Economics: Mind the gap

A political spat was triggered earlier this year over the wage gap between New Zealand and Australia: was it shrinking or growing? Before the 2008 general election, it was recalled at that time, National leader John Key had promised to close the gap.
But maybe there was economic advantage in not closing the gap, because Finance Minister Bill English had talked of the competitive edge offered by cheaper wages. Key, meanwhile, insisted the gap was being closed on the strength of increases in after-tax average wages on his watch.
Council of Trade Unions economist Bill Rosenberg’s calculations, to the contrary, showed the average Australian wage had surged 41 percent ahead of the New Zealand wage by June 2010; the gap had been 35 percent in June 2009. His figures did not include more generous employer superannuation contributions across the Tasman, but did take purchasing power parity into account.
Yes, our after-tax wages indeed had risen by around 16 percent since 2008, Rosenberg conceded, but “we cannot tax-cut our way to higher wages – tax cuts are large part of the reason for the increasing government debt”.
Key’s commitment to close the trans-Tasman wage gap was variant of the previous government’s pledge to edge New Zealand back up the OECD economic growth ladder.
As measured by growth in gross domestic product, our ranking has slumped since 1960, when we were fourth out of 24 OECD countries. Our annual average growth in real GDP has been consistently below the OECD average for the past five decades. The International Monetary Fund ranked us 33rd out of 183 countries for GDP per capita last year.
But as the Waikato Times mused in an editorial last month, maybe we were using the wrong measure. It drew attention to our ranking – creditable fifth place – on the Human Development Index, product of the United Nations Development Programme.
The HDI ranked 187 nations according to three criteria: the standard of living of its people, its population’s access to knowledge and its population’s chance of living long and healthy life.
Human development, according to the report, is the expansion of people’s freedoms and capabilities to lead lives that they value and have reason to value. “It is about expanding choices. Freedoms and capabilities are more expansive notion than basic needs.”
Norway took the gold for 2011, on the HDI measure. The Democratic Republic of the Congo, Niger and Burundi were at the bottom of the heap.
In contrast to our fall on OECD rankings based on GDP growth, the HDI gives New Zealand more comforting data. Between 1980 and 2011, our HDI value has increased from 0.800 to 0.908, an annual increase of about 0.4 percent.
In that period, life expectancy at birth has increased by 7.6 years, mean years of schooling have increased by 0.9 years and expected years of schooling have increased by 4.5 years. Gross national income per capita increased by 42 percent.
While this suggests our country is much better place to live in than the GDP growth measure alone implies, the Ministry of Education’s recently published Civic and Citizenship Education Study showed almost one in three Year 9 students want to live permanently in another country. Mostly they go to Australia – so how come they aren’t flocking to Norway?
Norway’s GNI per capita is US$47,557 (compared with New Zealand’s US$23,737), its life expectancy at birth is 81.1 years (ours is 80.7) and they clock in at 0.943 on the HDI (we clock in at 0.908).
Distance is deterrent to Kiwis wanting share of Norway’s good life. The need to learn new language would be another. And Norwegians kill whales.
It’s much easier to cross the ditch to Australia, which happens to sit in second place on the HDI index. Its GNI per capita is US$34,431, its life expectancy at birth is 81.9 years, and its HDI reading is 0.929. That means several gaps need closing. M

Bob Edlin is leading economic commentator and NZ Management’s regular economics columnist.

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