Closing the gap opens another front in the class war

For those with memories going back a few decades there are awful ironies in the appointment of former National Party leader Don Brash to lead a taskforce to advise the government on how to close the productivity and income gap with Australia.

The announcement was made by ACT leader Rodney Hide last week because the taskforce was a component of the ACT/National coalition agreement negotiated after last years election.

The ironies comes because it was the economic policies supported by Brash and Hide which accelerated the widening of the gap in the first place. It’s like using weasels to guard kiwi eggs.

Thirty years ago our wage levels were on a par with Australia and our productivity, the value of wealth created per worker, was also similar.

Now the OECD says that while Australia’s population is five times ours, their gross domestic product (GDP) is 7.2 times higher. Put baldly this means their output per worker is about 30% higher than for New Zealand. Hence the income gap which has now become a chasm.

Both Don Brash and Rodney Hide are right to dismiss the idea that the gap has arisen because Australia has vast mineral resources which have driven their economic development. “Plenty of countries with lots of resources are not succeeding while others with none are doing phenomenally well,” Hide said.

So what are the drivers of the gap? In the 1960s our productivity was similar (in fact a bit higher) than Australia. However our economy stalled somewhat from the mid 1970s as our greater dependence on agricultural exports to Britain was felt when Britain entered the European Union and left its immature offspring out in the cold.

This economic stall was exacerbated by the shift in investment from production to speculation in the heady days after the 1984 Labour government and before the 1987 share market crash. To use a rugby metaphor those with capital to invest took their eyes off the ball. They invested in share market bubbles while our manufacturing sector went to the wall through the dropping of tariffs and subsidies.

What started as a small gap became wider but looking at the data the break opened rapidly from the early 1990s and the explanation is simple. The single most important factor was National’s 1991 Employment Contracts Act which tipped the employment balance even more heavily against unions and workers, drove down wages relative to the cost of living and reduced incomes for New Zealand families. In the 10 years which followed, New Zealand businesses did very well but not by investing in capital development and improving productivity. Instead they made good profits simply from the relative fall in wages. They had an easy ride on the backs of wage and salary earners. Under Labour from 1999 the free ride for business continued. As Labour’s Finance Minister Michael Cullen pointed out in 2006 that “in the last few years company profits have increased at twice the rate of workers’ wages”.

There was nothing from Labour to address the gap with Australia although productivity did improve such that it averaged 1.3% in the eight years to 2008. In Australia it averaged 2% over the same period.

These developments are described by economists as “weaker wage growth” in New Zealand from the 1990s and “capital deepening” in Australia (the increase in capital investment per worker) to explain the main drivers of the gap. It would be more accurate to describe it as a victory for business owners over workers and the failure of those same corporate interests to invest here in productive economic development.

Australia never had an Employment Contracts Act. The closest they got was their former Prime Minister John Howard’s so-called “work choice” proposals which Australian unions fought and largely defeated. Hence throughout the past 20 years Australian workers gained a better share of the profits of their work while businesses there invested more to improve productivity.

New Zealand workers and unions have not recovered from the assaults of the last 30 years. Increases in family income have come from people working longer hours in lower-paid jobs and two or more family members working to bring in enough for a family to survive.

None of this will feature in Don Brash’s analysis of the problem. Instead his taskforce will almost certainly propose tax cuts for businesses (we’ll be told it’s so they have more to invest in increasing productivity) and growing business opportunities by part-privatising our remaining state assets and contracting out more of our public services to the private sector.

Proposals like these will thrill business leaders but none will reduce the wage gap. In fact they will have the precise opposite effect and that’s what this exercise is about. It will be used as an excuse to launch another attack on working New Zealanders and our public services.