A low-wage downside and the "living wage"

New Zealand wages are around 30 per cent below Australian wages. That makes our goods competitive in Australia — too competitive for some Australians. Their solution: a non-tariff trade barrier.

Horticulture farmers here have for a year or so been muttering sotto voce that Australian supermarkets were switching sourcing for their own-brand food from New Zealand to Australian producers. It is justified on a “buy Australia” campaign — and props up uncompetitive Australian suppliers. Add that to the near-prohibitive biosecurity procedures on New Zealand apples. Underarm bowlers are in action.

Contrast a call on Thursday by Anglo-Australian miner BHP Billiton’s boss Andrew Mackenzie for “vigilance” and “an evangelism” to promote free trade and stop “steps backwards” into “protectionism”.

Mackenzie — as a Scot made BHP chief only in 2013, he is not yet a paid-up underarm bowler — heads the B20 of big businesses feeding into Australia’s development of the agenda for the G20 heavyweight countries’ summit in Brisbane in November, at which Australia will argue the virtues of free trade — even while still subsidising some of its firms, a form of non-tariff protection.

Australia is in good company. Countries have been slipping in non-tariff trade barriers on a range of pretexts, which in time are likely to include climate change.

So New Zealand producers and exporters will likely find here and there blockages to entry that contravene free trade agreements in spirit if not in the fine print — as the Australian supermarkets are doing with CER.

What is the answer? Bill English has in the past noted the lower-wage-cost contribution to New Zealand competitiveness in Australia. But the supermarkets’ lesson is that low wages are not always a one-way advantage. There may be an economic cost.

Low wages are, of course, a cost to the low-waged: constrained lives for them and their families. There are also costs to society in less cohesion and to the economy in lower purchasing power which reduces demand for local goods as well as imported ones. In countries with reasonable social security, there are income and other support costs.

So some economists, for example, Jared Bernstein in the New York Times, and right-of-centre columnists, for example, Edward Luce of the Financial Times, argue for a higher United States federal minimum wage, now $US7.25 — in real terms 23 per cent lower than in 1968 and, at about $NZ8.80, way below our $13.75 minimum, soon to go to around $14.

A recent New York Times editorial quoted an Economic Policy Institute calculation that the Democrats’ proposed minimum wage lift to $US10.10 ($NZ12.25) would add $35 billion in wages up to 2016 and “the resulting increase in gross domestic product would create 85,000 new jobs”.

Opposing economists, for example, Harvard University’s Gregory Mankiw in the New York Times, echo our Treasury’s line: that wage rises cut employers’ profits and, if not matched by higher worker productivity, cost jobs.

Job losses was English’s Treasury-based line last November when he savaged proposals for a “living wage”. He treated it as a version of a minimum wage and said most of those on the minimum do not have dependents and in any case Working For Families and other programmes help families on low incomes.

“Living wage” proponents say it is calculated to buy the “basic necessities of life and enable workers to live with dignity and participate as active citizens in society”. At $18.40 it is not exactly luxury for a one-income family of four.

Backing for a living wage continues to gain momentum.

The Wellington City Council has applied it to its direct employees and aims to add employees of council-owned companies from next year and put contractors in its 2015 plan. The Christchurch City Council (positively) and some district health boards are considering it. Labour and the Greens say they will apply it to direct public service employees.

Next Monday the living wage coalition of 100-plus organisations will update the $18.40 and launch an employer accreditation scheme. A bunch of soon-to-be-accredited employers will be there. Firms joining say better pay lifts employee loyalty and gives the firms branding for socially-conscious consumers who, for example, buy “fair trade” and “organic” goods.

There is another dimension, which worries opponents: lifting the minimum wage also pushes up wages of those not far above the minimum. Might the living wage do the same?

The implication for New Zealand producers’ low-labour-cost competitiveness in Australia is obvious. And in the 2010s tightly enmeshed global economy there are limits to what a small export-dependent economy like ours can do without killing jobs. Also, more consumption means more imports.

But the Australian supermarket lesson is that low-wage-based competitiveness is not a one-way bet. Nor are low wages an obvious path to high-value-based competitiveness which can make us a sustainably high-wage country.