Friday, November 11, 2016

Why New Zealand’s wages are lower than Australia’s?

The Australians earn more than New Zealanders on average. For example, the Australian Bureau of Statistics reports the average weekly total earning in May 2016 to be 1160.90 Australian dollars while Statistics New Zealand figure for 2016 Q3 was 985.97 NZ dollars. Americans make more too. The microeconomic textbook explanation is straightforward. If (1) we supply more labour than Australians we will have relatively lower wages; (2) if our productivity is relatively lower; our wages would be relatively lower. Both (1) and (2) are evident in the data.

We supply relatively more labour (hours) than the Australians and the Americans. I measured the supply of labour as the average weekly hours worked when I was at the New Zealand Treasury in 2012. Hours depend on the consumption-income ratio, the marginal tax rate, the relative price of leisure, and the share of capital in production. Here is a graph for New Zealand, Australia, and the U.S.

Further, among other reasons for the increase in he supply of hours such as the increase in female labor supply, population of working age, immigration etc. the increase in labour supply (more hours worked) is also consistent with the decline in the reservation wage over time. The reservation wage has been declining relative to the real wage. The reservation wage is the wage equivalent of being unemployed. Most of the theoretical models of wage setting suggest that it depends on past real wages, labour productivity, and the unemployment rate. The reservation wage depends on the generosity of benefits, and other income supports the workers expect to have while they are unemployed. The benefits have been falling over time in New Zealand. The institutional dependence of unemployment benefits on past wage level, may suggest that the reservation wage also depends on past wages. The reservation wage depends also, on what the unemployed do with their time – the utility of leisure, which may include home production and income that, could be, earned in the informal sector. More on this is in Razzak (2015). Here is a plot of my estimate of New Zealand’s ratio of the average hourly reservation wage relative to the real average hourly wage.

And, we are less productive than the Aussies and the Americans. This has been shown in blogs (e.g., Michael Riddell’s blogs), the Conference Board data, and in many other papers to the extent there is a wide agreement.

Razzak, W, (2003), Towards Building a New Consensus About New Zealand’s productivity.
Razzak, W., 2015, Wage, productivity, and unemployment: microeconomics theory and macroeconomics data, Applied Economics, Vol. 47, Issue 58, 6284-6300

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