IMF tackles stalled wages growth with unusually radical thinking
The latest world economic outlook by the IMF sees slightly better times ahead for the world economy than it did six months ago and slightly poorer times ahead for Australia. But the IMF has noted the crisis of low wage growth across all advanced economies – and recommends that in an era of highly flexible employment with increasing levels of part-time work, governments need to protect and extend minimum wages and also look at changing unemployment benefits to acknowledge that the era of full-time work being standard is in the past.
As ever, the title of the IMF’s World Economic Outlook gives a good sense of the vibe. While never likely to be accused of clickbait, the titles generally provide a neat summation of the IMF’s view. The two IMF outlooks in 2016 were titled Too slow for too long and Subdued demand, conveying the sense that has infected the world’s economy since the GFC – things are positive, but barely so. By April this year the IMF was giving off small signs of optimism. The title of its outlook was Gaining momentum?, the question mark indicating a less than overwhelming sense of surety that things were getting better.
The latest outlook, Seeking sustainable growth: short-term recovery, long-term challenges certainly steers clear of suggesting boom times ahead, but the IMF is at least gaining some confidence that we are perhaps nearing the end of the post-GFC malaise.
The IMF has, for example, revised up its predictions for world growth in 2018 from 3.6% to 3.7%, with a big upward revision for the Euro area as well.
It also sees China having a better 2018 than it previously thought. While there is no return to the very optimistic projections for the 8.5% growth it made back in 2013, the 6.5% growth for China in 2018 is 0.3percentage points above what it estimated in April.
For Australia, the picture remains very much the same. Since 2014 the IMF has been predicting our economy in 2018 would grow by around 3%, and while there has been a slight revision down to 2.9%, essentially there is little change in the outlook.
But of course the IMF (like most economic institutions) has a knack for getting its predictions wrong.
In April it was predicting that Australia’s economy would grow this year by 3.1%; now it expects that growth to be just 2.2%. That is a pretty sad prediction given the first six months of the year saw our economy grow by 1.2%. It means the IMF expects the economy to slow such that it will grow by a mere 1% in the second half of this year.
The IMF also is slightly less optimistic than it was in April about our unemployment rate. In April it was predicting unemployment by the end of the year would fall to 5.3%, now it has it staying at the current level of 5.6%. It also expected by the end of next year the rate would be down to 5.1%, whereas now it has it at 5.4% before eventually going below 5% in 2020.
That is actually a better outcome than the government is predicting. In the May budget, the best the Treasury foresaw was unemployment falling to 5.25% in 2020-21.
Were our unemployment to fall to below 5% there might be some improvement in what the IMF has recognised is a major problem across all advanced economies – low wages growth.
One chapter of the outlook was devoted to the issue, with the IMF noting that “wage growth in most advanced economies remains markedly lower than it was before the great recession of 2008–09”. This would be no surprise to Australian workers, but perhaps there is at least some comfort in knowing we’re not alone.
The IMF suggests a main cause of the weak wages growth is higher unemployment and underemployment coupled with lower inflation expectations and productivity growth.
It notes that “labour market developments in advanced economies point to a possible disconnect between unemployment and wages”.
This is something that has certainly been the case in Australia. The report noted that while many advanced economies have unemployment rates near where they were before the great recession, “nominal wage growth rates continue to grow at a distinctly slower pace”.
This breakdown between unemployment and wage growth is clearly at play in Australia. Whereas normally wages grow faster as the unemployment rate falls, in the past two years, as the unemployment rate has fallen from 6.2%, wages growth has also fallen.
The IMF notes in most advanced economies the average hours worked has fallen since the GFC, but that this fall is really just part of a long-term pattern, as is the case in Australia.
The IMF comes across a bit flummoxed. It is almost as though it is shocked at the result of 30 years of pushing for lower wages growth, greater “flexibility” and lower union concentration.
It notes that while greater flexibility has led to higher rates of involuntary part-time employment (where hours have been cut rather than the worker sacked) and that this has “helped labour force participation and continued engagement with the workplace”, the IMF says this also “appears to be weighing on wage growth”.
Giving employers more power has led to lower wage growth? Who could have seen that coming?
As a result the IMF reaches for some rather radical (for the usually conservative body) solutions. Other than greater productivity growth (always the IMF’s go-to solution) it recommends governments take a much greater role in industrial relations.
It recommends countries extend the minimum wage if part-time employees are not covered (not an issue here) and “offering prorated paid annual, family, and sick leave to secure parity with full-time workers”.
Such a recommendation certainly sets the recent decision by the Fair Work Commission to cut penalty rates in awards covering the hospitality and retail sectors as a rather backward step. In an era where governments are struggling to work out how to increase wages growth, the biggest recent policy shift in our IR system has been to cut wages.
Even more radically – if rather undefined – the IMF also argues for a major upheaval of the social security system.
It suggests most nations’ unemployment benefits are more geared towards economies that existed after the second world war – where you either worked full-time or you were unemployed. The report suggests “a broader rethinking of the nature of social insurance may be needed”.
The IMF is not yet arguing for a universal basic income, but it clearly sees governments needing to play a more active role to ensure household incomes and standards of living can once again improve.
The Fair Work Commission’s recent decision to cut penalty rates has affected many in the hospitality industry. Photograph: Steven Saphore/Reuters