Why are wages not increasing?

Have you tried to get a tradie recently? Everyone is flat out. Builders, electricians, painters, plumbers, you name it; all of them are working long hours and have months of work ahead of them. Some are talking burnout. I’m not surprised. There are not enough of them by a long way and the enormous demand for building and renovation in today’s property market will probably see most of them gainfully employed for years.

Then there was an article at the weekend about chefs suffering depression, from working long hours. Nurses are suffering burnout because of staffing shortages. Engineers cannot be found for love or money. Unemployment is at 4.4%.

All of this is the perfect recipe for significant wage increases. It is economics 101. When demand increases, supply gets more expensive. But that is not happening in today’s labour market. And no one seems to be quite sure why not.

However, Tony Alexander at the?BNZ Weekly Overview?seems to have a few ideas about this. Quote:

So is this tight labour market producing?accelerating wages growth as we saw in the?2000s? No. The measure which I like to use from?the Labour Cost Index showed a slowdown in its
annual pace of increase to 3.2% from 3.4% two?quarters earlier, but was up from 3% a year back?and a low of 2.6% a year and a half ago. That is?not much of a trend improvement compared with?the 5.7% peak seen in 2006.?This lack of accelerating wages growth is a global?phenomenon and as yet there is no international?consensus on exactly why post-GFC tight labour?markets are not leading to strong wages growth.

There are elements of labour market?internationalisation, fear of redundancy because?of lurking world worries, introduction and worries?about Artificial Intelligence and similar things. But
in all probability the big factors are reduced?proportions of workforces in unions, young people?expecting higher remuneration by lucking into the?next big internet thing rather than incremental?wage rises over many years, and big pushback by?employers. End of quote.

Fewer people in unions does not mean everyone gets paid less. This is a myth put about by Marxists and unionists. Unions only help the lowest earners in collective bargaining situations. On an individual basis, anyone can bargain for themselves.

Also, I would be surprised if the bit about pushback by employers is true. Employers are struggling to find any good people at all. This is not the type of market where employers would be able to push back on wages. They pay what they have to if they want to get the work done. As an economist, I would expect Tony Alexander to understand this, but I’m not sure he does. Quote:

As I have highlighted here for some time, the?ability of businesses to raise prices either because?they feel like it or because costs have gone up?has greatly diminished. This is because you and I?can easily search for alternative prices, products,?and suppliers online at virtually zero cost. In the?old days undertaking such searches required lots?of time, stress, and driving around looking for?alternative merchants.? End of quote.

This may be more like it. It is, in fact, a catch 22. Low wages mean less disposable income, which means businesses cannot just push up prices as they would like. Even in the local coffee shop, if they push the price of a cup of coffee much above that of their competitor down the road, the customers will simply go down the road. Quote:

The absence of accelerating wages growth is?going to impede productivity growth in the?economy because labour resources will not be?reallocated as quickly as otherwise from low profit?businesses to high profit ones. That is where the?increasing minimum wage will prove quite useful.?It will force some businesses to lay off employees?or close down and those people will become?available for other labour-strapped employers who?can afford to pay more because they produce?something which can generate a higher profit. End of quote.

I don’t agree with this. Unless minimum-wage earners receive training they will remain on minimum wage. It may be in a different field, but the money will be the same. Quote:

The other angle on this is the government?s?concerns about lack of wages growth holding?back the social, economic, health and education?progression of people on low and middle incomes.?Lack of accelerating wages growth is going to?increasingly frustrate the government, especially?because the lack of good growth for middle?income earners will start to sway those important?voters away from Labour back toward National. End of quote.

Let’s hope it happens soon. Quote:

There is little the government can do about this?except try even harder to force employers to raise?wages through one tool at their disposal ??immigration rules. It is unreasonable first of all to?expect that a centre-left government would boost?immigration numbers and undermine the?bargaining power of their union supporters and?low income people. But as time goes by and
wages growth remains muted it becomes more?probable that new restrictions will be placed on?employers using imported labour in the hope that?this will force higher wages for the locals. End of quote.

This is clearly another factor keeping wages down. In spite of promises by both Labour and NZ First to reduce immigration, we still took in over 70,000 people in the last 12 months. The numbers are not dropping at all. And, as some of those people are taking menial jobs, or are taking jobs on less than minimum wage, there is no pressure on employers in those areas to pay more. That does not apply to all industries by any means.

There is a delicious irony in all of this, but it is doing the country no favours. Labour are actually diminishing the power of their union mates by allowing immigration to continue unabated. As a result, wages will probably continue to remain low. Tony Alexander concludes by saying that, eventually, employers will just have to bite the bullet and pay more. I think employers are prepared to do that already. But, until the government keeps its promises and reduces immigration, low wages are probably here to stay.