The Saturday Paper
Fact check: Frydenberg’s record employment figures
As Josh Frydenberg outlined the lowest unemployment figures in almost half a century, he failed to note that the increase in jobs had been accompanied by a decrease in real wages.
Josh Frydenberg’s budget speech last week tried to paint a picture of adversity overcome. Despite drought, fire and floods, despite war in Europe and the ravages of Covid-19, he said, the Australian economy had proved resilient.
As evidence of this, the treasurer pointed particularly to jobs.
“Tonight, I can confirm to the house, unemployment is at 4 per cent, the equal lowest in 48 years,” he said. “There are nearly two million more Australians in work today than when we came to government. More women in work than ever before.”
All of this was true and, according to the experts, a huge achievement, even if it was the result of several hundred billion dollars in government expenditure and the closure of Australia’s borders to job-seeking migrants.
What Frydenberg did not mention, however, was the fact that the increase in jobs has been accompanied by a decrease in real wages. He used the word “inflation” only once.
The unmentioned, inconvenient truth is that, according to Treasury, in this financial year inflation will be 4.25 per cent, while wages will have grown by 2.75 per cent. In net terms, workers are 1.5 per cent poorer.
And while Treasury’s forecast for next year has wages growth at 3.25 per cent, barely above inflation of 3 per cent, it’s worth noting that its wages forecasts have been consistently over-optimistic and that the supply chain issues that have driven inflation here and around the world are far from resolved.
The oft-repeated Labor line that “everything is going up except your pay” resonates, as recent polling shows. The latest Westpac–melbourne Institute Index of Consumer Sentiment fell to 96.6 in March, the weakest result since the height of the
Covid-19 crisis. A number less than 100 in the index indicates that pessimists outnumber optimists.
This week’s Resolve Political Monitor showed Labor enjoyed a five-point advantage with voters when it came to addressing costof-living pressures. Essential poll showed an even bigger margin in Labor’s favour: eight points. When Essential asked respondents to nominate the most important economic issue, 61 per cent said it was the cost of living. Another 10 per cent nominated the cost of housing and 8 per cent said wages. Add them all together and that’s almost 80 per cent of respondents concerned that they are not keeping up with inflation. Just 8 per cent were worried about government debt.
Not surprisingly, then, Frydenberg’s speech scarcely mentioned government debt or the budget deficit. He uttered the word “deficit” just once, blandly noting the budget would be in the red by $78 billion, or 3.4 per cent of gross domestic product, in 2022-23. Debt also scored only one mention. “Net debt as a share of the economy will peak at 33.1 per cent at 30 June 2026.”
The words that did get uttered, over and over again, were “cost of living”. He blamed “events abroad” for pushing up prices, rather than flat wages making life less affordable, and promised a raft of temporary measures to ease the strain: a halving of petrol excise, a one-off $420 cost-of-living tax offset for 10 million low and middle-income earners, and a one-off $250 cost-of-living payment for six million Australians on various government benefits, as well as billions in the regional conservative heartland.
How times have changed. In the 2019 budget, Frydenberg boasted the budget was “back in the black”. When Labor spent up big in response to the global financial crisis, conservatives railed against a “debt and deficit disaster”.
Some might see hypocrisy, but they should also see it in Labor’s response, which was to criticise the government for its “cash splash” of election bribes while also waving them through the parliament – thus giving electors licence to take the government’s money and still vote against it.
Clearly, both sides of politics perceive the political need to pacify the electorate.
But two big questions lie beneath: Are people really doing it that tough, and when will wages rise?
No doubt people are complaining about the cost of living, notes Mark Wooden, but they are apt to do so regardless of the statistical realities of the economy.
“We were getting the same response five years ago on cost-of-living pressures,” he says. “Yet all the indicators showed that costof-living pressures were pretty much absent when inflation was only rising 1.5 per cent a year.”
Wooden is a professorial research fellow at the Melbourne Institute of Applied Economic and Social Research at the University of Melbourne. He is also director of the long-running Household, Income and Labour Dynamics in Australia (HILDA) survey project.
He doubts things are really as bad for most households as the surveys suggest – including the consumer confidence survey done by his own institute. He notes that what people say in surveys is quite different from how they behave.
“Economists would say: look to revealed preferences rather than stated preferences,” he says. “So, look at retail sales. That’s a good indication of consumer confidence, not the consumer confidence indexes. And that’s just booming in the past couple of months.
“Pretty much anyone who’s got vague modicum of skills can get a job. We have got inflation rising, but it is nothing like it was in the ’80s or the ’90s. People have short memories, and some people, of course, weren’t even alive.”
Wooden thinks the expressed concern about the cost of living is possibly an indicator of a broader “psychological distress” engendered by the constant crises of the past couple of years.
He also suggests that for some people the Covid-19 crisis actually encouraged higher expectations of government and that those have been disappointed.
“In the Covid period you had that massive, temporary increase in unemployment benefits. On our own data, in the HILDA survey … it looked like a lot of people were very satisfied with the financial arrangements at the lower end. Simply, they weren’t living in poverty. Their incomes were close to doubled for six months or so.”
And then it was taken away, and they went back into poverty.
And it wasn’t just the unemployed who briefly enjoyed greater government generosity during Covid-19. It was parents who benefited from free childcare, stood-down workers whose wages were replaced by Jobkeeper, businesses that were overcompensated by government for lost trade.
Indeed, Saul Eslake, an independent economist and vice-chancellor’s fellow at the University of Tasmania, says a lot of people did very well out of the Covid-19 stimulus measures, with the result that the economy is “by almost any measure, doing very well”.
It wasn’t just the fact that the government’s budget “in an unprecedented way has taken onto itself the costs that normally fall to households and businesses during a recession,” he says. “You’ve also had enormous monetary policy stimulus through not just zero interest rates but because of the Reserve Bank buying heaps of bonds and lending the banks $190 billion at 0.1 per cent, so they can on-lend it to small business.”
He continues, “And on top of that we have, to quote Paul Keating’s famous phrase, once again been kissed on the arse by a rainbow in the form of huge increases in the prices of our major exports.”
Notwithstanding the fact that most of the benefit of higher prices for our resource exports has gone to companies – most of whose shareholders live outside Australia – or to superannuation funds, which reinvest rather than pass the money out to individuals, wealth has been growing even as wages have gone backwards in real terms.
“Households have racked up an additional $250 billion in bank deposits since the onset of Covid. That’s a 25 per cent increase. And, more broadly, personal wealth has increased by $3.7 trillion since December 2019,” Eslake says.
“That has been by no means evenly distributed. People in the bottom two quintiles – 40 per cent of the income distribution – probably have been going backwards.”
And it has likely increased intergenerational inequality, too, which was already growing rapidly. Between 2003 and ’04 and 2017-18, says Eslake, households headed by someone over 65 increased in their share of household wealth by roughly double the rate of increase in their share of the population.
“And that’s largely due to the housing boom, because older people are the only ones whose home-ownership rate hasn’t fallen over the last 30 years. Home ownership is the lowest in 60 years,” he says.
“It’s also partly due to the very generous tax treatment of superannuation, which disproportionately benefits older and richer people.”
The official statistics might say inflation is at 4.25 per cent, but cost-of-living pressures fall far more heavily on some people than on others. If you can work from home, and take only short trips out or drive an electric vehicle, the price of petrol is not much of a concern. If you have solar panels on your roof, the increasing cost of electricity, driven by rising fossil fuel prices, is less of a problem. If you are wealthy, increasing grocery prices will not be as keenly felt.
All of these issues disproportionately affect the poor. As Dr Andrew Leigh, shadow assistant minister for Treasury, points out, the lowest-income 20 per cent of households spend 26 per cent of their money on food and beverages. The richest households spend just 9 per cent. The bottom quintile spends twice as much of its income on clothing, footwear and household furnishings.
In his budget speech, Frydenberg offered short-term analgesia for the pain. He also promised that unemployment would “go even lower, delivering more jobs and higher wages”.
Maybe it will happen, says Professor
Jeff Borland, a labour market specialist in the faculty of business and economics at the University of Melbourne. It depends on “exactly what happens as we open up the borders and … in the medium term, what happens when the fiscal stimulus effects start to unwind”.
“But for the moment, I think they are showing a genuine improvement,” he says.
“We had a decade in the 2010s where we muddled along with the rate of unemployment, basically, about 5.5 per cent. That’s what it was in 2010 and what it was in March 2020.”
But now we have a lower unemployment rate off a higher participation rate. “We’ve seen both unemployment and underemployment coming down,” Borland says.
The pandemic, he says, provided for a “huge experiment of the government sort of throwing all this money at Covid, which had the unintentional effect of demonstrating that we can get the rate of unemployment down well below 5.5 per cent without much evidence of a big breakout in wage inflation”.
“Reducing unemployment from 5.5 to [a projected] 3.5 – that’s huge in terms of the extra productive potential that’s being utilised. It’s huge in terms of the distributional consequences.”
Younger people, whose position in the labour market had declined appreciably in the previous decade and who were initially worst affected by the recession, are particularly benefiting, Borland says.
“Now we’re actually seeing bigger growth in the percentage of young people employed than in other groups.”
But while the jobs growth is happening, the pay growth isn’t.
Part of the reason, says Eslake, is that Australia’s industrial relations system, the Fair Work Act brought in by the Gillard government, has very effectively reduced the bargaining power of workers. Another factor, he thinks, is that some employers have been “holding out for migration to pick up”.
Both he and Borland think wages will increase eventually, given the amount of fiscal stimulus that has been applied and assuming rising interest rates do not whack the economy.
Borland says “there’s inertia in the system” that slows down when those wage rises might happen. About a third of workers’ wages are tied to enterprise bargaining agreements, renegotiated every few years. Another 25 per cent are covered by the Fair Work Commission, “and they only change every year”.
So, even if Frydenberg’s promise of higher wages comes to pass, it won’t happen for a while. Certainly not between now and the election.
“Economists would say: look to revealed preferences rather than stated preferences. So, look at retail sales. That’s a good indication of consumer confidence ... And that’s just booming in the past couple of months.”