Low growth ideal
Townsville WAGES growth has run at just under 2 per cent over the last 12 months. Indeed, it’s been running broadly around that rate – somewhere in the range 0.4 to 0.6 per cent every quarter – for the last three years. Not just good, but great. To borrow a quote from a former treasurer, this is the – extended – wages moderation we had to have. It’s not only keeping more people in jobs, it’s adjusting all of us to our 2017 reality.
Now, this low wages growth is supposed to be bad news for wage earners, because wages aren’t growing as fast as inflation or “at best” only as fast. It’s supposed to be bad news for the budget, because the Federal Government is banking on faster wages growth boosting tax revenues and so helping cut the deficit.
And most – weirdly – of all, it’s supposed to be bad news for inflation, because that’s running below the Reserve Bank’s 2- 3 per cent inflation range ( with the 2.5 per cent midpoint generally interpreted as the RBA’s “target”).
Well, I say bollocks to all three. Not only is a 2 per cent or so annual wages growth perfectly appropriate, even more fundamentally it’s absolutely necessary. Indeed, even a lower growth rate would be just as great or indeed even better.
In stark and stunning contrast higher wages growth, even moderately higher growth like, say, 3- 4 per cent, would be the disaster.
And you’d think that most people would sort of understand that wages growing even faster, even at, say, “just” 5- 7 per cent a year, would be a “t i p p i n g - Aust r a l i a - o v e r - t h e - c l i f f ” style Triple- A disaster.
At its most basic, the low wages growth around 2 per cent a year is the ultimate “self- protection” device. It protects the wage- earner against “big government” and losing their job.
The only way faster wages growth is “good for the budget” is through bracket creep – taxpayers going into high tax brackets and so paying both higher marginal and average tax rates.
In the “bad old days” when wages were growing at 8- 10 per cent a year, we had galloping bracket creep – allowing politicians to then bribe us by “giving back” some of it via phony “tax cuts”. We also had galloping inflation which wiped away the benefit of those higher wages anyway.
Even with low wages growth around 2- 3 per cent, over a few years it adds up to billions of dollars in bracket creep – which is every bit a tax increase as an upfront out- in- theopen hike but done behind your back.
Over the next four years the annual personal tax take is going to leap by an astonishing $ 60 billion. A big slice of that is bracket creep and there is no way – no way – we are going to see even a phony tax cut this side of the 12th of Never. Or at least, not anything meaningful.
As a general economic reality toofast wages growth has consistently priced Aussie workers out of jobs and closed down businesses by the tens of thousands.
Broadly, in the past, the only sustainable wages growth was growth “paid for” by equivalent increases in productivity. So 3 per cent parallel increases in both wages and productivity were OK.
But not any more. The combination of low- wage China and the digital tech shift has made unsustainable not just modest annual wage increases but even much of our absolute wages level.
Arguably, brutally, we need a significant shift down in our national real wage level, similar to but not as brutal as that happening in countries like Greece and Spain.
There seems to me to be two ways we can do this – with some sort of traumatic national economic shift, like we had in 1990, with the jobless rate maybe doubling; or an extended period of gentle real wage decline, and we might even get away with merely keeping the national real wage unchanged.
There’s a very simple sobering equation for most workers: do you want 100 per cent of your current wage or 0 per cent of a higher wage?
Fundamentally, the supposed “bad news” low wage growth is actually very good news – it’s preserving jobs and fighting back against bracket creep.
The RBA should also think very carefully about trying to get both wages and inflation higher.
First, the 2- 3 per cent inflation range is NOT symmetrical – 1 per cent inflation is not the danger that 4 per cent inflation is.
Secondly, we are now living in 2017, in a very different world to that of 1995 when the target was adopted.
Not that it could ( even just attempt to) do anything much anyway.