Trotter, Shearer and the labour market

By Paul Walker 24/10/2012

In a recent column in The Press Chris Trotter says that

“Immigrants have become an indispensable component of the New Zealand labour market”.

And how! As I type these words I sit in a room with an American, two Englishmen, two Canadians, a Czech and an Indian. What would come of our universities if David Shearer got his way on restrictions on immigrant labour? This is just one example of a labour market in New Zealand for which the last thing we need are restrictions on immigrant labour.

Trotter goes on:

“In his speech to the Hornby Working Men’s Club on Thursday, Shearer quite rightly stated that: “We need to avoid being locked into a downward spiral where our skilled people go to Australia for better wages, where those people are replaced by migrants who are paid less, which in turn sends more of our skilled workers to Australia.”

In that single sentence the Labour leader encapsulated the grim dynamic of New Zealand’s labour market. This country’s ability to hold on to its skilled workers has been very seriously weakened by the power of what is, in effect, a single Australasian market for skilled labour.”

I take from this that our skilled workers are heading to Australia and thus reducing the supply of such workers in New Zealand. This should put upward pressure on wages. But I also take from the Trotter piece that wages are not increasing, which is where Shearer’s comments on the increased supply of immigrants comes in. The supply of skilled labour in increasing and thus, roughly, the two effects cancel each other out. Wages stay about the same.

What is the problem with this? If the supply and demand conditions are such that wages do not increase, why should we worry? Does this not mean that our firms are more competitive as their costs of production are not increasing at the rate that they are overseas. Does this not help our exporters, which we keep being told need our help. Does this not help those firms trying to rebuild Christchurch by controlling their costs?

Trotter goes on to write,

Shearer appears to think that limiting the influx of immigrant labour will somehow slow the exodus of skilled New Zealand workers to Australia.

Insofar as low wages are the reason for workers heading to Australia then it would help. If the supply of skilled workers is reduced then the wages paid to these workers will increase. This will close the relative wage gap between New Zealand and Australia. But will increase the cost of production for New Zealand firms making them less competitive in world markets and less able to compete against imports.

Trotter argues later in his article that

At the core of the problems Shearer identifies in his speech is the depressed levels of New Zealand wages and salaries.

But this depressed level of wages and salaries may well be simply a reflection of low productivity. As Paul Krugman has said,

Economic history offers no example of a country that experienced long-term productivity growth without a roughly equal rise in real wages. In the 1950s, when European productivity was typically less than half of U.S. productivity, so were European wages; today average compensation measured in dollars is about the same. As Japan climbed the productivity ladder over the past 30 years, its wages also rose, from 10% to 110% of the U.S. level. South Korea’s wages have also risen dramatically over time. (“Does Third World Growth Hurt First World Prosperity?” Harvard Business Review 72 n4, July-August 1994: 113-21.)

So if Trotter and Shearer want to see an increase in incomes, they need policies to increase productivity. It is far from clear how Trotter’s ideas of

[ …] pass[ing] legislation designed to reverse the flow of wealth from wage and salary earners to owners and shareholders. It will not, by substantially lifting the minimum wage, engineer a wholesale winnowing-out of New Zealand’s most inefficient businesses. It will not pass legislation restoring universal union membership or the national award system. It will not use the government’s ability to set wages and salaries in the public sector to provide both a guide and a goad for private sector employers

will increase New Zealand’s productivity.