How to escape from a low-wage trap

On Q+A this morning, there was much discussion about inequality, and in particular New Zealand’s very low wages, which leave so many reliant on a Working for Families top-up. The question is, how to get out of that low-wage trap?

At this point, classical economics isn’t very helpful, because it tends to focus on comparative advantage: the idea that whatever you do better than other countries is what you should stick with. And at the moment what we do best is produce low-value goods cheaper than other developed countries because our wages are so low.

To get out of that trap requires a game-changer, a trap-breaker. As one of the contributors to Inequality: A New Zealand Crisis, Nigel Haworth, argues, we need a combined push from government, business and unions to shift ourselves – in ways that the market alone won’t do – into a high-value, high-wage state.

That means more government investment in R+D and other changes.

But in particular, it means reversing the idea that you have to have economic growth first, then you can afford higher wages. Instead, we have to realise that if we pay people better, and do a few other things, people will work harder and more productively – thus generating the high-value economic growth that we need.

That’s because better paid people feel more rewarded. They’ll also work better if they have more input into how their company is run.

So we need that game-changer to break out of the low-wage trap – and, at the same time, reduce inequality.

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