Thursday, May 01, 2008

Higher productivity = higher wages

I've noticed that several blogs and more than a few politicians have made a lot of noise about higher NZ wages, with nary a clue how to go about it.   The answer is simple: you can only get higher wages from higher productivity. 

mining pic5086_man_digging_hole_with_shovelIn economist-speak: Productivity is a measure of how efficiently labour produces goods and services, which is essentially a measure of how much capital labour gets to use.  (To put it as simply as possible: You'll dig a bigger hole with an Caterpillar than you will with a shovel.  That's a pure  example of the efficiency of more capital.)

This is why having a government suck money out of capital markets and stop capital investment in NZ is a bad idea: it lessens the amount of local capital that local labour gets to use.  This is why New Zealand wages are 30% lower than Australia -- not because Australia has stronger unions or any other stupid reason, but because Australia has more capital, and is more productive with it.

This is why, in short, if you want higher wages you should be doing all you can to discourage restrictions on NZ's capital markets, and discouraging restrictions on productivity.

I'll let Paul Walker explain the details, and show you all the graphs.

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