DAVID JAMES. Penalty rate cuts are the result of thinking small

 Australia is showing signs of contracting the American disease of rising inequality, which will ultimately spill over into low growth, especially when the effect of high household indebtedness has its inevitable dampening effect. In the last quarter of 2016 GDP growth was strong and corporate profits jumped 20.1 per cent. But wages and salaries actually went down 0.5 per cent on a seasonally adjusted basis.  

Witnessing the debate over Sunday penalty rates, the result of which was to cut the remuneration for mostly low wage workers further, an intriguing pattern of thinking emerged. It can be characterised as a microcosm/macrocosm duality.

Those arguing for lower Sunday wage rates chose to demonstrate their case by talking about individual businesses, the micro approach. ‘Many individual businesses would love to open on a Sunday and if only wage rates were lower then they would,’ goes the logic. ‘So unleash those businesses and much greater employment will follow.’

Superficially impressive, it does not survive much scrutiny. As economists love to point out when politicians compare government budget deficits to a household budget, systems (the macro level) do not behave in the same way as a household (the micro level).

A similar distinction can be made with wage rates. The effect of progressively lower wages is to lower overall demand in the economy. While an individual business might benefit from cheaper labour, most businesses will be harmed by workers having less to spend.

Needless to say, this is not something that is investigated much — it does not suit the neoliberal assumptions of most modern economics — but the phenomenon is hard to miss, especially with the economic divisions that are emerging in America.

Discussion of productivity suffers from a similarly deceptive duality. From the micro perspective, productivity is treated much the same as profitability. It is seen as a win-lose battle between workers and owners. ‘If my workers get paid more, then my cost of production will go up, my productivity will go down and I won’t be able to make profits.’

At the macro level, things look very different. For one thing, at least two thirds of productivity gains have been shown to be the result of capital investments rather than improvements in labour efficiency.

This makes sense. Even in labour-intensive businesses, wages growth can only be influenced to a small degree. Even if workers wages can be cut, it will not be by much. On the other hand, very large efficiency improvements can be achieved through capital investment, such as robotics, digital distribution systems, enhanced computerisation and online innovations, to name a few possibilities.

“International competitiveness is a function of many factors, such as being good at what you do. Which is why global Scandinavian businesses can compete despite having to operate in a high tax environment. Australia’s lazy oligopolies are nowhere near that level.”

That is why local industries that are exposed to global competition should not base their competitiveness on cheap wages. They will inevitably lose because wages are so much cheaper elsewhere. It is better for those businesses and the national economy if they are forced to operate in a high wage environment, because it will encourage them to position themselves at the higher value end of the market and pursue high levels of productivity that are not based on cheap labour.

A similar micro-line is routinely taken with tax: ‘Businesses must have lower taxes so they can invest more, create more employment and compete internationally.’

This involves some heroic assumptions. Most Australian public companies aggressively farm out their profits as dividends rather than re-invest them. Nor do they have much interest in employing more. There is no better way for Australian public companies to get their share price up than to have a round of redundancies. (In America, profits have been used mainly for share buybacks. There, too, there has been negligible interest in employing more.)

As for international competitiveness, that is a function of many factors, such as being good at what you do. Which is why global Scandinavian businesses have persistently shown they can compete despite having to operate in a high tax environment. Australia’s lazy oligopolies are nowhere near that level.

There is also very good evidence, at the macro level, that countries with efficient tax systems greatly outperform those with weak tax systems — for the simple reason that it means the government is not broke. For example, this is one of the key differences between India (which has poor tax collection) and China (which aggressively collects tax).

Australia is showing signs of contracting the American disease of rising inequality, which will ultimately spill over into low growth, especially when the effect of high household indebtedness has its inevitable dampening effect. In the last quarter of 2016 GDP growth was strong and corporate profits jumped 20.1 per cent. But wages and salaries actually went down 0.5 per cent on a seasonally adjusted basis.

To those who like to think small, the micro-types, this may look like a more ‘efficient’ economy. In fact, it is an economy, and a society, that is getting sicker.

David James is the managing editor of businessadvantagepng.com.  This article was first published in Eureka Street on 6 March 2017.

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2 Responses to DAVID JAMES. Penalty rate cuts are the result of thinking small

  1. Dog's Breakfast says:

    Agreed David, especially the difference between the micro and the macro.

    The penalty rates are particularly misunderstood, because those businesses theoretically are operating under the current regime. There will be a small adjustment at which point there will be a new and only slightly changed equilibrium.

    Being able to employ people for more hours to serve the same, or less number of meals or coffees, means that they will have achieved nothing, but as the individual owner will normally be there for most of the opening hours, will just see himself work longer hours.

    I would argue though that you have muddied the water a little talking about productivity and wages. As I have explained on other forums, wages are an outcome of productivity, not an input. Productivity is, or should be, a measure of output per unit of input, and wages are not an input in this case.

    I suspect many economists will disagree with that statement as wages are sometimes used as a proxy for many ABS measures, but productivity should be about what is produced from a given number of inputs, not how much you paid for those inputs.

    How much you pay for those inputs is a measure of business viability. If you don’t produce and sell enough to meet your costs, you are going out of business.

    Our measuring systems, particularly around productivity need a complete re-think. They are so ‘proxy’ as to be close to worthless.

  2. David Brown says:

    thank you….

    first time I have seen a well written exposure of penny pinching leading to a sick economy

    Libs/IPA micro minds are driving Australia down…
    Murdoch, Gina and other wealthy cheering and donating from the sidelines

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