Analysis: Magical thinking doesn't lift wages

During the election campaign, newly sworn-in Prime Minister Jacinda Ardern named climate change as the challenge of her generation. If it is, lifting labour productivity is a close second.

Productivity growth has been low over the past decade and a half. Therefore, growth in real wages has also been modest. If future generations are to share New Zealand’s enviable prosperity, that must change.

The first response to this challenge from Ms Ardern’s government has been a promise to lift the minimum wage to $20 an hour by 2021. This will be achieved in stages. The first step is on April 1, 2018, when the minimum wage will rise from $15.75 to $16.50 – an impressive 5% increase.

Unfortunately, though, it is magical thinking to believe we can make the poor better off simply by legislating substantial increases in the minimum wage. Labour markets work like other markets. Put up the price and demand will decrease.

While those who remain employed on the higher minimum wage will be better off, those who lose their jobs will be worse off. And the least skilled workers will be the biggest losers.

The present-day equivalent of a minimum wage of $20 in 2021 is near $17.50. Using Ministry of Business forecasts, the NZ Initiative’s Eric Crampton estimates that an increase in the minimum wage to $17.50 would come at the cost of 15,000 jobs. And Dr Crampton quantifies the net costs to the government of 15,000 lost jobs at $125 million.

But the most significant costs do not lie in the losses for the government. Nor in what the loss of 15,000 jobs means to the wider economy.

The real cost is the loss of human capital. It is the costs to the lives of the thousands of – probably young – New Zealanders who get knocked off the employment ladder. Or, worse still, who fail to get a foot on the first rung.

The OECD’s 2017 survey of the New Zealand economy shows employment in New Zealand is shifting to high-skilled occupations.

Of course, all other things being equal, this would be good news. As technology drives demand for more, high-skilled workers, it pushes up productivity. With greater productivity comes greater incomes.

But the same forces are creating more difficult conditions for lower-skilled, less productive, workers.

Better education is the answer
The answer to the low productivity, low wage problem lies in education. More highly educated school-leavers will mean more are suited to the growing number of higher-skilled jobs.

So, if there is one thing that matters for the long-term well-being of New Zealanders, it is the quality of education.

Unfortunately, the trends are deeply worrying. We face two long-term problems. First, the system has the largest gap between high and low achievers of any OECD country, with the low achievers disproportionately Maori and Pasifika.

Second, despite improving NCEA pass-rates, the performance of all students has been declining over the past decade or so in the international rankings. Of even more concern, student performance is not simply declining relative to other countries. It is also declining relative to past generations of New Zealand students. This suggests the system itself is in decline.

The previous National-led government came into office nine years ago promising solutions. However, its enthusiasm for bold solutions soon waned. But before it ran out of steam, it fulfilled its pre-election promise to introduce national standards in reading, writing and maths.

This policy followed in the footsteps of former Australian prime minister Julia Gillard. As minister for education in the then Rudd-led Labour government, Ms Gillard overcame union resistance and introduced the MySchool website, giving Australian parents hard data on student and school performance using national testing.

However, what followed in New Zealand was a pale reflection of Ms Gillard’s success in Australia. Rather than national testing, national standards rely on the judgment of individual teachers on student progress and achievement. While the framework introduced may be national, it is not standard.

But many schools have embraced it. And recent data, including the Trends in International Mathematics and Science Study (TIMSS), provides evidence national standards may, at last, be lifting educational outcomes – both overall and for Maori and Pasifika.

Despite this, Chris Hipkins, the newly minted minister of education, confirmed last week that national standards will be scrapped. Fortunately, he has promised something better in their place.

Yet he is on record saying this will “value the whole curriculum,” and not just reading, writing, and mathematics. And he said there will be less assessment and more teaching.

It is an old adage that what gets measured gets done. If Mr Hipkins’ replacement for national standards involves less assessment, can we have any confidence it will help lift students’ skills?

Mr Hipkins is passionate about education, and he has waited a long time to take over his new portfolio. Let’s hope his ideas are not just more magical thinking. 

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