Facts of the matter: race to the bottom

The wage gap has been in the news again, with talk of Australian banks and other businesses moving call centres to New Zealand to take advantage of low pay on this side of the Tasman.

wages ladder2 5By Bill Rosenberg

The government is talking up the low wages as an advantage for attracting investment and jobs – hardly a “brighter future” for New Zealand workers, and not what would have come to most people’s minds when, in the 2008 election, National promised to close the wage gap with Australia.

It’s a strategy with a 1990s ancestry clearly etched in its features. Back then, it led to painfully slow wage growth: the average hourly wage rose only 4.3 percent, after taking account of price rises, during nearly 10 years of the Employment Contracts Act. 

Wages fell well behind productivity growth, and employers did not bother to invest in improving productivity because they knew they could rely on low labour costs.



I had a look at the wage comparison with Australia two years ago. It’s not straightforward to compare wages between countries. Even the average wage, which is a fairly common measure internationally, is reported differently in the two countries. Last time I tried to correct for those differences, but now I have a new measure which is more directly comparable.

The new measure is based on what is called “compensation of employees”. It’s particularly useful for this comparison because it is defined in a standard way for both countries (and to a large extent internationally). It includes superannuation contributions made by the employer (which is compulsory and much bigger in Australia) and other benefits such as private health insurance.

If we divide it by the number of hours employees work in a year, it gives us a much broader and standardised view of the “wage” that employees earn.


So what does the comparison look like?

In the year to March 2012, using this calculation, the wage for Australia was A$39.01 and for New Zealand $28.61.

If the employer pays for wages in New Zealand but sells the product in Australia (as is happening with call centres), the wage gap is driven by the exchange rate and is currently a remarkable 74 percent.


Purchasing power

However, from a worker’s point of view, the crucial issue is how much your wage will buy. In other words, what’s the gap in purchasing power?

Using OECD calculations of purchasing power parity, Australians on average get 34 percent more in purchasing power per hour worked than New Zealanders. 

The biggest reduction in the purchasing-power gap was in 2004 to 2005 when unions campaigned for a 5 percent pay increase, the health unions, including the PSA, successfully negotiated higher rates of pay, and the Employment Relations Act was changed to strengthen collective bargaining. Those changes to the ERA are the ones the present government is now proposing to reverse.


The minimum wage

A comparison of minimum wages in the two countries shows the Australian minimum wage consistently 50 percent ahead in purchasing power until 2002 when there were significant increases in New Zealand. The gap began to narrow sharply as a result. It bottomed out in 2010 at 9 percent but has risen to 13 percent since then.

The government says it is an advantage to have a yawning wage gap as it means we can attract jobs from across the Tasman. But the long period for which there has been a sizeable and growing gap, and the move of many businesses in the other direction attracted by the larger population in Australia, indicate that driving down wages is no answer to New Zealand’s problems.

Australian workers will be concerned at the downward pressure it will bring on their wages. It is a race-to-the-bottom policy.


This article is from the September 2013 issue of the PSA Journal. You can read back issues of the Journal by clicking here.