Inflation is hammering much of the world and working people are on the receiving end twice, both in terms of increasing costs of living and tighter monetary policy pushing up mortgage rates and the cost of commercial borrowing (read: less job creation).

A number of recent analyses from the US (where inflation has reached 8.3%) and Europe (7.4%) have made the point that rising profits are responsible for inflation in the form of higher prices.

Josh Bivens of the Economic Policy Institute, for example, argues that while the growth in unit labour costs accounted for the vast majority (61.8%) of growth in unit prices in the US nonfinancial corporate sector over the 1979-2019 period, from Q2 2020 to Q4 2021 the major contributor at 53.9% of unit price growth has been corporate profits.

Similarly in the Eurozone, Isabel Schnabel suggests that unit profits have made a far larger contribution to price increases since 2021 than unit labour costs.

I’m not aware of a similar dataset that decomposes the source of unit price increases in NZ in this way (although I’m keen to explore anything you think might give us some info).

There is however clear evidence that the rate of profit is growing. Figure 1 uses Treasury’s outturn tax data to estimate the amount of profit earned over the economy, in March 2022 dollars.

This shows that over this twenty-five year period the total estimated profit extracted from New Zealand workers has more than quadrupled, from around $17 billion in the year to March 1997 to $72 billion in the year to March 2022.

This suggests that after paying company tax, NZ businesses generated around $52 billion in post-tax profits in the year to March 2022. And, while there was a clear dip in the year to March 2021 (pandemic effects), the subsequent year is not only a big increase, but noticeably higher than 2019, itself a big jump on the previous three years.

In Figure 2 the blue line shows the estimated profit data divided by the number of hours worked to generate an estimate of the rate at which profit is extracted across the economy.

While an average hour of work in 1997 netted an average employer about $5.50 in profit (in March 2022 dollars), by 2022 that had increased to $14.90 an hour, a 170% increase over 25 years, 6.8% a year.

Over the same period the average wage (the orange line) has increased only 33%, around 1.3% a year.

Some people have criticised this data, with one helpful response suggesting that the time delay between when returns are realised vs when they are reported and taxed is too long to suggest that these are pandemic-related profits.

Another common response is that this is not representative, and that there are plenty of small employers that generate hardly any profit, certainly nothing of this scale. Given these are average figures, it also means that for every employer that just breaks even on an hour of paid work, there’s another whose earning $29.80 per hour in profit per worker.

Capital and labour

The dollar increases between capital and labour over this period have been roughly the same – extracted profit per hour has increased by $9.38 over this period (roughly 37 cents increase per year) while the average wage has increased by $8.93 (roughly 36 cents per year).

However the latest year shows a much larger swing. In the year to March 2022 profit per hour increased by $3.21, while the average wage actually declined $0.77.

Looking at non-inflation-adjusted data for a moment gives us a better sense of these contributions. Together, increases to both the average wage and average profit in the year to March 2022 come to $5.63, however 71% of that increase is attributable to profit and only 29% to wages.

While this data doesn’t account for changes in input price and therefore make the same kind of precise calculations as Bivens has for the US, it does suggest to us that in New Zealand profit plays a much greater role than labour in the last year, on top of a steady climb in profit over the past couple of decades.

In this light, I’m glad that Fair Pay Agreements seem to be moving ahead, regardless of criticism from business lobby groups.

Edward Miller is a Researcher and Policy Analyst at FIRST Union

Are Profits Driving Inflation in NZ?