In recent decades, inequalities in New Zealand have grown faster than in most other OECD countries. This trend was halted under the last Labour Government, but other governments have more than made up for it.
Rising inequality is bad for a country that prides itself on its egalitarianism.
Large wealth disparities are bad for nearly everyone. High levels of inequality in society have been linked to higher chances of poor health outcomes, poor education outcomes and anti-social behaviour. These things have both social and economic costs for a country.
Last month I posted for Red Alert on why inequality is bad. But how does one go about tackling inequality?
Increasing GST, and taking the income to give the biggest tax-cuts to the wealthiest people is clearly not the answer. National’s tax ‘switch’ has hurt those at the bottom, and squeezed those in the middle, who are now worse off than they were before. Inequalities are even worse now than the graph above suggests.
The OECD held a forum on tackling inequality at the start of this month. The background paper is instructive.
Aside from asking if who you marry matters, the report also asks what policy-makers can do about the problem of inequality. Answers focus in the area of skills training and education, particularly where they are available for disadvantaged groups. Looks like National’s cuts to education in the early childhood (ECE) and adult and community (ACE) area aren’t the right answer either.
Labour has promised to reverse the ECE and ACE cuts. We’ve also said we’d make the first $5000 of earnings tax free. And we’ll raise the minimum wage to $15. All of these things are useful first steps in tackling inequality.
In line with the OECD view, an economy that provides skills, jobs and opportunity for all New Zealanders has both social and economic benefits.
Hat-tip Jeremy Warner at The Telegraph.
Dr David Clark is the Labour Candidate for Dunedin North. He has worked in shops, in a factory, as a Presbyterian Minister, as a University Tutor and as an analyst at the New Zealand Treasury. He currently runs a University Hall of Residence.
David I agree completely that inequality is bad but what you have proposed to fix it doesn’t add up. The first $5000 tax free will add very little to take home pay. Increasing the minimum wage will increase unemployment and the welfare bill and the changes to education funding are tweaks on the side of the argument you put forward.
I could support putting the savings of cuts in spending into training people for work – education is critical!
We need to create the opportunity for people to move forward and close the gap by lifting the bottom productively. We don’t need to create additional costs for the country and trap people in welfarism eternally. I believe in NZ’ers abilities to do this. Why don’t Labour?
So how may jobs are you prepared to sacrifice by raising the minimum wage to $15?
Sure, you will lift some people out of poverty, but how many will you doom to the unemployment benefit scrap heap by increasing the minimum wage?
I’m also willing to bet that the youth unemployment rate will become even more out of whack with the adult unemployment rate due to increasing the minimum wage to $15.
@darrenw. Some facts:
1/ The first $5000 tax-free will make a difference to those who really need it.
2/ Increasing the minimum wage won’t necessarily increase unemployment. It will push any lazy employers towards developing higher-value products. The fifth Labour government increased it by around $5 and NZ unemployment dropped to the second lowest in the OECD.
3/ Increasing productivity and raising skills for ALL citizens is what Labour is all about. The Nats are the ones trying to sell off our State Assets and ‘outsource’ our economy.
‘Rising inequality is bad for a country that prides itself on its egalitarianism’ – It’s also bad for you to comtemplate social engineering as a solution.
Both main parties have been harking on about increasing skills, productivity etc… for decades, why has nothing changed? The same lines are trolled out before each election and at the end of your stretch, little, if anything, has improved. And you wonder why politicians get trashed?
David, there’s a guy who lives in Parnell whose personal after tax wealth went up by $100,000 a week from his investments, every week, for the last couple years. So looks like some people are doing very well indeed, and others are doing very badly from your figures. Any idea what this means for inequality when comparing, say, the guy from Parnell with an average worker in Mangere, say?
darrenw,
what do you mean by “inequality”?; and
how would you “lift the bottom productively”?
Some things you have posted agreement with so far
remove minimum wages
remove welfare
increase prison sentences
Can you point me to a country or countries where this has been shown to lift the bottom productively and lead to decreased inequality?
@softstarter, 2.47pm.
You put forward a seductive pitch about lack of change in the economy, but it is not supported by facts.
The last Labour Government grew the economy by 25% in real terms. That means that the average citizen was producing goods and services worth a lot more at the end of the fifth Labour government’s term than s/he was at the begining. Enough said.
We are catching up with Australia!
This is about as good a win as any other National – ACT have given us . . .
Great post David!
And a very pertinent graph. Sadly, we aren’t the egalitarian society we claim to be.
Regarding minimum wage you’ve got to look at where it is relative to the average wage and what level you believe it’s going to have a large effect. From the post Minimum wages – addressing the more sensible critiques at Offsetting Behaviour:
Given that the minimum wage is already at half the average here one would certainly expect a negative effect on employment raising it to $15 an hour.
Also some interesting results from Canadian experience with minimum wages and poverty.
So one might reasonably believe that raising the minimum wage to $15 an hour could exasperate rather than reduce inequality.
QtR, we have one of the most open markets in the world, so our minimum wage labour market is one of the most inelastic in the world – covering the domestic services sector facing no foreign competition.
Trying to extrapolate a reference to the Canadian study of another labour market is not that valid – particularly its conclusions for family poverty (different welfare systems). The adverse impact can only come with job loss of a family provider (here if their partner is working WFF kicks in with extra support to compensate) – so poverty for families can only occur if a sole provider loses their minimum wage job.
The figure of 6000 job losses has been cited in the past for the $15 an hour wage level here – but we keep hearing claims that is youth that bear the brunt of the job loss (which jobs would go – not cleaning and carer jobs that many women do. The retail sector jobs, fast food … . There are 300,000 people looking at a 10-18% increase in pay – people who struggle to keep parity with the CPI most of the time. It’s their turn.
Frankly we need to move to compulsory saving, but we cannot do this while the minimum wage is as low as it is. 2% from all workers and 2% from employers is the dedicated contribution the Cullen Super Fund needs – from all workers, but not all workers can afford this until the minimum wahge is $15 an hour.
Under moderation again?
If the poorest person in NZ was a millionaire, but the richest was a billionaire, would that be an inequality?
Depends on inflation.
Ceteris Paribus Spud.
It would be a lot less inequality than we have now – we already have multi-billionaires, but the poorest own little have debt and live on a benefit.
Whatius whatius, Nick?
Not to worry, Sir Internettius Saviassus has told me!
I wanna be one of your millionaires, Nick.
Good post David. I think that a commitment to increase the minimum wage to $15.00 an hour is a very positive step and would do a lot to move a lot of people out of poverty.
However, I am more interested in a major change in legislative direction around the ability of low-income workers to have a real say in how their wages and employment conditions are set.
Currently we have a system that is so deregulated that it cannot respond to the need to increase wage rates even when the economy is booming.
John Key is talking about wages racing ahead of inflation two to three years out, but we know from experience that it won’t happen with our current framework in place.
In the 2003-07 period the Labour Government wanted wages to increase because of major skills shortages and low unemployment, but apart from raising the minimum wage and other direct state interventions (such as a failed attempt to force aged care employers to pass on Government funding to wage rates through contractual provisions)there was little that they could do.
There is no mechanism, such as the national award system and arbitrated minimum wage orders in Australia, that give New Zealand workers the ability to affect anything outside of their workplace and given the low rate of unionisation in the private sector, most workers just take whatever the boss gives them.
If the growing income inequality in this country is to be addressed we cannot rely on the Government to do the heavy lifting. We must set up systems that give a greater ability for New Zealand workers to be involved in a system that establishes wage norms that is good for them and for the long-term development of the industries they work in.
SPC –
Moving from paid employment to welfare is in my opinion not an improvement. Not for the individual and not for the economy as a whole.
I certainly agree that making inter-country comparisons is very difficult. The quote came with significant caveats. I do note that Canada has a similar (some of the highest in the world) level of economic freedom to New Zealand including in labour markets.
We can look at the masses of evidence from around the world that show the negative effects on employment of high minimum wages and weigh the probabilities that raising the minimum wage here to $15 would or would not have such an impact and roll the dice. I personally think that its playing against the odds and a gamble with the economy and the livelihoods of thousands of workers.
The issues comes down to whether you believe the coercive power of the institution of mass coercion we call the state should be used to achieve that particular social outcome. Personally, I don’t believe it should be.
What’s the “compulsion” difference between a higher tax level and a dedicated contribution to the Cullen Fund to afford tax paid super?
300,000 people getting a 10 to 18% increase in income and a projected impact on 6000 jobs (that’s less than government cuts to employment numbers in the public sector).
The extra tax revenue from the minimum wage increase could protect 6000 well paid public sector jobs.
Not yet is it less than public sector jobs cut.
You ignore the amount by which a particular firm, if possible in their industry, could shift that the cost of the wage increase onto the consumer and then in effect real wages might not increase as much as you might think.
The best way to increase real wages is to increase marginal labour productivity. That comes about through, technological development, capital deepening, capital accumulation, and so on not by government decree.
Your assuming that the only choice is between higher taxes or compulsory savings and that the only way to increase personal savings for retirement is through state coercion.
I know one thing – a 10 to 18% increase in wage for 300,000 people and the impact on their costs goes up by less than the GST increase means they will be very much better off.
I also know that those who employ cleaners and carers and supermarket staff or fast food staff are not responsive to “productivity” signals as to pay levels – they are cost plus margin businesses and they will pay staff as little as they can get away with.
What has personal savings got to do with the affordability of tax paid super by the provision of the Cullen Fund – either we eventually increase taxes to afford tax paid super or we build up a fund now to meet the rising cost (demographics) of this future liability.
The only way all workers can make a dedicated contribution to this Cullen Fund each year is if the low paid have a higher minimum wage – so they can afford it. A case where social justice and fiscal prudence coincide.
Under moderation again.
We can’t know how much the cost of living will increase through the wage increase being shifted onto the consumer, so we can’t claim that raising the minimum wage will simply raise real wages by 10 – 18%. Nominal wages yes, real wages no. Those of whom lose their jobs will not be better off. Those who don’t currently have a job and will find it harder to get one won’t be better off. All of us whose cost of living will increase will not be better off.
They’re not the only jobs that hire low wage workers. I don’t know what jobs you’ve worked at in the past, but I’ve worked minimum wage jobs in agriculture and they are precisely the kind of businesses that can increase productivity through capital investment and they’re the kind of businesses that can pass their costs onto consumers.
I assumed when you said we need to move to compulsory saving you were referring to making contributions to kiwisaver compulsory. Using the coercive power of the state to force people to save is something I find morally dubious to say the least.
If increasing the min wage to $15 is a good thing, why not increase it to $20?
Or $200?
End of poverty, overnight!
The natural restraint on the minimum wage is its relativity to the average wage set in the “market place” (debate ranges on a level between 40 and 66%, ours is 50%) especially as this speaks to a margin for work experience and skill development. If it is too high then it will supercede the market rate for more valued workers – however there is also a problem where low paid workers are price takers because they do not have access to other employment and thus require protection from their market vulnerability – just as those receiving accommodation supplement are given help is they cannot meet market rents.
There is no evidence that a $15 an hour wage is too high, and its impact on an inelastic domestic services sector is said to be minimal job loss.
QtR
You know very well the cost impact of increasing the minimum wage to $15 an hour would be less than 1% – its so low that it is not even factored in when various options for the minimum wage are considered. A 10 to 18% nominal wage increase for the 300,000 is close to the real wage increase they receive and you cannot be serious in challenging that. That fact may be inconvenient to your argument but that does not mitigate its relevance.
Agricultural workers may have been paid minimum wage in the past but they are not now. And the whole point of investment in productivity is not to need minimum wage jobs in the productive sector anyhow.
If we are to have have annual contributions to finance the Cullen Fund – the only way to afford tax paid super (something you care nothing about doing) then we need
to make them compulsory and dedicated to the Fund. These can only occur if the low paid are on a higher minimum wage first. There is nothing coercive about the state financing its future spending promises.
Good to see someone is posting stuff regarding National’s very weak area – Education. Seems like a good idea in Election Year.
It is pretty obvious that if (when) we get another National led government – there will be real draconian stuff in our primary schools in particular. A National led govt win will be interpreted as an endorsement of Anne Tolley – just you wait and see!