JOHN KERIN. Wage compression and its wider implications, economic and political.

Apr 1, 2019

All macro-economic variables relate to one another. The economic growth  rate, monetary and fiscal policy, budgetary policy, business profitability, investment, taxation (and the avoidance and evasion of tax), the wage rate, transfers and trade balance all interact and adapt to many factors, some beyond our control. There are always choices to be made at various times on the basis of evidence and analysis, but ideological and philosophical political choices always need critical analysis. A major problem in Australia’s economic management is that short term fixes increasingly deny the chance for reform. 

The Morrison Government denies that there is any problem with either wages or inequality (denial seems to be in vogue with the current Prime Minister). Finance Minister Cormann has recently said downward flexibility in our wage growth is “a deliberate design feature of our economic architecture”. Treasurer Frydenburg thinks that equality of opportunity is the recipe for growth in investment, employment and wages and that other policies only represent “class warfare”.  John Howard has now said (25 March 2019) that inequality is a “myth” due to “the relative prosperity of the middle class”.

While ever the government only thinks that economic growth depends on population, productivity and participation (supply variables) and discounts demand, nothing much will change regarding desirable aspects for better economic management. High levels of immigration have been responsible for much of the alleged success of our economy in recent years. (See Michael Keating 17 and 18 December 2018 and 25 January 2019 in Pearls and Irritations).

There is little sense in regarding the concern many have about our stagnant wage rate in isolation from other factors in economic management nor can we ignore broader economic and social implications and effects. The choices made determine many social and long term factors beyond the immediate such as Australia’s growing level of inequality, less equal opportunity and the intergenerational and downhill nature of relative poverty. The more one segment of a generation has to pass on the more it will benefit the next, and the reverse is just as true.

Today the US is a policy test-bed for us to see the impact of policies leading to obscene levels of inequality and structural poverty. The executive pay of the top 350 US firms is 312 times that of the average US worker; the minimum wage has been fixed for a decade at $7.25 an hour; over 40 million people live on food stamps.

The Reserve Bank of Australia has now caught up with the conclusions of the IMF and OECD that stagnant wages are a matter for concern and that increasing company profits will not necessarily lead to more investment, employment and wages if aggregate demand is weak.  One hundred and twenty economists, lawyers and labour market analysts recently signed a letter to the Australian Financial Review pointing out that since 2015 wages have risen at barely half the pace of growth over the preceding 50 years. It is their belief that increases in wages and demand will lead to more investment. Fifty to sixty per cent of our GDP depends on consumption. Our household debt to GDP ratio was 12o.5% in July 2018, exceeded only by Switzerland. Our household savings to GDP ratio is at a low of 2.5% compared to an average of 9.52% from 1959 to 2018. Household spending has outgrown disposable income since 2015. The worker share of national income is near a 50 year low at 52%. The percentage increase in annual wages since 2013 has been 2.4% compared with the average of 3.6% from 1996 t0 2013. Inflation is under control.

Because the government only looks at supply variables it is certain next week’s budget will have optimistic assumptions for wage growth (when world economic activity is slowing) and that the recent surge in iron ore prices will enable it to give tax cuts and transfer payments as an election lolly, ignoring longer term concerns. Other arguments will be trotted out by government propagandists against the background of their belief that existing tax cuts and cuts to penalty rates will stimulate growth. What is happening to the retail and small business sector now is not due to ALP policies, nor is the potential loss of $700 billion wealth due to our hyped-up housing market. It is only during ALP governments that the National Debt is such a tragedy, not that it is a worry if it doubles under a Coalition Government?

Another argument will be that we have a relatively high minimum wage, but does this mean that those on the minimum wage always get a full week of work?  The structure of the workforce, however,  has changed dramatically in the last few years, much impacted by technological change. More people are working in casual, part-time jobs and we see sham contracting, the rise of labour hire firms, the rise of the gig economy and ‘employment’ of interns and skills-based immigration because of failings in our VET and TAFE sector.

Unions no longer have the numbers nor the ability to contest wage decisions to the extent they once did, due to changes to industrial laws since 1996. Fair Work Australia’s terms of reference seem to have been misinterpreted.

Corporate profits have risen by 40-43% since 2016, five times more than wages at 8% and dividends have risen by 9.5%. National account figures show that profits rose 6.1 times faster than wages per employee. Productivity gains aren’t fully accruing to the workforce. Tax paid by most multinationals is an illusion and 269 of our largest companies pay no tax. The percentage of tax paid is closer to 20% than the official 30% rate.

The latest report on poverty in Australia found that we have three million people living in relative poverty, including 739,000 children and 1.1 million under the age of 24. The criterion of poverty of 50% of the median wage can be debated, but if employed people on low wages can’t manage, how can they? Perhaps this is where most of our inequality lies?

John Kerin was a Minister in the Hawke and Keating Governments.

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