Week in Review
There should be more to capitalism than capital
More people are in work and many employers struggle to find the staff they need, but wages and productivity continue to stagnate - is it time to reinvent capitalism?
Since the Global Financial Crisis we’ve grown our economy by employing more people. But we haven’t made our workforce smarter and more productive, so pay has stagnated.
We’re in good company. Most developed countries have performed as poorly, as the OECD shows in its latest annual productivity report released on Monday.
That’s no consolation for anyone - employees, employers, investors and other citizens. All sluggish nations are suffering growing social unrest. This in turn is weakening their capability and resolve to rise to fearsome challenges. The list of challenges is long. The impact of technology on societies and work, and the climate crisis are just two. But they in particular have the potential to drive highly beneficial change, if we put our minds to them.
It’s very clear who are the losers and winners from this poor productivity performance. As the OECD report noted: “In Italy, New Zealand and Portugal, and to a lesser extent the Netherlands and Spain, GDP per capita growth was almost entirely driven by labour utilisation.”
Virtually absent for these and many other OECD countries was productivity growth from using labour, technology and capital better. Across the OECD, such growth in multifactor productivity since 2010 has been about half the pre-GFC rate.
Of course, better labour utilisation is good. It means more people have jobs. Our latest labour market data out this week, showed the unemployment rate for the March quarter falling to 4.2 percent and the under-utilisation rate falling to 11.3 percent. This meant 67.5 per cent of the available workforce were employed, very close to an all-time high but down slightly from the previous quarter.
However, ANZ’s latest weekly economics report offered some telling analysis of how our businesses have been responding to the growing economy. As its chart below shows, since the GFC they have far more favoured hiring people than investing capital, and even more strongly so over the past five years.
As ANZ noted: “This has absorbed the very large growth in the labour supply New Zealand has experienced via net immigration. However, it does have unfortunate implications for productivity growth, which is what drives real wage and wealth gains on a per capita basis over the medium to long term.”
Could New Zealand businesses have invested more in technology, plant and employee capability? Yes. In aggregate, they have had a good run of growth in revenues, profits and asset over recent years, as StatsNZ’s latest Annual Enterprise Survey shows. This is for the 2017 financial year, with the 2018 report due late this June.
Comparing 2017 with 2016 for all industries, revenues grew 6.5 percent to $644 billion and expenditures grew 4.4 percent to $560.7b. But operating profits grew by 20.1 percent to $13b. Meanwhile assets grew 2.9 percent to $2 trillion, and return on assets increased from 3.6 percent to 4.4 percent.
With such a healthy rise in operating profits New Zealand businesses could have easily invested more in themselves and their employees, including paying them more. But instead the rewards of this growth have gone almost exclusively to the owners of the assets, to capital rather than labour.
This is one reason why our stock market has continued its spectacular rise, with the NZX 50 index recently breaking through 10,000 for the first time. Since its low point after the GFC in February 2009, the index has risen 300 percent.
Clearly New Zealand’s listed businesses aren’t intrinsically that much bigger and better to justify those valuations. Other factors have been at work such as very low interest rates. But good profit growth, thanks in part to suppressing wages and skimping on capital expenditure, has been and remains a crucial factor in rising share prices. That said, the reporting season underway is starting to show signs of that investor confidence cracking.
Most other markets around the world have been equally as buoyant. The most telling example is the US. Companies benefitted hugely from President Trump slashing their tax rate. But they spent most of the extra profits on buying back shares rather than raising wages or investing more capital in themselves. The share buybacks helped push up dividends and share prices, thus benefitting investors but not employees unless they own shares in their employers. This excellent Paul Krugman column lays out the evidence.
... capitalism has to purge its narrow fixation on financial capital and embrace at least five other capitals - natural, social, human, cultural and technological ...
However, conventional wisdom says that companies, here and abroad, will resume investing in productivity growth when they find it harder to hire people or to keep down wages. Yet, the BNZ’s latest manufacturing report, drawing on NZIER survey data, shows that a net 60 percent of companies are reporting difficulty finding skilled staff and a net 40 percent said finding unskilled staff was hard.
Moreover, with immigration easing and labour utilisation high there aren’t many more new workers to hire. Yet wages are essentially stagnant in real terms, just as inflation remains deeply subdued, also defying conventional wisdom.
This late in the economic cycle is an unlikely time for our companies to suddenly embark on an investment boom to improve productivity. If their margins are squeezed by a slight pickup in inflation or wages, they are more likely to cut staff and costs to try to maintain profits. Another negative is the easing of the NZ dollar, which is making imported equipment and technology more expensive. These are all good reasons why investors should worry more about their companies.
A further example of businesses’ pursuit of short-term gains at long-term cost is their attitude to tax reforms. They were so focused on blocking a capital gains tax that they ignored the raft of changes which the Tax Working Group recommended to help them invest in their businesses, as I wrote in this column in March.
Should business lobbyists wake up and clamour for those changes anyway, the Government should extract some binding quid pro quos from them. Good ones would include their serious engagement on:
- harnessing technology to constructively change the nature and value of work (a subject the Productivity Commission has just begun to study with this useful issues paper);
- revamping of industry training;
- agreeing some sectoral Fair Pay Agreements; and
- transforming our economy to a sustainable, low emissions one by investing in substantial reductions in greenhouse gases.
But above all, our businesses must join the growing global debate about how we have to reinvent capitalism, so it better serves people and the planet.
The best place to start is to acknowledge capitalism has to purge its narrow fixation on financial capital and embrace at least five other capitals - natural, social, human, cultural and technological – with finance becoming only a mechanism to facilitate those, rather than an end in itself.