If bulldusting about productivity was productive, we'd all be rich

It seems the longer we wait for a sign that productivity has stopped flatlining, the more and the sillier the nonsense we have to listen to, brought to us by a media that likes to stand around in the playground shouting “Fight! Fight! Fight!″⁣.

The combatants are led by Canberra’s second-biggest industry, the business lobbyists, unceasing in their rent-seeking on behalf of their employer customers back in the real world. Their job is to portray all the problems businesses encounter as caused by the government, which must therefore lift its game and start shelling out.

In your naivety, you may have imagined that if a business isn’t managing to improve its productivity, that would be a sign its managers weren’t doing their job. But, as the lobbyists have succeeded in persuading all of us, such thinking is quite perverse.

Apparently, productivity is something produced on the cabinet-room table, and those lazy pollies haven’t been churning out enough of it. How? By deciding to cut businesses’ taxes. Isn’t that obvious? Bit weak on economics, are you?

Unfortunately, those economists who could contribute some simple sense to the debate stay silent. The Chris Richardsons and Saul Eslakes have bigger fish to fry, apparently.

The latest in the lobbyists’ efforts to blame anyone but business for poor productivity was their professed alarm at the Fair Work Commission’s decision last week to increase award wages, covering the bottom 20 per cent of workers, by 3.5 per cent, a shocking 1.1 percentage points above the annual rise in the consumer price index of 2.4 per cent.

According to one employer group, this was “well beyond what current economic conditions can safely sustain”. According to another, the increase would hit shops, restaurants, cafes, hospitality and accommodation the worst.

Innes Willox, chief executive mouth for the Australian Industry Group and a leading purveyor of productivity incomprehension, claimed that “by giving insufficient attention to the well-established link between real wages and productivity, this decision will further suppress private sector investment and employment generation at a time our economy can least afford it”.

The least understanding of neoclassical economics shows this thinking is the wrong way round. It’s when the cost of labour gets too high that businesses have greater incentive to invest in labour-saving equipment.

At present, we’re told, business investment spending as a proportion of national income is the lowest it’s been in at least 40 years. If so, it’s a sign that labour costs are too low, not too high.

The other reason firms are motivated to invest in expanding their production capacity is if business is booming. But this is where business risks shooting itself in the foot. Whereas keeping the lid on wages may seem profit-increasing for the individual firm, when all of them do it at the same time, it’s profit-reducing.

Why? Because the economy is circular. Because wages are by far the greatest source of household income. So the more successful employers are in holding down their wage costs, the less their customers have to spend on whatever businesses are selling. If economic growth is weak – as it is – the first place to look for a reason is the strength of wages growth.

Fortunately, however, while sensible economists leave the running to the false prophets of the business lobby, my second favourite website, The Conversation, has given a voice to Professor John Buchanan, of the University of Sydney, an expert on the topic who isn’t afraid to speak truth to business bulldust.

“In Australia, it has long been accepted that – all things being equal – wages should move with both prices and productivity,” he says. “Adjusting them for inflation ensures their real value is maintained. Adjusting them for productivity [improvement] means employees share in rising prosperity associated with society becoming more productive over time.”

In recent times, however, all things ain’t been equal. Depending on how it’s measured, the rate of inflation peaked at 7.8 per cent (using the CPI, which excludes mortgage interest rates) or 9.6 per cent (using the living cost index for employed households, which does include them).

So the Fair Work Commission has cut the real wages of people on award wages by about 4.5 per cent – something the lobby groups somehow forgot to mention. That’s what honest dealers these guys are. If there’s a way to fiddle the figures, they’ll find it.

The supposed real increase of 1.1 per cent in award wages is actually just a reduction in their real fall to about 3.4 per cent. So much for the impossible impost that will send many small businesses to the wall.

The commission has always been into swings and roundabouts. Cut real wages now to get inflation down, then, when things are back to normal, start getting real wages back to where they should be. So we can expect more so-called real increases – each of them no doubt dealing death and destruction to the economy.

Speaking of fiddling the figures, the commission points out a little-recognised inaccuracy in the conventional way of measuring real wages. It says that, if you take into account that prices rise continuously but wages rise only once a year, award wage workers’ overall loss of earnings since July 2021 has been 14.4 per cent.

What the lobbyist witch doctors have been doing is concealing the truth that the best explanation for our weak productivity performance is that employers have been seeking to increase their profits by holding down wage costs, rather than by investing in labour-saving technology.

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Think the measurement of inflation's a bit off? You're probably right

By MILLIE MUROI, Economics Writer

If you’ve ever looked at the latest inflation figures and thought to yourself it doesn’t really reflect the ballooning or shrinking prices you’ve been paying, you’re probably right.

Like most measures of our economy’s health, the consumer price index (CPI) – our main inflation gauge – is only a rough estimate of what’s happening to prices. It tracks changes in the costs of a vast range of things but also skips over some key items we spend on.

This week, we learned prices at the end of last year were climbing at the slowest annual rate since March 2021 at 2.4 per cent (a much more reassuring figure than the 7.8 per cent we were seeing two years ago). But if you feel like the prices you’re paying are moving to a different tune, they probably are.

The index, measured by the Australian Bureau of Statistics, basically tracks the change in the price of a typical “basket” of goods and services that we, as households, consume. Think: a big shopping trolley that carries a lot more than what you’d find in a supermarket. Sure, it includes eggs and fruit, but it also includes things like school fees, specialist visits and subscriptions to your favourite streaming platform.

Of course, you probably don’t spend on the exact same things, or buy the exact same amount, as people on the other side of the country – or even your neighbours – which is why the inflation measure isn’t a perfect fit for specific households.

The CPI is based on the average spending habits of everyone (well, at least those living in the capital cities). Then, based on this data, the bureau gives different “weightings” – a measure of an item’s relative importance in the total basket – to different items and categories. Things we spend a lot of our money on – like housing costs and food – get a bigger weighting in the index, meaning any changes in prices in those categories will shift the dial more when it comes to the final inflation figure.

Since the things we tend to spend on change over time, the bureau frequently updates these weightings.

The first ever “basket” in 1948, for example, put the proportion of our spending on food and non-alcoholic beverages at nearly one third, with dairy products alone taking up nearly a quarter of our food budget. Women’s clothing, meanwhile, accounted for about 10 per cent of our total spending. Combined with spending on men’s attire at nearly 5 per cent, our total spending on clothing back then took a bigger bite out of our budget than the 12 per cent we used to spend on housing!

Today, food and non-alcoholic drinks account for 17 per cent of the typical household’s spending, and both dairy products and women’s clothing just 1 per cent each – the latter being largely thanks to the rise of mass-produced and cheap imported garments. It’s perhaps little surprise that the biggest share of our spending is now on housing at more than 20 per cent, while transport, including our spending on cars, burns about 11 per cent (transport spending was measured through fares – such as the price of train tickets – which took up about 6 per cent of the typical household budget in 1948 before cars became widespread).

So, how does the bureau know what we’re spending on?

One way is through the household expenditure survey, which is conducted roughly every five years and gives the bureau an indication of how much we’re spending on different goods and services. It’s the reason why, for many years, the CPI weightings – only changed about every five years. Now, as collecting information has become easier and more digital, the weightings are updated every year and rely on various sources including retail trade and transaction data.

The bureau gets its pricing data by monitoring the prices of thousands of products. It looks for this information through everything from websites, to supermarket and department store data, as well as pricing data it receives from government authorities, energy providers and real estate agents.

Combining the pricing and weighting data gives us the consumer price index which is released in its complete form every three months. Since September 2022, the bureau has also published a monthly CPI reading, although the goods and services measured each month tend to alternate, giving us an incomplete picture of what’s going on.

As we’ve talked about, the CPI isn’t an accurate measure of our cost of living, although we all assume it is.

A better measure is the bureau’s “selected living-cost indexes” which break down changes in the cost of living for different types of households. Working households, for example, saw their annual living costs rise by 4.7 per cent last September quarter, while self-funded retirees only experienced a 2.8 per cent increase.

That’s mostly because different household types tend to splash cash on different things. Self-funded retirees and age pensioners might, for instance, spend slightly more on health, meaning any price changes there may bump their cost of living more than it would for working households.

But by far the biggest reason for the difference between working households and older cohorts is that working households are more likely to have a mortgage they are paying off. This means changes in interest rates – which are included in the selected living cost indexes but not the CPI – have a bigger impact on their overall cost of living.

It’s also one of the biggest shortcomings of the CPI. In the early 1990s, the Reserve Bank started using interest rates to target inflation: a practice that’s now become very familiar to us all. But later that decade, the bank asked the bureau to remove interest rates from the consumer price index. Why? Because the bank didn’t want the instrument it was using to control the rise in prices — interest rates — to be included among the price rises being measured. Your instrument should be separate from your target.

Instead, since 1998, the CPI has measured housing prices through changes in components such as rents, the cost of building new homes, and the cost of maintenance and repairs. But that means for the roughly one third of Australian households with a mortgage, the CPI is not a very good measure of the price pressures they are facing.

While the CPI is a rough estimate of the cost of living pressures we’re facing, if you feel like the pinch you’re feeling is harder or softer than the latest figures suggest, you’re probably right.

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