IMF tack­les stalled wages growth with un­usu­ally rad­i­cal think­ing

The Guardian Australia - - Opinion - Greg Jeri­cho

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

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