In defence of the “low wage advantage call”

I don’t like politics, and I get a peverse pleasure from attacking things that political parties say – what can I say, I’m human.

However, I can’t say I agree with the attacks on Bill English’s comment that NZ has a comparative advantage over Australia because labour is cheaper.

He was talking about this in the context of “attracting capital”.  He was saying that the labour quality was similar, the regulatory environment was similar, but because of a lack of investment wages were 30% lower.

How does this work?  Well, capital increases the “marginal product” of workers, the higher the marginal product of workers the higher their wages will/can be.  We know that Bill English believes that NZ hasn’t been investing enough – a point I find interesting, even if I don’t completely agree.

However, this is consistent with what he believes – he thinks investment in NZ has been too low, and that is why wages are too low.  As a result, by saying “hey our workers are cheaper” he is in one sense telling people overseas that the return on capital in NZ is higher – and that they should invest here.  If they invest, they will in turn push up wages helping NZ to “catch Australia” as he loves to say.

Now I don’t believe this – I think there are likely to be fundamental reasons we can’t “catch Australia“.  However, if Bill English believes that low investment has lead to lower wages, going out and telling investors about this IS consistent with their goal of catching Australia. [It is consistent with the long running productivity discussion in recent years (see here and here) – a discussion that has “morphed” into a focus on savings more recently]

I’m sure it doesn’t seem like a good statement to make in a “marketing/political” sense – but at least its honest and consistent.  Surprising for a politician …

Update:  It appears that John Key made some comments as well – it looks like he had the same idea about it being a push to increase the flow of capital to drive higher wages in the future.

Update 2:  Whole situation is discussed here.  Just as a note, I have no problem with foreign investment – yes foreign investors want a rate of return, but by definition they can only get that return if they are creating value …

  • I guess if he had a simple message – “hey our wages are low because of a lack of investment, so lets get (some of) that investment by using our wages as an attractive factor” that could have been something.

    I guess what people are perhaps, intuitively more than logically, criticizing him for is the limitations in this logic- what happens to our ability to attract capital should our wages start to increase and we thus lose that competitive advantage? His political critics would take it a step further and say that “ah hah, National’s true plan is to keep wages low so that international and NZ businesses can pocket the change!.” He walked into a political narrative trap – such traps exist on both sides of the spectrum. Of course his political detractors want to believe that English has no other ideas to grow the economy and in a way the criticism rests on this assumption, which seems unlikely even for those of us like myself who remain unconvinced about his long-term vision.

  • @sigma1

    All good points – the quote I read did seem to indicate that he was talking on an investment side, and I feel like they have been taken out of context.

    “I guess what people are perhaps, intuitively more than logically, criticizing him for is the limitations in this logic- what happens to our ability to attract capital should our wages start to increase and we thus lose that competitive advantage?”

    Of course that is the point – investment is a flow, and we would want (expect) the flow to slow as the “marginal benefit” of additional investment dwindled below the cost. The key thing is that investment isn’t the goal – it was merely a play to make people who are thinking of investing think about investing their capital in NZ.

    “He walked into a political narrative trap – such traps exist on both sides of the spectrum.”

    Here I completely agree – this is where he got caught. What he said was completely consistent with both his beliefs and all the things he has said in the past. However, other people were able to frame it as a contradiction.

    “Of course his political detractors want to believe that English has no other ideas to grow the economy and in a way the criticism rests on this assumption, which seems unlikely even for those of us like myself who remain unconvinced about his long-term vision.”

    Personally, I don’t believe in long-term visions. If I was running a company, or living my life, I would – but the role of government isn’t to organise and allocate, it is an institution that is trying to smooth the allocative process of the market, and help to introduce “social benifits/costs/issues” that may otherwise be missed.

    I don’t like the whole Australia catching blab – but I also find it hard when someone talks consistently within their set of beliefs and people misquote them and attack. I don’t like defending politicians – but I don’t think he was wrong to say what he said, and I think people are framing his discussion inappropriately for their own gain

    And this is why I dislike politics – people get rewarded for misinformation :/ .

  • Well I agree with you that at least we can appreciate an “honest” politician. It seems like he is trying to atract more investors, and hey maybe it’ll help him in his goal to “catch Australia” lol. At least Bill English let the people know what he wants. 🙂

  • @Matt Nolan
    “the role of government isn’t to organise and allocate, it is an institution that is trying to smooth the allocative process of the market, and help to introduce “social benifits/costs/issues” that may otherwise be missed.”

    I doubt many governments agree with you on that point. Aren’t the government meant to be steering the HMNZS New Zealand Inc to lands of fortune and prosperity, after all?

  • @rauparaha

    “steering the HMNZS New Zealand Inc to lands of fortune and prosperity”

    Photoshop, now

  • Greg

    “We know that Bill English believes that NZ hasn’t been investing enough – a point I find interesting, even if I don’t completely agree.”

    First, let’s observe that if returns to capital were high here, then Bill wouldn’t have needed to say anything. Returns would be equilibrating by themselves; there’d be no need to “attract capital”. It’d be flocking here all by itself.

    It should be straightforward to establish the basic facts of the matter: how does our K/Y (capital to GDP ratio) compare to the countries we like to compare ourselves to?

    If our K/Y is significantly lower than our “peer group’s”, Bill has a point. But, then, why do we lack investment opportunities? Why do we need salesmen to “attract capital”?

    I don’t want to explore the low K/Y possibility in this comment. I’d prefer to look at the alternative possibility, that our K/Y is within shouting distance of those of our peers.

    If our K/Y is not wildly different from our peers’, then our lower output must be because our capital is misallocated (which is an industrial policy failure), and/or because other factors are operating. The chief suspects being those of economic geography: scale and agglomeration, trade route position, and distance to markets. (Institutional factors have been ruled out by the OECD and WB.)

    I suspect that NZ’s K/Y is anæmic, but not extremely so. And I think that our current low wage, low investment situation is due partly to industrial policy. (Although I’d prefer that it was all economic geography.)

    If you reduce the cost of one input and increase the cost of another, firms will adjust their investment decisions, and, over time, their decision-making heuristics and habits. They use more of the one and less of the other. In the aggregate, over time, this changes the structure of the economy.

    Way back, the Employment Contracts Act was passed in order to reduce the cost of labour – Jim Bolger as good as admitted that to Geoff Robinson on Morning Report. (“What happens if wages go up after the act is passed?” “Then the government will amend the legislation.”)

    Also in the dim past, capital was made expensive in the name of keeping to an inflation target.

    These policies seem to have worked. As well as “a lack of investment”, we have (or had, till ’08) a higher labour force participation rate than Australia. More of the cheap input, less of the dear one.

    So our current patterns of wages and investment are due, in part at least, to industrial policy set in the eighties, and adhered to through the nineties. (Incidentally, the idea that governments _can_ avoid “organising and allocating” is a strange one. Every act or omission of a government necessarily has economic consequences. All policy is industrial; some of it has other effects as well.)

    Now, the point: Wages depend on productivity; this is obvious. But if one of Kaldor’s stylised facts is true –the one that says that returns to capital are roughly constant over time — then productivity depends on wages too. “Pay peanuts, get monkeys”, as the saying goes. As with everything to do with economic growth, though, the effect takes decades to become apparent.

    I’d view Bill’s words as a signal to potential investors that wage policy is not going to change, and so by implicit contrast that returns to capital _are_ going to change. But I’m not sure he’s right about the quality of (marginal) workers being the same, any more.

  • Miguel Sanchez

    I wonder how much overlap there is between those ripping into Bill English for celebrating low wages as a competitive advantage, and those arguing that we need a lower exchange rate – effectively a lowering of the national wage – to make us more competitive. I’m guessing it’s damn near complete.