The mys­tery of stag­nant wages.

While the govern­ment trum­pets its jobs fig­ures, it re­fuses to en­gage with wage stag­na­tion. The truth is, no­body knows by what for­mula wages will go up again.

The Saturday Paper - - The Week Contents - Mike Sec­combe

DUR­ING THE PAST COU­PLE OF DECADES, AND MORE PAR­TIC­U­LARLY SINCE THE GFC 10 YEARS AGO, THE BAL­ANCE OF BAR­GAIN­ING POWER SHIFTED RAD­I­CALLY FROM WORK­ERS TO EM­PLOY­ERS AND SHARE­HOLD­ERS.

Bud­get speeches tend to be boast­ful pre­sen­ta­tions, and Scott Mor­ri­son’s ef­fort this week was cer­tainly no ex­cep­tion, as he trum­peted a list of in­di­ca­tors of the govern­ment’s master­ful eco­nomic man­age­ment.

The trea­surer’s No. 1 boast re­lated to job cre­ation.

“The Aus­tralian Bureau of Statis­tics fig­ures show that al­most a mil­lion jobs have been cre­ated since we were first elected, as promised [by Tony Ab­bott],” he said.

On face value that’s a very im­pres­sive fig­ure, a mil­lion jobs in fewer than five years. But put in de­mo­graphic con­text, it is far less so. Since the elec­tion of this govern­ment, Aus­tralia’s pop­u­la­tion has grown by 1.8 mil­lion. At elec­tion time in Septem­ber 2013, the un­em­ploy­ment rate was 5.6 per cent. The un­em­ploy­ment rate to­day? Also 5.6 per cent.

To be fair, it should be noted the par­tic­i­pa­tion rate – the pro­por­tion of peo­ple in the work­force – has grown slightly, from 64.9 per cent to 65.5.

But the over­whelm­ing bulk of that job cre­ation comes down to noth­ing more than pop­u­la­tion growth.

The same ap­plies to the other part of the govern­ment’s “jobs and growth” slo­ga­neer­ing: Aus­tralia’s eco­nomic growth ap­pears world-beat­ing un­til you fac­tor in our world-beat­ing pop­u­la­tion growth. When you look at Aus­tralia’s rate of gross do­mes­tic prod­uct (GDP) growth in per capita terms, it looks very un­der­whelm­ing com­pared with many other de­vel­oped na­tions.

Let’s fo­cus on jobs, though. The govern­ment’s prom­ises about jobs and wage growth are not only the most du­bi­ous part of this year’s bud­get, but of the govern­ment’s whole eco­nomic pitch.

Mor­ri­son keeps telling us that Aus­tralia’s long years of wage stag­na­tion will end soon. And it keeps not hap­pen­ing.

In last year’s bud­get speech he ac­knowl­edged that Aus­tralian work­ers were grow­ing “frus­trated at not get­ting ahead” and at not shar­ing in “[Aus­tralia’s] hard-won growth”.

“It’s been a fair while since most hard­work­ing Aus­tralians have had a de­cent pay rise,” he said. “I be­lieve, though, that we are now mov­ing to­wards the end of this dif­fi­cult pe­riod.”

Mor­ri­son pre­dicted a re­bound in wages growth in the year ahead, spurred by the im­prov­ing world econ­omy and the pas­sage of the first tranche of com­pany tax cuts, for com­pa­nies up to $50 mil­lion in turnover. He was sure then that the ben­e­fits would quickly trickle down to work­ers. But they didn’t.

In this year’s bud­get speech, he re­gret­ted that the gains from a strength­en­ing econ­omy “are yet to reach ev­ery­one”.

“This will take more time,” he said. In his reck­on­ing, it would also take the in­tro­duc­tion of more cor­po­rate tax cuts. “Full im­ple­men­ta­tion of our en­ter­prise tax plan is needed for our busi­nesses to re­main in­ter­na­tion­ally com­pet­i­tive, in­vest, cre­ate more jobs, boost wages and in­crease trade for smaller busi­nesses.”

Although the pas­sage of the next lot of cor­po­rate tax cuts through the par­lia­ment looks un­likely, Mor­ri­son also promised – again – that mean­ing­ful wage in­creases were im­mi­nent.

The bud­get pa­pers fore­cast wage growth to pick up from the cur­rent 2.1 per cent – a rate barely above in­fla­tion – to 2.25 per cent by the June quar­ter this year. They would then keep grow­ing, to 2.75 per cent next year, then 3.25 per cent in June 2020, then 3.5 per cent in both the 2020/21 and 2021/22 fis­cal years.

The fore­casts, says em­i­nent in­de­pen­dent econ­o­mist Saul Es­lake, “run counter to all the in­ter­na­tional ev­i­dence”.

Be­fore we get to that ev­i­dence, though, a bit of back­ground. As Mor­ri­son says, over and over again, wage growth fol­lows “the nor­mal rules of sup­ply and de­mand”.

It’s an en­tirely or­tho­dox view: as the labour mar­ket tight­ens, em­ploy­ers find it harder to at­tract work­ers and have to in­crease wages.

Eco­nom­ics holds that there is an op­ti­mum rate of em­ploy­ment, so-called full em­ploy­ment, although the word “full” doesn’t mean that ev­ery­one has a job. It de­scribes the point at which the rel­a­tive power of em­ploy­ers and em­ploy­ees is roughly equal, where work­ers are nei­ther un­der­em­ployed nor un­der­paid, but where wage de­mands are not so press­ing as to drive un­ac­cept­able in­fla­tion. More technically, this sweet spot is called the non-ac­cel­er­at­ing in­fla­tion rate of un­em­ploy­ment, or NAIRU.

It has gen­er­ally been con­sid­ered that full em­ploy­ment in ad­vanced economies oc­curs with a base un­em­ploy­ment rate of about 5 per cent, give or take a lit­tle. And on that ba­sis, we might ex­pect to be see­ing stronger wage growth al­ready, given that the cur­rent un­em­ploy­ment rate is only 5.6.

But some­thing seems to have fun­da­men­tally changed in the eco­nomic sys­tem. All across the de­vel­oped world, coun­tries are ex­pe­ri­enc­ing lev­els of un­em­ploy­ment far be­low those that used to be con­sid­ered full em­ploy­ment, with­out sig­nif­i­cant wage growth.

Take the United States, for ex­am­ple. Last Fri­day the US De­part­ment of La­bor an­nounced that the April job­less rate was just 3.9 per cent. Not since the late 1960s (1966–70) has it been so low for an ex­tended pe­riod. But wages, mea­sured in hourly earn­ings, had gone up just 2.6 per cent dur­ing the pre­vi­ous year, not much faster than in­fla­tion.

The re­sults were taken by in­vestors as an in­di­ca­tion that in­ter­est rates would stay lower for longer. The US stock mar­ket went higher. The in­vestor class loves low wage growth.

Like­wise in Bri­tain. Un­em­ploy­ment there stands at 4.2 per cent, the low­est since the mid 1970s. But wage growth has been flat, just 2.6 per cent ac­cord­ing to re­cent data. In Ger­many, un­em­ploy­ment is 3.6 per cent and wages growth 0.5. In Ja­pan, un­em­ploy­ment is 2.5 per cent and wage growth 0.8 per cent. In New Zealand, the fig­ures are 4.4 un­em­ploy­ment and barely 1 per cent wage growth.

You get the pic­ture. The old rules that ap­plied to “jobs and growth” changed. Old eco­nom­ics can’t ex­plain it. The so-called Phillips curve, used to graph­i­cally plot the re­la­tion­ship be­tween jobs growth, wages and in­fla­tion, is no longer a curve but a flat line.

Only one thing is clear: dur­ing the past cou­ple of decades, and more par­tic­u­larly since the global fi­nan­cial cri­sis 10 years ago, the bal­ance of bar­gain­ing power shifted rad­i­cally from work­ers to em­ploy­ers and share­hold­ers. NAIRU is no longer about 5 per cent, but some­where much lower.

Around the world a lot of peo­ple far more eco­nom­i­cally qual­i­fied than Scott Mor­ri­son are at a loss to un­der­stand ex­actly what is be­hind it. In March, a pa­per by the Re­serve Bank of Aus­tralia (RBA) sought to ex­plain why nom­i­nal wage growth in ad­vanced economies has been slug­gish over the past cou­ple of years, de­spite tight labour mar­kets.

It sug­gested cycli­cally low pro­duc­tiv­ity might have some­thing to do with it, along with “struc­turally lower em­ployee bar­gain­ing power” due to lower rates of union­i­sa­tion and greater labour mar­ket flex­i­bil­ity.

“At the same time,” it said, “au­to­ma­tion, tech­no­log­i­cal change, in­creas­ing global pro­duc­tion in­te­gra­tion and off­shoring have af­fected some seg­ments of the labour mar­ket”.

This makes work­ers feel less se­cure and un­der more com­pet­i­tive pres­sure.

The pa­per reached no firm con­clu­sion about the cause, sim­ply not­ing that “Wage growth in Canada, the United King­dom, Swe­den, pe­riph­ery euro area, the United States and Aus­tralia” was a great deal lower than their eco­nomic mod­els would sug­gest.

“The un­ex­plained com­po­nent of wage growth (mea­sured by the resid­u­als of the Phillips curve model) has be­come per­sis­tently and clearly neg­a­tive; this pat­tern is ev­i­dent across most of the economies in the sam­ple.”

Bot­tom line, the pa­per was a long­winded way of say­ing, “We don’t know.”

Last Novem­ber, RBA gov­er­nor Philip Lowe noted hourly earn­ings in Aus­tralia were grow­ing at the slow­est rate in more than 50 years, as a re­sult of low wage in­creases and a shift of peo­ple out of rel­a­tively well-paid min­ing jobs into lower-pay­ing jobs.

He also noted a mind­set in Aus­tralia “that the key to higher prof­its is to re­duce costs”. Not in­vest­ment, not in­no­va­tion, but cost cut­ting.

Lowe has im­plored work­ers to seek pay rises, and em­ploy­ers to give them.

But why would they? As the in­ter­na­tional com­par­isons show, even at 5.6 per cent un­em­ploy­ment Aus­tralia re­mains way above the level at which work­ers have any sig­nif­i­cant bar­gain­ing power un­der the new rules of the eco­nomic game.

As to what that level is, Saul Es­lake is as per­plexed as any­one else.

“We know the un­em­ploy­ment rate now needs to be be­low the tra­di­tional full em­ploy­ment rate for longer be­fore wages start to move,” he says. “But no one knows how much be­low or for how long.”

We do know that the US un­em­ploy­ment rate has been be­low the cur­rent Aus­tralian rate since Fe­bru­ary 2015. The Bri­tish rate has been lower since Novem­ber 2014, and Ger­many’s has been lower since the end of 2011.

“And,” says John Hew­son, eco­nom­ics pro­fes­sor and for­mer leader of the Lib­eral Party, “it’s not just the un­em­ploy­ment rate you have to con­sider, but the un­der­em­ploy­ment rate.”

The un­der­em­ploy­ment rate now is 8.4 per cent. Even the gen­er­ally op­ti­mistic spin placed on the state of the econ­omy in the bud­get pa­pers in­cluded the caveat that “un­cer­tainty around as­sess­ments of the de­gree of spare ca­pac­ity in the labour mar­ket and hence wage pres­sures…”

We can’t en­tirely blame the govern­ment for this state of af­fairs. The change is global. But we can ques­tion their re­sponse and their fail­ure to learn from over­seas ex­pe­ri­ence. Both Bri­tain and the US have brought in mas­sive cor­po­rate tax cuts, sub­stan­tially paid for by cuts to govern­ment as­sis­tance to the dis­ad­van­taged.

The the­ory was that the ben­e­fits would trickle down to wages. They didn’t.

“Look at the US,” Hew­son says. “They have more than full em­ploy­ment at 3.9 per cent. They have huge cor­po­rate liq­uid­ity now with the tax cuts. And the cor­po­rate sec­tor has re­sponded with a record level of share buy­backs and div­i­dend pay­outs.”

He doesn’t buy the govern­ment line that sim­i­lar huge cor­po­rate tax cuts are a nec­es­sary pre­con­di­tion for wage growth here.

“Old school eco­nom­ics says this is go­ing to trickle down to in­creased in­vest­ment and more em­ploy­ment and higher wages,” he says. “But the bot­tom line is that old-school eco­nom­ics does not ap­ply in the cur­rent cir­cum­stances.”

Cut­ting cor­po­rate taxes won’t change things. Nor, as Philip Lowe said in his speech last year, will per­sonal tax cuts solve the prob­lem of stag­nant wages.

More omi­nously for Mor­ri­son and the old school, work­ers are com­ing to the same re­al­i­sa­tion. A hun­dred thou­sand peo­ple march­ing in the streets of Mel­bourne this week were tes­ta­ment

• to that.

MIKE SEC­COMBE is The Satur­day Pa­per’s na­tional cor­re­spon­dent.

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