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AFR, GENERIC, OFFICE Businessman walking out of a revolving door — money, business man, commuters, employment, wages, jobs, economy, CBD, city, building, property. Monday 24th November 2003S photo illustration Louie Douvisafrphotos苏州夜总会招聘 AFR, SPECIALX 21948 ***afrphotos苏州夜总会招聘*** Photo: Louie DouvisScott Morrison’s budget projections rely entirely on orthodox economic thinking about what drives wages. Unfortunately that orthodox thinking is demonstrably wrong.
The textbooks say that, as unemployment falls, the labour market tightens and wages rise. Supply and demand and all that. But it’s not happening.
The fancier version of that story is that we’re enjoying a surge in national income as our resources export volumes rise, a surge that will result in higher profits that labour will subsequently want a share of. But wanting and getting are two very different things.
Last week’s n Bureau of Statistics wages index showed wages growth falling to 1.9 per cent and lower in the private sector. Real wages shrunk despite the economy overall motoring along reasonably well.
It takes a huge leap of faith – or perhaps blind belief in old textbooks – for Morrison to forecast in the face of present experience that wages growth will double in the next four years. It’s more likely that we’ll run into the problem of inflation rising and wages failing to respond.
And it’s not just an n problem. Much of the developed world is suffering weak wages growth . Over the weekend, Bloomberg offered eight possible reasons why wages aren’t picking up despite the US unemployment rate dropping to 4.4 per cent.
The answer to the conundrum for is likely to be a combination of those factors.
Rising underemployment on top of unemployment is an obvious suspect. The increasing casualisation of the workforce, the rise and rise in part-time rather than full-time jobs, eats away at labour’s ability to demand wage rises.
The collapse of organised labour. Over the past quarter century, trade union membership for the individual’s main job has fallen from 40 per cent to 15. In the private sector, 942,000 workers are trade union members in their main job – 10.4 per cent. There are more private contractors now than private sector unionists.
Globalisation – the pressure to be internationally competitive – weighs on wages even when local unemployment is down.
Low inflation expectations become self-fulfilling – since the global financial crisis, workers have become used to wage increases of about the inflation rate and have accepted low inflation. The Fair Work Commission determining minimum wages tends to stick around the inflation rate.
Corporate culture since the GFC has swung towards chief executives and chief financial officers relying on cost cutting or containment to get their bonuses. In a highly competitive business environment, where there’s often little confidence to invest in the business to grow the bottom line, reducing costs has become an important KPI. The boss just says “no” – and gets paid more for saying it.
At the extreme, there are cases such as Coates Hire looking to cut wages by as much as 40 per cent by terminating an existing pay agreement. And that’s despite Coates doing increasingly well from the infrastructure boom taking off on the east coast.
Yet Treasury is sticking with its textbook fairy tale despite the official family’s wage price index forecasts being consistently wrong, as the accompanying Reserve Bank graph shows.
While Treasury and the RBA sip from the same forecasting cup, it seems our central bank is becoming less assured of the Happy Ever After projections.
The May board minutes released last week sounded much more cautious than Treasury:
“Members noted that, although it seemed unlikely that wage growth would slow much further, wage pressures were expected to rise only gradually as the effects of structural adjustment following the mining investment and terms of trade boom, which had weighed on aggregate wage growth, continued to wane.”
A research paper in the RBA’s March bulletin on low wages growth concluded it was difficult to identify if structural changes were driving the wages outcome, but they need to be monitored.
The paper noted that only about 20 per cent of workers have wages determined by awards, with another 10 to 15 per cent indirectly influenced. Wage growth in industries that have a higher prevalence of individual agreements has declined most significantly over recent years.
Individuals did well when the economy was booming, when employers were willing to compete for them, but with the boom days over, so is the average individual’s bargaining power.
And aside from the falling proportion of organised labour, much of the remaining union movement has mellowed. With a few obvious exceptions, unions such as the shoppies seem more interested in maintaining jobs – and union membership – than pushing for wage rises that could threaten employment.
Disruption is heavy upon the land. The great achievement of the internet isn’t the ability to go online and buy a cheap shirt from China, rather it is the empowerment of customers – they can’t be fooled any more. Everything is effectively up for tender, resulting in competitive pressure being a daily reality. That generally means containing costs.
The irony of retailers and cafes pushing for reduced weekend penalty rates is that such employers want to pay their own staff less, but want all other employers to pay their staff more so they can afford to eat in cafes. It could prove a bitter victory for the business lobby to find that pushing for a “more flexible” labour force ends up meaning fewer customers.
The bigger danger for the budget is the possibility of a double whammy. The lack of much faster wages growth means the government won’t get the income tax boost it’s relying on. On top of that, inflation edging higher through energy and housing costs means real wages shrink more, which would flow onto lower consumption growth – unless we blow out our debt levels even further.
RBA board members this month “noted that the ABS would issue revised expenditure weights for the Consumer Price Index (CPI) in the December quarter 2017 CPI release, which would reflect changes in consumption behaviour over the preceding six years in response to factors including large changes in relative prices”.
In other words, we might find our inflation rate is higher than we thought. If workers can’t win wage increases to at least keep pace with it, the government will have another political fire to put out before the next election.
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