in part because wages have gone up. Accordingly, forklift operators, office workers, truckies and tradies need a pay rise, in order to afford their groceries, fuel and mortgage payments. Once those in the productive sector get their pay rise, the costs of production go up again, and prices continue to move upwards. That’s why, once it starts, inflation is so damn difficult to stop.

One of the results of our weakening economy is the downgrading of our currency. A couple of years ago, our dollar was buying a fraction over 70 US cents. Today it’s buying 58 US cents. So the things we bring in from overseas are costing 15 per cent more. Two years ago, a barrel of oil was costing US$68.44. Today it’s US$87.96. On the face of it, that sounds like a US$19.52 increase or 25.5 per cent. But it’s worse than that, because when you buy that barrel of oil with a weakening New Zealand dollar, the price has gone from $97.10 per barrel to $150.79. The actual increase is more like 55.29 per cent. And that’s before you pay the petrol station attendant a few more dollars in wages.

The figures above might go some way towards explaining why fighting inflation must be such a high priority for this country. It’s like a bushfire: easy to start, almost impossible to stop.

The Reserve Bank is fighting inflation by increasing interest rates. The theory is that if money costs more, people will spend less. That’s worked before, so it’s worth doing. But it won’t work on its own.

We’ve also opened the immigration floodgates, meaning greater availability of workers. So, as supply improves, the rate of wage cost increases will slow down. The tough part of the solution is that, in order to get wage costs back to where they need to be, some people may lose their jobs. That can be tough for the businesses concerned and catastrophic for the people involved.

But when the Reserve Bank puts up interest rates, and banks tighten up on lending, people will not build as many houses and businesses will carry less inventory. That means we need fewer builders and perhaps fewer salespeople. So some may lose their jobs. That means there is not as much money to spend at the supermarket or the appliance store. And the cycle continues – a cycle that becomes difficult to break.

“The best way to break the cycle is to grow our economy.”

The best way to break the cycle is to grow our economy. To do that, we need to find new and innovative things to do, as well as doing more of what we already do. Unquestionably, our strongest suit is agriculture. There are two ways to grow that business. We need to find new customers who will buy what we already make. But we also need to develop new stuff we can sell to our existing customers. Growing our trading with both existing and new product lines, more rapidly than we have done in the past, will be an important ingredient of our recovery over the next five years.

Our tourism industry continues to recover from the post-Covid slowdown. We should be asking ourselves what we do next. How quickly can we get to 100 per cent of what we once were? We need to go back to our traditional tourism clients and work with them to grow the pie. But we also need to go to new targets. Who are the people who don’t come to our shores? Are they American motorcycle riders or European boaties? How can we better cater to such targets?

And then we need to look at what we can do that is new or different. What countries can we trade with more? Is our business with China, India or Europe anywhere near capacity? How do we know?

On the product side, we’re still exporting logs with the bark on. Surely, with a forestry industry like ours, we can do more, add more value, grow more revenue than we are doing. There is some great work being done on bio-forestry. How do we incentivise that industry to move more quickly?

This article first appeared in The New Zealand Herald, Saturday 12th October, 2023.