How do we get our stubbornly low pay rates up so they compare better with those in Australia? David Chaston has an idea, one that may help fight asset price inflation too

$175 per week. That is how much less Kiwis get paid, on average, than Aussies.

Over a year, that mounts up – to more than $9,000.

But if there is one thing that unites the views of all political parties in New Zealand, it is that Kiwis are not paid enough.

All parties campaign on programs they think will rectify this issue.

So at the start of a new Government, it is timely to review the issue, and set a benchmark on how well they do fixing the intractable problem of low pay.

The base data is the average weekly earnings data released by Statistics NZ.

In the year to September 2017, this grew by +2.5%. That is better than inflation, so there were real gains, but not enough to close the gap with Australia.

(We are using Australia as the benchmark out of convenience and immediate relevance – to use the US or some European benchmarks seems a step too far at present.)

We compare that NZ data with equivalent Australian data from the Australian Bureau of Statistics (ABS), their 6302.0 series.

But as we all know, taxes are different in the two countries. So we have converted both series to take-home pay, deducting the PAYE withholdings from the gross weekly earnings series. In New Zealand, that is the income tax, plus the ACC levy. In Australia, it is also their income tax, plus their Medicare levy.

These are the tax rates we applied:

New Zealand (per IRD)  
Tax rates for the 2017-2018 tax year  
Annual taxable income (NZD) Tax rate
Up to $14,000 10.5%
Over $14,000 and up to $48,000 17.5%
Over $48,000 and up to $70,000 30.0%
Remaining income over $70,000 33.0%
plus the ACC earners levy of 1.39%


Australia (per ATO)  
Resident tax rates 2017–18  
Annual taxable income (AUD) Tax rate
0 – $18,200 Nil
$18,201 – $37,000 19.0%
$37,001 – $87,000 32.5%
$87,001 – $180,000 37.0%
$180,001 and over 45.0%
plus the Medicare levy of 2%.

After we applied these tax rates to get take-home pay, and after we applied the exchange rate (one that matched the NZ and AU time series), we can compare the two countries average after-tax take-home pays properly.

The most obvious thing revealed is how much the exchange rate affects the variations. Clearly the Aussie data on take-home pay does not move up and down over there; it is only when converted to our currency that it does.

In fact, as at the end of 2017, Kiwi take-home pay is as close to the Aussie level than at any time in the past 25 years.

We are gaining on them – slowly to be fair and still a long way to go, but gains never-the-less.

And that raises an interesting point. Much of that gain is due to the exchange rate.

A high exchange rate makes our wages higher. And a lower exchange rate makes them lower.

So for all the energy and angst put into public policy settings needed to close the gap, why don’t we just run public policies that will raise the exchange rate?

That will do more, quicker, to raise effective compensation here than anything else.

It is not really possible to argue that a high exchange rate is bad for New Zealand. We have a relatively high rate now and we have the best economic growth rate in a long time, we have low and falling unemployment, we have very high levels of labour force participation, and we have low inflation – costs are not eating into pay gains. We even have a current account deficit that is falling in relation to GDP. What’s not to like? By any measure, New Zealand is currently prosperous, even with a ‘high’ exchange rate.

And the impact could be won quickly. We have waited for generations to get a fix on the persistent low pay gap with the rest of the developed world, for marginal gains. True we are at a better place now than in the past, but we have a long way to go still.

In a different century, it used to be argued that a low exchange rate would boost exports and bring us wealth via an export boom. The problem with that is that we are now no longer as dependent on raw commodity exports. In fact, our exports, especially of processed and highly-transformed goods and services are at their highest level ever – with a relatively high exchange rate. A low exchange rate only benefits a few raw commodity producers, the very type of exports we are trying to move away from. (Actually, let’s not forget that our wine industry – in fact the whole horticulture export industry – along with the seafood industry, and forestry, are all breaking export records even with a relatively high exchange rate.)

Even our tourism industry doesn’t suffer from a higher exchange rate. Nor does our education industry.

A low exchange rate policy is a sign of backward-looking public policy ideas.

A high exchange rate policy would benefit most workers, most people, with purchasing power more like other first world countries.

New Zealand workers should celebrate a higher exchange rate. New Zealand business should focus on products and services that offer their customers value no matter what the exchange rate is.

The public policy attraction is, this is a change that can bring major benefits to most people, and quickly. Renewed focus on reducing our exposure to low-value commodity exports can make it sustainable.

  Take-home pay …
  NZ AU in NZ$ diff NZ vs AU
September $ $ $ %
1992 413.49 556.04 -142.55 74.4%
1997 452.93 588.97 -136.04 76.9%
2002 518.04 712.49 -194.45 72.7%
2007 619.68 819.57 -199.89 75.6%
2012 738.84 1,091.81 -352.97 67.7%
2017 827.85 1,003.23 -175.38 82.5%

That might see Adrian Orr end the RBNZ fixation and angst over the low OCR setting in an attempt to keep the exchange rate from rising.

Higher interest rates will dampen asset price inflation, help make housing more affordable, reward savers, keep prices low, and most importantly, reward workers by making their real (after inflation) gains go further.

Higher interest rates will likely bring a higher exchange rate which will also speed the transition of our economy away from low-value commodity production, which also has to be a good thing.

There will be some minor dislocation for a few, but in return, major gains for most.

We have tinkered with higher exchange rates for a number of years. Not only did the world not end, we are now more prosperous that at any time in three generations (from when we just sold meat and wool to the UK and had the Korean War wool boom).

Higher exchange rates have worked out for us.

Let’s make it an explicit public policy, and work to maximise the gains.