Monday, August 17, 2020

Tribal prejudices about wages guarantee a weak recovery

Neither side of politics wants to admit it, but it’s a safe bet that the economy’s recovery from the coronacession will be weak and slow until we get back to strong growth in wages.

Scott Morrison and the Liberals can’t admit it because it flies in the face of their tribe’s view that the unions have too much power, that wage rises are always economically damaging and that public servants are underworked and overpaid.

Meanwhile, Anthony Albanese and Labor can’t admit it because they live in fear of being portrayed as anti-business and because tribal loyalties mean they’ve taken on the union movement’s vested interest in ever-increasing compulsory super contributions.

Last week we learnt that, as measured by the wage price index, after growing by a weak 0.5 per cent or so per quarter for the past six years, wages grew by just 0.2 per cent in the June quarter, the first virus-affected quarter. This took annual growth down to 1.8 per cent.

Worse, wages in the private sector grew by just 0.1 per cent in the quarter. This included actual falls in some wage rates, those negotiated by individual arrangement with people in senior executive and highly paid jobs.

The Reserve Bank sees annual wage growth falling to 1.25 per cent by the end of this year, and staying there until the end of next year. By the end of 2022, it will have recovered only to its present well-below-par rate.

Wage growth is the key to recovery because wages are the greatest single driver of economic activity and employment. But rather than thinking of ways to get wages up, both sides are working on ways to slow them further.

Not that private sector employers will need any help. They always skip pay rises during recessions because, afraid of losing their jobs, workers know they’re in no position to argue.

But, while as individuals, firms benefit from cutting the real value of the wages they pay, when all of them do it at the same time, they all suffer because the nation’s households have less money to spend on the products of the nation’s businesses.

So what can governments do? Well, they can at least avoid doing anything that makes real wage growth any weaker. Federal and state governments can resist the temptation to cut the real wages of their own employees.

This helps sustain household income directly, but also indirectly because employer and employee judgments about what’s “a fair thing” are influenced by what other employers are doing – that is, by wage “norms”.

State Labor governments have been as bad as Coalition governments in using weak growth in private sector wages as an excuse to slow the growth in their own wages. They haven’t, however, been as muddle-headed as the NSW government in freezing its public servants’ wages so as to “stimulate” their economy by using the saving to pay for additional infrastructure spending.

Robbing Peter to pay Paul ain’t stimulus. And the Australia Institute has used the Australian Bureau of Statistics’ “input-output tables” to show that whereas every $1 million spent by consumers (including public servants) generates 1.79 jobs directly, every $1 million spent on construction generates only 0.97 jobs.

But federal Labor is worse. It’s thrown its weight behind the for-profit and industry superannuation funds’ campaign to ensure the rate of compulsory employer super contributions is raised from 9.5 per cent of wages to 12 per cent over the next few years.

Labor and the unions have turned a blind eye to the theoretical and empirical evidence that employers largely recover the cost of super contributions by granting pay rises that are lower than otherwise.

So, at a time when we need workers to be spending as much as they can, and the rate of household saving is way too high, the labour movement wants workers to save an even higher proportion of their wage – even though the more we save the less jobs growth we get.

(The Grattan Institute’s Brendan Coates has demonstrated that the present contribution rate of 9.5 per cent is sufficient to yield workers a comfortable income in retirement, and that the Morrison government’s early release of super to distressed workers will have little effect on this because most of it will be made up by part-pension payments that are higher than otherwise.)

Finally, Morrison and the Liberals are working on plans to further “reform” the wage-fixing system by making changes that the employers want but the unions oppose. This would leave everyone better off, we’re told, by making the system more “flexible”.

At a time when the system is, if anything, too flexible – witness: so much part-time and casual labour, labour-hire, phoney self-employment, the “gig economy”, almost non-existent strikes, and six years of chronically weak wage growth – this could only increase employers’ power to keep wages low.

See what I mean? Wage growth looks set to stay even weaker than it was before the coronacession.