The second part of a reply.

Did Wages Reflect Growth in Productivity? by Martin Feldstein

(Professor of Economics, Harvard University, and President and CEO of the National Bureau of Economic Research. [He has since retired from his NBER position] This paper was prepared for presentation at the annual meeting of the American Economic Association on January 5, 2008.)

Feldstein opens his article by saying

“The level of productivity doubled in the U.S. nonfarm business sector between 1970 and 2006. Wages, or more accurately total compensation per hour, increased at approximately the same annual rate during that period if nominal compensation is adjusted for inflation in the same way as the nominal output measure that is used to calculate productivity. More specifically, the doubling of productivity represented a 1.9 percent annual rate of increase. Real compensation per hour rose at 1.7 percent per year when nominal compensation is deflated using the same nonfarm business sector output price index.

In the period since 2000, productivity rose much more rapidly (2.9 percent a year) and compensation per hour rose nearly as fast (2.5 percent a year).”

Later he says

“If wages rise at the same pace as productivity, labor’s share of national income remains essentially unchanged. This paper presents specific evidence that this has happened: the share of national income going to employees is at approximately the same level now as it was in 1970.”

Making natural heritage a matter of national importance under the RMA but saying nothing about the need to be able to access building aggregates etc. The result is that soon we shall be importing sand.

And so on.
Right now we need an anti obstacle commission rather than a productivity commission – although that can have its day when we once again in a growth economy.

“………Why this hasn’t happened in NZ is what need to be explored.
Some areas to look at are:
How the interest rate is used to control the housing market which where a lot of our ‘capital’ ends up……”

Thank you, BlueDevil. Go to the top of the class. THAT in a nutshell, is our problem. We have had an increase in money supply, courtesy of Japanese investors, and all it has done is pump up the price of houses while investment in productivity-improving capital stagnated. This happened on Mikhael Kullen’s watch, by the way, we can’t blame Wall Street or anyone else for this.

You wait till the Japanese investors want their money out of NZ again. It would be bad enough even if this money HAD been used for productivity increases, but seeing it has all been blown on housing price inflation, we are STUFFED.

We SHOULD have had:

1) Lower company tax. (Note that company tax is a tax on growth. Profits distributed as income are taxed at that point anyway. To tax profits BEFORE they are distributed as income is a “spite” tax, pure and simple; and what’s more, it is a “cut your nose off to spite your face” tax, it is a shoot yourself in the foot tax.)

2) A freed-up supply of land so that demand for housing flowed into construction of houses, not inflated prices of a constricted number of existing stock houses. We could have still had a building sector providing jobs and training and paying taxes – we could have kept a few of the builders who have shot the gap to Aussie.

There are a few more things we should have had, but these are the crucial ones. And I don’t just mean the tax rates and land restrictions were a little bit wrong, the distortions of investment were ENORMOUS. We still need to do these things, but it will take a long, long, time for the distortions we have already accumulated to iron out of the system.

If we get a total crash meanwhile, the situation is out of our hands, we will get a dry recovery program all right, courtesy of the IMF, and Roger Douglas in 2008 would have been a kinder alternative (not to mention Don Brash in 2005 – what “might have been”).

Actually no. For a start your graph only covers 6 years, hardly long-term productivity growth. Also over such a short time period the signal can get lost in the noise so you wouldn’t expect to see much. The measure of productivity isn’t TFP, is it output per worker employed, a measure of labour productivity. Also they claim more of the productivity growth have gone into profits. Profits are income for people as well, either today or if reinvested tomorrow. To see the productivity/wage effect most clearly look at places like India and China over the next 20 years or so. Incomes will rise in both. Also do you really think that people in Japan today are not, on average, better off than people in Japan at the end of WW2? Do you really think that wages in Europe and South Korea haven’t increased since the end of WW2?

“Economic history offers no example of a country that experienced long-term productivity growth without a roughly equal rise in real wages.”

“That’s rubbish – productivity in NZ has increased by roughly 30% in the last 16 years, yet the real average wage for the 25% of the paid employees, that work in the secondary labour market (hospitality, retail etc) is the same.”

Roger nome, that comment is NOT rubbish, it refers to the overall.

YOU are isolating out those sectors of the workforce whose productivity is NOT increased by the accumulation of capital.

Other have addressed the point admirably above, but I would like to add that to help those sectors that are left behind in the era of advancing productivity and technology and demand for skills and knowledge and ability, we must not slaughter the goose that lays the golden eggs, roger; which is what you would do in your obsession with inequality. Presumably you would prefer everyone to stay at Bangladeshi levels rather than advance to American levels, with inequality.

As long as you do NOT agree with my long held conviction that the lowest income earners should not have to pay tax at all, you are a bleedin hypocrite. Note that approx. the bottom 40% – get that – FORTY PERCENT – of American earners, PAY NO TAX. THAT is what you can do when you have lots of seriously wealthy people paying MOST of the tax. The infamous Bush “tax cuts for the rich” actually resulted in substantial INCREASES in the share of tax revenue paid by the top 1%; the top 5%, the top 30%, and so on.

Come over from the dark side, roger, ability like yours is wasted on the Left.

“Perhaps the biggest job is ’saving’ NZs banking system. I’m unconvinced that we have seen the worst yet. In fact, I would not be surprised to see a bank go under.”

We are lucky our banks are all owned overseas, wreck, or I am sure they would have gone under just like our finance sector has. As for Kiwibank you can bet the bill to the taxpayer is ramping up as we speak.

In the 80’s NZ sufferred from very high inflation and correspondingly high interest rates. One of the ideas behind the RBA was by lowering inflation, interest rates would fall. This would result in more capital being used and an increase in productivity and an increase in income per person. Japan is a fine example of this, low interest rate increases the capital employed which raises the productivity per person which raises their income.

Why this hasn’t happened in NZ is what need to be explored.
Some areas to look at are:
How the interest rate is used to control the housing market which where a lot of our ‘capital’ ends up.
Why business pay a much higher interest rate on their borrowings (cwf housing)?
Would increasing wages & salaries actually increase productivity by causing capital to increase (or would the Reserve Bank just bang up interest rates)? Singapore tried this and it worked but there was a lot of pain for the low cost industries as they disappeared

for empirical evidence see the following link:

http://news.bbc.co.uk/2/hi/business/5303590.stm#graph

there are lies, bloody lies and statistics, and you want us to look at what?

You do realise Disraeli was joking when he said that?

While I agree that there was need to enshrine some rights for workers in the national control system, we have achieved a point where there are no rights for employers, a situation that needs remedy.

A practical example!

An an employer I hire a university graduate straight from completing their degree. I pay them in the top decile of their peers, and provide significant opportunity for development through experience. In their second year, with a pay rise that maintains the top decile position, the same employee asks for an investment of $8,000 in course fees and attendance costs to participate in an international conference that is relevant to their area of work, and I agree. Immediately after the conference, the employee puts forward a two year personal development plan that requires an investment of $15,000 and will “bring to the company some global best practice that will increase the company’s economic position; I agree to the investment. In year three, after $12,000 of the $15,000 has been spent, the employee is earning, pre-bonus, ion the TOP PERCENTILE of their peers, and I have invested $20,000 over and above an excellent salary package in them and they submit their resignation with 2 weeks notice! They are moving to an employer that is offering $5,000 per year more in salary and benefits, and where they have a faster potential of promotion to an executive position. I have invested in the attractiveness of the employee to another employer, and that employer is going to reap the benefit of my investment. Can I get a return – no way, it is the employee’s right to leave as, when and for whatever reason they like. I, on the other hand, do not have ‘equal opportunity’ to un-hire poor performers or retain people I have invested in.

There orta be a law guv!

Why is it that whenever you guys on the Left start talking about the economy, you assume that the starting position was the most correct and that movement away from that is always bad. You dont even consider for a minute that MAYBE the soaring profits and stagnating wages were redressing a previous imbalance.

In order to win the historical argument against the ECA you first have to prove that the situation before it was good. Not good just for workers, or even good for business owners, you need to prove it was good for New Zealand.

The reforms of the 1980’s, and later the ECA, redressed an imbalance in the New Zealand economy. Increased profits encouraged more investment. Not only that, the new environment promoted entrepreneurship and an impression that the government wasnt hostile to risk takers.

That is something the last Labour government pissed all over. As a result, investment in NZ dropped away, the NZX was as stagnant as any mid-90’s median wage, and we are now in a worse position to deal with adverse global economic conditions.

do you think the rich just put their money in the bank? you dont think they invest in shares, commercial property etc etc?

as for the 25% of the workforce not making enough money for your liking – who gives a fuck? is there not an opportunity for them to upskill??? i know plenty of people who left school early to work in shite jobs.. realising their mistake they have gone on to upskill and are now doing well.

there are lies, bloody lies and statistics, and you want us to look at what?

lets get the unions some more power too!

at the moment its just not fair!

these “business owners” that risk everything to start a company, work harder than everyone else, have untold stress etc expect to be rewarded more than the guy that brings nothing to the table! its just not on!

Now the 4th Labour government’s Labour Relations Act was a sensible middle ground. It allowed employers to opt out of arbitration (meaning lower wage growth) whilst retaining statutory minimum standards for vulnerable workers through the Awards system. Wage growth was excessive from 1981 to 1987, and drove inflation too high, but by 1990 it had come down to a sustainable level. We didn’t need the ECA.

P.S. you can find all this information on my blog.