Magical thinking doesn't lift wages

INITIATIVE MATTERS

Roger Partridge

Newly-minted Education Minister Chris Hipkins is passionate, but will it result in effective action?

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. 

All content copyright NBR. Do not reproduce in any form without permission, even if you have a paid subscription.


40 · Got a question about this story? Leave it in Comments & Questions below.


This article is tagged with the following keywords. Find out more about MyNBR Tags

Post Comment

40 Comments & Questions

Commenter icon key: Subscriber Verified

Two comments here: firstly, there is another way to increase wages apart from productivity and education and that is to reduce the return on capital ie reduce profits. My firm pays 25 percent of pretax profits to staff and that strategy has drastically improved productivity and reduced labour turnover...no one ever leaves.secondly on education the government needs to nudge the right sort of training...eg subsidies for engineering degrees and none for the arts, sociology, psychology and all those non-degrees where graduates end up as baristas.

Reply
Share
  • 1
  • 0

So if all employers immediately double wages and salaries, productivity should go through the roof and staff turnover would be non existent. It's a wonder no-one ever thought of it before!

Reply
Share
  • 1
  • 1

Exactly. I can say categorically that it has worked for us.one of the biggest costs to a company is labour turnover and the need to train new staff.pay them well, treat them right, problem solved.

Reply
Share
  • 0
  • 0

I agree, Sheather oversimplifies what is, in fact, a complex problem that does not, incidentally, just affect New Zealand. It's an issue that is being grappled with throughout the West. However he does highlight an important point that is often overlooked in discussions on raising productivity and that is that it is not just about the workers, it also involves the employer.

In the case of New Zealand not enough of our employers and companies actively pursue measures, both capital, and policy, that improve the productivity of all aspects of their business. Workers, management, plant and equipment, processes, remuneration etc. Focus and emphasis on this also need to change as does the attitude towards them.

Reply
Share
  • 2
  • 0

That seems a basic misunderstanding of what Brent said. He said they get 25% of pre-tax profit, ergo they have ownership over how much more money they make (by increasing the company's profit).

Seems like that ownership and ability to increase their own income by being more productive may be producing results.

It is not a case of simply doubling wages at all.

Reply
Share
  • 0
  • 0

Agreed. I'm all for funded/free tertiary education (and think all the ladder-pullers in the previous government were unfair and selfish to deny free education to the generation after them), but funding should be targeted at the qualifications most useful to to the country.

That said, there should also be allowance for those "less useful" degrees eg music psychology philosophy sociology etc without which it would be a boring and flavorless society.

Reply
Share
  • 1
  • 0

And the recipients of a free education should have to pay the rates of income tax my generation paid for its "free" education and meet the same entrance standards we did..

Reply
Share
  • 2
  • 0

I agree with you......but

Free tertiary education as long as you pass the course.

That way those there will have to apply themselves to the courses they are on and not the social aspect tertiary education also offers!!

Reply
Share
  • 1
  • 0

Above all education is about classification and about determining who is intelligent and who is ordinary. The most basic fact is that in a European society at base before immigration, war etc given that intelligence and general body quality are largely inherited and that sexual orientation and what is called mental illness aren't but are nothing more than social constructs ( the essence of the right wing right view ) 25% are intelligent and 75% ordinary, it is fairly vital to determine who is intelligent and who isn't because only those who are intelligent and have the potential and type of mind that can fully differentiate either verbally or mathematically or both, should be allowed full responsibility over other humans and can actually think.
IQ is actually your percentile rating. An IQ of 110 means top 25% and IQ of 100, top 50% and an IQ of 130 top 3 percent, and IQ or 136 top 1 Percent or 140 top 0.5 % 145 0.25%. The balance or basket of questions in an IQ tests should change over the time to reflect a society that acquires more competence in say pattern tests or less emphasis on grammar- so a set number of questions right or wrong does not indicate the same IQ at different times- the score is the percentile rating over an equivalent group. A percentile rating for NZ alone in say 1965 or 1970 would be accurate in 2005 pr 2015 it would be highly inaccurate because the racial proportions in this society have changed obviously but the overall quality of the population intellecutally has probably greatly decreased because a great deal of NZ skilled jobs are now based in Sydney, Shangahi, London, Tokyo or LA and much of the mechanical or office type jobs still done in NZ probably require vastly less intellect or skill than they once did.
In NZ there has been a progressive downgrading in the quality of IQ and ability assessments used and the consistency, accuracy of the testing, recording, interpretation of such assesments.
As in the 1970s standard NZ IQ test scores in some schools on old tests like Otis deteriorated , schools switched to easier pattern tests and later demanded the abandonment of IQ testing and say 3 chances at the same or a similar IQ test which completely destroys the logic of intelligence which is a test of a persons speed of reasoning and ability to cope with 2 or more conflicting ideas. Much of the purpose of intelligence testing is officer selection and in the military 110 was till the end of the cold war assumed to me the minimum although other factors such as social class and height were also critical and with reason, ie people from the Scottish slums were never commissioned even if they were medical doctors. But when the US has reached the point you have a person like Obama who believes its a triumph of social advance to appoint an enlisted man like Hagel Defence Secretary and appoints, a women a general or admiral on the basis shes a great screen operator, decides to run his ABM cruisers in the Black SEa despite the fact the US warships are defenceless their, and in an emergencey or crisis there is no exist through the Dardnelles or Bosphorous and there operation of ABM ships let alone in Russian waters is totally illegal. And more than that Obama seems to believe that 30 year old unarmoured cruisers last for ever and the simple and necessary act of keeping them hot and wired actually preserves the physical ship as well.
I could go on and on but the fact is in NZ mere market reform does not produce a free labour market or give an employer to hire the best or fire the worst for a moment in NZ which is a small dull nation where world of mouth prevails and it is difficult to get evidence or records of peoples level of performance and a general belief prevails that all are equal and all can rise to higher levels of performance.
With the scrapping by Clark of School Cert and Bursary the last inflated and watered down measures of basic ability which could still be regarded as having any remote accuracy were abandoned, At NZ university it is now mainly presentational ability that is tested and PC

Reply
Share
  • 1
  • 0

Seems like a decent company. It's a pity there isn't more around like it. I've worked for some shockers in my time.

Reply
Share
  • 0
  • 0

"... My firm pays 25 percent of pretax profits to staff..."
What happens in a bad year, do your staff share in the profits reductions with pay cuts? When you lose money do you claw-back from staff the previous year's profit-sharing? If they are sharing in profits they need to be sharing in risks, or the incentives are mis-aligned and sooner rather than later you'll have bad outcomes.

Reply
Share
  • 1
  • 0

The deal is their normal pay plus 25 percent of profits...bad years = lower profits so they share in the good and not so good times.touch wood we have never made a loss.

Reply
Share
  • 1
  • 0

We are putting a similar system into place next year. Unfortunately for the staff who are already paid 20 - 30% over industry standard rates so we are looking at 10%.

We have only had 3 staff leave in 17 years and two of those were with a little encouragment and the third moved city with hubby....so no choice.

Reply
Share
  • 1
  • 0

To keep things in perspective we need to know what type of business this business is to write comments.ie private or government, under competition or monopoly, levels of taxation etc.

Reply
Share
  • 0
  • 0

It's a financial advisory business...competitors include the banks one of whom pitched for a new client we also saw.when they gave us the business they showed us the bank recommendation...every single product the bank recommended was their own product...in every asset class...and in the disclosure statement they said "we are independent,we are not biased ".can you believe that ? That sort of behaviour has been aided and abetted by the previous governments policies as regards the financial markets authority (fma).true story.

Reply
Share
  • 1
  • 0

In that case I can only offer congratulations and well done.

Reply
Share
  • 1
  • 0

Thanks but to be quite honest it's not hard to succeed in the financial services area when many of your competitors charge too much and refuse to do the right thing due to the fact they are almost always compromised.

Reply
Share
  • 0
  • 0

Reading goat entrails and advising people as to what is the future has been profitable since time began.
These days it is backed up with a "free" University degree.

Reply
Share
  • 0
  • 0

To have maximum benefit for society as a whole (and for its least fortunate members) focus and any additional expenditure should be on early childhood education. Providing free tertiary education is of no use to those who are illiterate or innumerate due to their lack of success in ECE and primary school.

Reply
Share
  • 1
  • 0

As a GM I see it as a priveledge to train staff, yes they will leave to improve their earning potential beyond minimum wage but to have been part of their journey where they will be set up in a well paid profecion which benefits their family and wider community brings me nothing but joy

Reply
Share
  • 1
  • 0

I see it as a nuisance to be avoided at all costs.if you hire someone and they leave in 3 years you have made a costly mistake.

Reply
Share
  • 0
  • 0

I wrote post #3 and suggest a different approach to viewing this issue, without being too specific I manage a small printing company and recently brought in a casual employee, one of many out there, he is a hard working young man and we will put him through an apprenticeship covering all facets of our trade and at the end of this he will more then likely move on and we will do the same again, it's the growth of these young people, in confidence, self discipline and in the eyes of the community that I see as an investment, last year at the printing industry awards ceremony the apprentice of the year recipient spoke about what a life changing event this opportunity was for him, so what you may see as a nuisance I see as a potential gift to a young person that could be life changing and it drives me daily to succeed in business to be able to do more beyond delivering profit.

Reply
Share
  • 0
  • 0

That's fair enough and good on you.

Reply
Share
  • 0
  • 0

CFO: What happens if we train them and they leave?
CEO: What happens if we don’t and they stay?

Reply
Share
  • 0
  • 0

The Oxford economist Craig Holmes, when applying three analytical models to data provided by the World Bank, finds a surprising lack of macroeconomic evidence for the belief the a national economy will grow due to the expansion of higher education. Partridge (and the New Zealand Initiative) often peddle this old (and now discredited) myth. Labour cost were screwed down by uncontrolled immigration, but that abuse has now ended.

Reply
Share
  • 1
  • 0

You are far closer to mark than Mr Sheather. I too have trained many young lads and got a great sense of satisfaction seeing them move on and succeed in life.
There are two kind of businesses, one is a "price taker" business, the other is a "cost plus" business. The former productive, and in full open competition.
The latter on the other hand produces nothing to replace what it consumes and is usually found close to Gov. coffers.
I live work and breathe in the former.

Reply
Share
  • 1
  • 0

No self-serving CEOs here.

Reply
Share
  • 0
  • 0

I am astounded that there are people who would like to see the freezing worker, truck driver, waiter, mechanic, chippie, labourers et al taxed more heavily just so wannabe dentists, lawyers, economists, and accountants can get through university free.
I find it hard to believe a "labour" government comes up with this

Reply
Share
  • 1
  • 0

Can I recommend Thomas Powell's excellent book "intelegent society" which speaks to this issue

Reply
Share
  • 0
  • 0

That's an issue but the payoff for the government and nz is the higher rates of tax those people pay through their working lives.i know,not all stay but many do.the government has had a huge pay off from my free education.

Reply
Share
  • 0
  • 0

When you say "the Government" I presume you mean NZ? If so I would like to know more?
"higher taxes through their lives" Their standard of living and disposable income (spending cash) is a good deal higher than those that were taxed to pay for their diploma.
Ironic is it not that it is, in the main, labour supporters hurt the most by these taxes for "free this, free that".

Reply
Share
  • 0
  • 0

Yes I mean nz.my point was those people who got engineering,medical,commerce ,science degrees on average earn more over their working lives therefore pay more tax so providing the government with a highly positive npv on the initial negative cashflow.fair enough?

Reply
Share
  • 0
  • 0

And where do they get the money to pay "more tax"?
Does it not come also from the wages and salaries of their clients? The same people who also payed tax so these "higher tax payers" could get free education?

Reply
Share
  • 0
  • 0

That's a circular argument.remember too that spending 6 years at medical school isn't free...substantial opportunity costs involved aren't there.

Reply
Share
  • 0
  • 0

Oh! so it's "a circular argument" is it. I didn't know that. Sorry.
I'm presuming as it is, "a circular argument", it is not worthy of consideration by those properly educated in the science of economics and should be just dismissed as "a circular argument"?
I must remember that next time I pay my dentists bill. Also my apologies to all those hard working Accountants, Lawyers and of course financial advisers, for having the impudence to bring up a "circular argument".

Reply
Share
  • 0
  • 0

I don't know why you find it hard to believe that a Labour govt came up with that. That's what Labour does these days, it taxes working class people to pay for everything. Just wait till next year when they start putting taxes up to pay for it all. Then the moaning will begin from all the people that thought a Labour govt will be a good thing. Enjoy your tax increases.

Reply
Share
  • 0
  • 0

John Morrisons comments are so true. Nothing is free. Someone, somewhere in the private sector has to pay. Students are completely estranged from the real world as it is without adding this no cost programme.

Reply
Share
  • 0
  • 0

There are lots of angles here...many small nz hospitals are full of imported specialists because there are no locals.flying a radiologist in from the USA for 6 months doesn't sound like a cheap option.probably takes them a month to get up to speed ...learning the software for a start.....accomodation costs,travel etc then they are gone.

Reply
Share
  • 0
  • 0

How do you validate the veracity of your claims to staff, that you are paying them 25% share of pre tax profits? Do they just accept your claims or, do you furnish them with copies of your financial accounts?

Reply
Share
  • 0
  • 0

Staples rodway do the calculations before I even see the quarterly accounts...so yes they just accept the numbers.

Reply
Share
  • 0
  • 0

Post New comment or question

Plain text

  • No HTML tags allowed.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.

NZ Market Snapshot

Forex

Sym Price Change
USD 0.6802 -0.0004 -0.06%
AUD 0.8992 -0.0014 -0.16%
EUR 0.5772 -0.0009 -0.16%
GBP 0.5149 -0.0008 -0.16%
HKD 5.3116 -0.0113 -0.21%
JPY 76.2840 0.0400 0.05%

Commods

Commodity Price Change Time
Gold Index 1296.5 15.490 2017-11-17T00:
Oil Brent 62.7 1.370 2017-11-17T00:
Oil Nymex 56.6 1.440 2017-11-17T00:
Silver Index 17.4 0.300 2017-11-17T00:

Indices

Symbol Open High Last %
NASDAQ 6794.7 6797.8 6793.3 -0.15%
DJI 23433.8 23433.8 23458.4 -0.43%