Stuff: Higher wages, lower unemployment — What if we took this chance to build a trickle-up economy?

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They said the quiet bit out loud, didn’t they? Earlier this week, the Employers and Manufacturers Association argued that unemployment, currently at 4.7 per cent, would be “on the too-low side” if it fell to 3-4 per cent, and 4-5 per cent would be “better”.

Superficially, it’s startling that anyone could want more people out of work. But such assumptions have been quietly nestled in our ideological fabric for several decades.

In the 1980s and 90s, New Zealand governments took a hyper-individualist turn. They abandoned the pursuit of full employment; indeed higher unemployment was accepted as creating greater competition among workers, which suppressed wages and in turn kept inflation low.

In this top-down economy, wealth was supposed to “trickle” from rich to poor (though that word was seldom used). The workplace power balance was tilted against employees and towards employers, notably with the 1991 Employment Contracts Act, which made it much harder for unions to organise.

After it passed, pay for supermarket workers fell up to 44 per cent in eight years. A newly minted shop assistant in 1981 would have been paid $18.62, in today’s dollars; by 2019, the average entry-level retail job paid just $18.22.

During this time, union membership also plummeted. Firms shed apprentices, viewing investment in skills as the individual’s responsibility. Wages might be low, but it simply reflected the individual’s ability and the inevitable playing-out of “market forces”.

So New Zealand became a low-wage, low-skill economy; and employers looked to immigration to plug workforce gaps.

All this is now contested. With the economy booming, and post-Covid immigration slashed, firms are struggling to find staff. Job ads are at record highs.

And in some cases, wages are up. Trade Me says salaries on its hospitality and tourism listings have risen 12 per cent.

But many employers are displeased. Restaurants are turning the lights out in protest. Owners are happy to accept market forces when they keep the wage bill low, but not when they might drive it up.

Firms want ministers to restore high immigration and resume the old normal. But what if we seized this inflection point and created a new, bottom-up economy, one that uses training and wage rises to drive growth, manage inflation and ensure better lives?

First, we’d scale up skills training. While complaints about “unemployable” New Zealanders are overstated, businesses are right that many lack relevant skills, and we calamitously underinvest here. High-skilled, high-wage Denmark spends 1.6 per cent of its collective income on helping the unemployed find work; we spend just 0.2 per cent.

Labour has launched free trades training and the Mana in Mahi scheme, but much more is needed. It can’t all be public subsidies, either: firms must spend more to upskill their workforce.

Second, while people will always be out of work short-term as they change jobs and life situations, we could aim for zero long-term unemployment, implying an unemployment rate of just 2-3 per cent.

Would that turbocharge inflation? Well, in 1956, New Zealand had precisely five people drawing unemployment benefits, and almost zero unemployment – but inflation did not spiral out of control. (That came later.)

In general, wage rises shouldn’t be inflationary if they match productivity gains, because the extra productivity allows firms to sell more things with the same cost base. And on those grounds alone, workers are due a huge pay rise.

If the average wage had kept pace with productivity gains since 1989, by 2017 it would have been $38. Instead, thanks to the Employment Contracts Act and related reforms, it was $33. A catch-up is overdue. Since better-paid staff are more productive (up to a point), that could spark a virtuous spiral: trickle-up, not trickle-down.

Wage increases aren’t inflationary if, instead of putting up prices, company owners accept lower profits. Small cafes can’t always afford that, but big corporates can.

If that’s to happen, we’ll need to soften the assumption that what firms offer always matches people’s ability, and acknowledge that often it reflects a power imbalance. When employees have more bargaining power, they can negotiate wages that better match their worth, and get a larger slice of the pie.

That in turn will require something like the Government’s proposed Fair Pay Agreements, which aim to take good terms and conditions enjoyed at one firm and spread them across an industry. As employers point out, it’s hard being the first restaurant to pay staff $25, not $20. But if everyone must, there’s no competitive disadvantage. Dining out becomes slightly dearer, but benefits can be increased accordingly, and the middle classes can go less often but savour it more.

The wider prize here? Better-trained Kiwis available for better-paying jobs. Then there’d be no danger of anyone’s being undercut by a renewed openness to immigrants, who are after all an economic – and social – boon. And we’d have started reordering the economy’s vast forces – wages, training, profits, productivity, inflation – into a new world of work, built from the bottom up.