Scott Morrison's claim that living standards have improved will be met with a hollow laugh
If there is one aim of economic policy it is to improve living standards. There isn’t much point to improving productivity, increasing employment, cutting taxes or anything else if living standards don’t rise. Scott Morrison would have us believe living standards have improved in the past two years, but clearly his belief does not match most people’s experience. And until real wages start growing, he will look massively out of touch should he continue to argue things are getting better.
One of the problems with living standards is deciding how to measure them.
A fairly easy way is to measure real wages. I like to use the private sector wage price index and the RBA’s underlying inflation measure which is less jumpy than CPI.
Using this measure it is pretty clear that real wages have been flat since the end of 2012. And when you consider that nominal wage rises do incur more tax, and can also see you lose government payments, you can make a good case that workers’ purchasing power has declined in the past four years:
You can also use average earnings, which unlike the wages price index measures people moving from lower paid to higher paid jobs.
But even here we see since the end of 2012 real average earnings have been flat. Since that time total full-time average earnings have grown by 10.5%, while underlying inflation has grown by 10%:
And because part-time employment has grown faster in that time it means the overall picture is even worse. Average total earnings have risen just 8.9% since the end of 2012, meaning the real average earnings of all Australians has fallen in that time.
But Scott Morrison’s favoured measure for living standards at the moment is a broader one included in the national accounts and goes by the name of “real net national disposable income per capita”.
And it is easy to see why Morrison would wish to use these figures, because after some years of decline in the past year it has begun to improve.
But the problem is while it may measure national income, and that might be a better indicator of our living standards than GDP per capita, it is very much beholden to changes in the prices of our exports:
The main reason real net national disposable income declined during 2012-15 was that our terms of trade also declined – as we were getting less income as a nation for our exports.
Since the middle of last year however, the prices for our exports have improved markedly and thus so too has our national income.
That was the impetus behind the treasurer boasting on Twitter last week that “Bill Shorten said in QT
living standards fell in past 2 years. FALSE. National Accts show they’re up 3.8%”.
Morrison could have gone further and claimed they had risen 4.8% if he had used the trend, but he instead had picked the seasonally adjusted measure.
Either way, living standards up! Woo hoo!
But I hear you thinking, if national income has improved so much, then why hasn’t my own income? And that is the problem with using national income as basis for living standards.
Unless you happen to have an iron ore mine nestled between the roses in your back yard, you’re most likely not seeing a big upswing in your income when the price of iron ore soars.
National disposable income is mostly made up of wage and salaries and company profits. And yet while income going to employees accounts for around 48% of gross national income, it has only accounted for 22% of the growth since September 2015.
During the two years in which the treasurer would have us believe living standards have improved, the big driver of national income growth has been profits.
But when normal people talk living standards, they don’t talk some amorphous “national income” – they mean households, not BHP or Rio Tinto.
Unfortunately while we can find out how households are doing, unlike the real net national disposable income per capita measure, working out real household disposable income per capita takes a bit more work because the ABS doesn’t give us a nice final figure to use.
The national accounts does give us the average compensation per employee, but only in current dollars, so as with average earnings we need to account for inflation.
In June this year the average compensation per employee was $18,924, and as with average earnings that figure has fallen in real terms over the past few years:
Since September 2015, while the treasurer would say living standards have improved 3.8%, the average compensation per employee has grown just 0.7%, and inflation has increased 2.5%.
But again, this is not strictly household income.
The national accounts do give us the amount of household disposable income, and economist Roger Wilkins, who produces the annual Hilda survey at the Melbourne Institute, argues that household income is a better measure to track living standards than is national income.
Again the ABS only gives us the total current dollar amount, so we need to first convert it into a per capita amount and then account for inflation.
And unsurprisingly as with wages, average earnings and average employee compensation, the past four to five years has seen a definite end to the growth of household living standards:
Not surprisingly, given the past six months has seen the compensation of employees grow by less than inflation, real household disposable income per capita has dropped sharply.
But this is no short term problem. In the past three years, annual growth of household living standards has fallen by 0.1% on average – the worst result since the early 1990s recession:
To turn this around we don’t need profits to soar like they have in the past year, we need real wages to start growing.
But while the latest employment figures do suggest jobs are growing solidly – including full-time work – the figures also showed the continued disconnect between unemployment and underemployment:
Since November 2014 the unemployment rate has fallen 0.7% points, but the underemployment rate in that time has risen 0.3% points.
The treasurer hopes that renewed profit growth will flow through to wages, but as the RBA has noted, while underemployment remains at such levels workers will often feel they have to make a choice between more hours and higher wages – and more hours wins out.
Until that situation changes, any attempts by the treasurer or other members of the government to suggest living standards are improving is going to be met with a very hollow laugh and much rolling of the eyes.