New Zealand’s nationwide lockdown left us all stuck at home with many people concerned about what the future would hold. Thankfully, a combination of wage subsidies, remote working and essential businesses remaining operational, kept most people in employment. Job numbers in the June quarter were only down a seasonally adjusted 0.5% from their March peak before the lockdown according to the Household Labour Force Survey.
But to keep their job, many people still had to take a wage haircut as part of sharing the risk of an uncertain world between themselves and their employer. This got me thinking:
- How much was the wage haircut for the average earner?
- How did this reduction to average wages compare to the fall in mortgage expenses for homeowners because of lower interest rates?
Average wages were down less than $20
The short answer to the size of the average lockdown wage haircut is smaller than you would think.
The average fall in weekly wages during the June 2020 quarter was only $18.62 before tax ($12.78 after tax) compared to a year ago, according to calculations from Statistics NZ data that is based on payday tax filings.
Average weekly wages in the June 2020 quarter were $1,151.76 before tax ($937.23 after tax). A year ago, average weekly earnings were $1,170.38 ($924.45 after tax).
And existing homeowners were better off
This decline in wages was much smaller than the fall in mortgage expenses because of lower interest rates. Consequently, in net terms, an existing homeowner earning an average income was actually better off.
Let’s take for example, a couple, both employed at the average wage. Their take home household income in the June quarter last year would have been $1,874.46. Now imagine, if they had purchased a standard house, at a median sale price of $585,000, with a 20% deposit, on a 30-year term at a one-year fixed rate of 3.88%pa. In this situation their mortgage payments would have been $506.45 per week or 27% of their take home income.
Now fast forward one year to the June 2020 quarter and that same couple, assuming they had both kept their average paying jobs, would have had a household income of $1,848.90. With one-year fixed mortgage rates having fallen to an average of 2.67%pa by then, they could have refixed and paid $436.68 per week or 24% of their take home income.
Comparing the reduced mortgage payments against the lower income, shows that the couple is $44.21 per week in net terms better off than they were a year ago. Even adjusting for the effects of inflation, they would still be $23.34 per week better off.
Data like this helps show why we had a sugar rush of spending coming out of lockdown. Not only had people not had the same opportunities to consume as they normally would have, so bank accounts had naturally been expanding, but on average homeowners had more discretionary weekly income!
Banking data further supports these sentiments. Households’ bank deposits shot up $6.1bn between March and June 2020 to sit at $195.1bn, according to the Reserve Bank. This was the largest quarterly increase in households’ bank deposits in a series stretching back more than 20 years.
However, not everyone is fortunate enough to be the average
I know the data to date looks promising. But we shouldn’t get ahead of ourselves and conclude that it was all roses for homeowners during lockdown. The data presented has all been based on averages, and let’s not forget that averages are simply a measure of central tendency – the person in the middle.
An average tells us nothing about distributional outcomes. We know from previous crises that different demographics were affected differently, with youth, Māori and Pasifika more heavily affected than others.
We also know that in the current situation some people did fine, such as government workers or those in industries where demand spiked, but there were also people who lost their job or had to take a much larger haircut to retain it.
For example, for many people on the wage subsidy, their earnings fell to 80% of their usual level. A household of two people in such a situation would have seen their after-tax weekly income fall to $1,553.28, compared to $1,874.46 a year ago. If this household were homeowners, then the fall in earnings would have been greater than the reduction to their mortgage expenses. Using my same homeownership example from before would have seen this couple worse off by $251.41 per week ($267.91 factoring in inflation) in net terms.
My focus on homeowners has also forgotten about renters. The 2018 Census found about 35% of households rented. These households did not benefit from lower interest rates offsetting lower wages. In fact, for those of you who read my article last month, will have seen that rents have been increasing relatively rapidly recently. Over the three months to August, rents climbed 2.9% from a year ago.
To be continued…
This article has shown that the person in the middle, earning an average income, and already a homeowner, has fared okay thus far in the crisis. But it has also highlighted that these averages can be deceptive and ignore distributional outcomes for those that had a different experience. In an upcoming article, I will put the spotlight on these distributional outcomes with a plain English account of what we know so far about divergences within the labour market across different demographics and throughout the country. After all, although averages are interesting, a comprehensive understanding of wellbeing should be based on a more detailed assessment of people and places.