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The Never-Ending Inequality Debate

I wrote an article for the NBR on inequality to stir debate - it's called "Labour isn't working on Inequality" and can be accessed at, or below:

When Labour was elected, a new focus on inequality was announced. In a speech called “Well-being as a Cure for Inequality”, given at the Bill and Melinda Gates Foundation Goal Keepers Summit in New York in 2019, the PM declared that the 1980s free market reforms in NZ had come “with a high price …. the gap between rich and poor quickly expanded”. But what about Gates’ own views? He’s against making generalizations about “the rich” and gives an example of three wealthy people. One is putting capital into building their business, another into a charity whereas a third mostly consumes, spending on boats. Whilst “all three people are contributing to inequality”, Gates argues the first two deliver more value to society than the third. He adds that thanks to the rise of the middle class in countries like China … Brazil and Thailand” the world is becoming more equal.

Should a government wish to reduce inequality, then its’ causes first need to be identified. There are four leading suspects: globalization, increased demand for skilled labour, higher pay for top executives and government policy on things like taxes and minimum wages.

The first suspect, globalization, refers to how our trade with low wage economies can lead to the pay of unskilled workers in NZ being “set in Beijing”. The argument is that in a global economy, domestic wages can be influenced by overseas labour-market conditions. For example, when a Kiwi-based business can run a call-centre out of the Philippines then downward pressure is put on the pay of these types of local workers.

To the extent there’s truth in this view, how has Labour responded? Ironically, by signing free-trade agreements with low wage economies. Last year NZ joined the Regional Comprehensive Economic Partnership which includes China, Cambodia, the Philippines and Indonesia. Why would our government do such a thing? No doubt to garner support from the Kiwi business community by opening up trading opportunities and to make cheaper imports available to Kiwi consumers. Adverse inequality effects of the agreement don’t figure.

The second suspect behind high inequality goes by the phrase "skill-biased technological progress". The argument is that there has been increasing demand the past few decades for skilled workers, which has dramatically pushed up their wages compared to unskilled workers.

A big chunk of that demand is for people with maths and computer science skills. Leading up to 2008 those trained in mathematical finance were the top dogs in London and New York. Now they are being usurped by workers in fields like Artificial Intelligence at Google and other firms, some of whom are being paid on a par with American football stars.

However, NZ’s international school test scores in maths are plummeting. I asked some of our nation’s best mathematicians for reasons. These folks are mostly unwilling to enter the fraught public debates on this matter. Anyhow, their under-the-radar view is as follows. The reported test scores reflect what’s going on in primary and intermediate students – so things may be a lot worse in secondary schools where most Kiwi maths teachers don't have an undergraduate degree majoring in the subject.

So why aren't we attracting well-qualified maths teachers? The reason centres on salaries. Maths graduates can get highly-paid jobs outside of teaching. However, the NZ teachers union won't allow salary differences on the basis of subject area. Consequently maths specialists aren’t finding teaching attractive. The view of the mathematicians is that they don’t see the union's hold on pay-scales ending.

The mathematicians have a point. Since Labour (and National) won’t tackle this issue with the union, expect inequality in NZ to rise as maths skills become more highly rewarded by employers. Wealthy Kiwis can simply by-pass the problem by hiring private maths tutors.

A third reason for higher inequality relates to the job market for top executives. One of the world’s leading names on this topic, my former British examiner, Sir Tony Atkinson, who was invited out to NZ by the Clark government, wrote that “as an English-speaking country, NZ CEO salaries have been most likely affected by the internationalisation of the market for executives”. Since we’re price-takers in this market rather than price-makers, there’s little our politicians can do to influence it.

A fourth cause of inequality is government policy. The RBNZ’s poorly judged, over-the-top, $100 billion “quantitative easing programme” has caused wealth inequality to rise by increasing house prices. Tweaking the top tax rate will unlikely have much of a counter effect. Put in this context, one can easily explain why this government is hiking the minimum wage. It’s in Labour’s vital interests to do so as a visible demonstration of an attempt to address inequality when little is being achieved on other fronts. There’s also a neat aspect of this policy to the Finance Minister. It doesn’t cost the government. That is, it comes with no fiscal outlays. Nor tax increases. The bill is stuck onto firms’ payrolls. This aspect of increasing the minimum wage is the best argument against it. If people say they want to live in a more equal society by redistributing wealth then everyone should be prepared to pay more taxes.

In any case, it’s hard to see how adding a few more dollars an hour to the minimum wage and some tinkering with the benefit system can offset the other powerful forces at work in NZ that are impacting inequality, namely globalization, higher demand for skills in maths-related subjects, rises in top executive pay and the $100 billion quantitative easing programme.

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