Want greater productivity? Set wages to rise by 3.5 pc every year

Stand by for yet more talk about productivity. With the election over and Labor more comfortably ensconced on the Treasury benches, Treasurer Jim Chalmers has pronounced that top priority can turn from fixing the cost of living to fixing our poor productivity performance.

We’ll get the first of the Productivity Commission’s reports today on things we can do to improve our ... productivity. Well, let’s hope something comes of it. I’ll believe it when I see it.

Forgive my scepticism, but the great and good have been sermonising on the need for productivity improvement for well over a decade and, so far, the rate of improvement has gone down, not up.

A few years back, the Australia Institute reminded us that just about every economic change the Abbott-Turnbull-Morrison government made came with an assurance it would lead to greater productivity. It didn’t.

(But usefully, the think tank defined productivity as the amount of output of goods and services that can be extracted from each unit of input of labour or physical capital.)

So, at the opening of open season on claims about productivity, let’s start by spelling out a few clarifying facts. First, over the past decade or so, productivity improvement has slowed throughout the developed world. Thus, if we manage to turn ours around, we’ll have achieved something none of the other rich countries have managed.

Second, almost everything we hear implies that if productivity isn’t improving, it must be the government’s fault. So productivity must be something supplied by the government and, if the supply is inadequate, the government must produce more.

Nonsense. Productivity is determined by how efficiently every workplace is organised. Since the great majority of workplaces are privately owned, if the economy’s productivity isn’t improving from year to year, it’s primarily because the nation’s bosses aren’t bothering to improve it.

Remember this next time you see the (Big) Business Council issuing yet another report urging the government to do something to improve productivity. What businesspeople say about productivity is usually thinly disguised rent-seeking.

“You want higher productivity? Simple – give me a tax cut. You want to increase business investment in capital equipment? Simple – introduce a new investment incentive. And remember, if only you’d give us greater freedom in the way we may treat our workers, the economy would be much better.”

Why do even economists go along with the idea that poor productivity must be the government’s fault? Because of a bias built into the way economists are taught to think about the economy. Their “neoclassical model” assumes that all consumers and all businesspeople react rationally to the incentives (prices) they face.

So if the private sector isn’t working well, the only possible explanation is that the government has given them the wrong incentives and should fix them.

Third, businesspeople, politicians and even economists often imply that any improvement in the productivity of labour (output per hour worked) is automatically passed on to workers as higher real wages by the economy’s “invisible hand”.

Don’t believe it. The Productivity Commission seems to support this by finding that, over the long term, improvement in labour productivity and the rise in real wages are pretty much equal.

Trouble is, as they keep telling you at uni, “correlation doesn’t imply causation”. As Nobel Prize-winning economist Daron Acemoglu argues in his book Power and Progress, workers get their share of the benefits of technological advance only if governments make sure they do.

Fourth, economics 101 teaches that the main way firms increase the productivity of their workers is by giving them more and better machines to work with. This is called “capital deepening”, in contrast to the “capital widening” that must be done just to ensure the amount of machinery per worker doesn’t fall as high immigration increases the workforce.

It’s remarkable how few sermonising economists think to make the obvious point that the weak rate of business investment in plant and equipment over the past decade or more makes the absence of improvement in the productivity of labour utterly unsurprising.

Fifth, remember Sims’ Law. As Rod Sims, former boss of the competition commission, often reminded us, improving productivity is just one of the ways businesses may seek to increase their profits.

It seems clear that improving productivity has not been a popular way for the Business Council’s members to improve profits in recent times. My guess is that they’ve been more inclined to do it by using loopholes in our industrial relations law to keep the cost of labour low: casualisation, use of labour hire companies and non-compete clauses in employment contracts, for instance.

Sixth, few economists make the obvious neoclassical point that the less the rise in the real cost of labour, the less the incentive for businesses to invest in labour-saving equipment.

So here’s my proposal for encouraging greater labour productivity. Rather than continuing to tell workers their real wages can’t rise until we get some more productivity, we should try reversing the process.

We should make the cost of labour grow in real terms – which would do wonders for consumer spending and economic growth – and see if this encourages firms to step up their investment in labour-saving technology, thereby improving productivity of workers.

Federal and state governments should seek to establish a wage “norm” whereby everyone’s wages rose by 3.5 per cent a year – come rain or shine. That would be 2.5 percentage points for inflation, plus 1 percentage point for productivity improvement yet to be induced. Think of how much less time that workers and bosses would spend arguing about pay rises.

Governments have no legal power to dictate the size of wage rises. But they could start to inculcate such a norm by increasing their own employees’ wages by that percentage.

The feds could urge the Fair Work Commission to raise all award wage minimums by that proportion at its annual review. If wages of the bottom quarter of workers kept rising by that percentage, it would become very hard for employers to increase higher wage rates by less.

A frightening idea to some, maybe, but one that might really get our productivity improving.

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Question for voters: Which party do I want deciding wages policy?

The craziest thing about this election is that we’re into the last week of the campaign without anyone much bothering to mention the word “wages”. Really? We’re too obsessed by the cost-of-living crisis to have any interest is what has happened, and will happen, to our wages?

Is it possible our voters could be so detached from reality that they don’t see the link between prices and wages? It reminds me of the person who voted for Trump because “prices went up, and they’ve never come back down”.

That’s right, sir, the general level of consumer prices goes up and rarely falls back. That’s why it’s nice to see your wage rising in line with the rise in prices, or even a bit faster than prices. If that’s what happens, you don’t have a lot to complain about.

Is it possible some people think the government can do something about rising prices but has nothing to do with wages?

Actually, the proportion of workers who are members of a union has fallen so far – to 13 per cent – that many workers may feel they have no say in what happens to their wage, and neither does the government. The boss increases your pay occasionally if she feels like it.

The fact is, the cost of living is always high on ordinary people’s list of complaints. But it became a particular concern in 2022 because of the huge surge in prices caused by the pandemic. The annual rate of increase in prices got to about 8 per cent, but is now back down to the 2 to 3 per cent range we’ve become used to.

Trouble is, wages didn’t rise as much as prices did and, to make matters worse, in its efforts to get the inflation rate down, the Reserve Bank caused interest rates on home loans to rise by more than 4 percentage points. As well, “bracket creep” took an extra bite out of workers’ after-tax pay.

That’s what explains the voters’ obsession with the cost of living. But the surge in prices was set in train before the Albanese government won the last election in May 2022. So the real questions are: what has this government done about it, and would a change of government improve the prospects for the cost of living?

We can learn a lot from a new research paper by one of the nation’s top labour-market economists, Professor David Peetz, of Griffith University and the Australia Institute’s Centre for Future Work.

Peetz finds that, despite a fall in “real” wages (that is, after allowing for price rises) during the COVID pandemic and the subsequent surge in prices, by December 2024, real wages had recovered to be equal to what they were at the end of 2011.

Two things to note. First, this is wages before taking account of income tax. Real after-tax wages would not have recovered to their level 13 years earlier, because of the bracket creep made greater by the price surge.

Second, over those 13 years, the productivity of labour improved by 15 per cent. So none of the benefit of that improvement was shared with workers – contrary to the assurances of businesspeople, politicians and economists that, by some magic process, productivity automatically increases real wages.

Sorry, there’s nothing automatic about it. If workers don’t have the bargaining power to insist on their fair share of the spoils, employers don’t pass it on.

What labour-market economists understand, but most economists (including Reserve Bank boffins) keep forgetting, is that wage rates are determined not simply by the balance of supply and demand for labour, but also by the employees’ bargaining power relative to the employers’ bargaining power.

Peetz’s examination of 16 factors that influence or indicate power in the jobs market shows that “almost all economic and labour market trends in the past half century have reduced workers’ power”.

To be precise, he finds that 14 of the 16 factors indicate reduced workers’ bargaining power.

Here’s a list of the 14 – reduced union membership, a reduced proportion of workers whose wages are bargained collectively by unions, fewer days lost through strikes, the advent of the gig economy, businesses’ increased use of labour-hire companies, increased casual employment, fewer workers changing jobs, increased outsourcing of work, industries dominated by fewer firms, more issuing of temporary visas to foreign workers, use of non-compete clauses in employment contracts, increased franchising of businesses, increased importance of share-market capital, and increased competition from low-wage imports.

The two factors indicating increased workers’ power are the gradual decline in the gender pay gap and the fall in the rate of unemployment since 2010, although it’s been creeping up since 2023.

Peetz sees the influence of this overall decline in workers’ bargaining power in figures for the average annualised wage increases under new enterprise agreements. They gradually declined from about 3.5 per cent in 2014 to 2.5 per cent by 2022.

But in the two years since then, the average reached a peak of 4.8 per cent, and was higher in every quarter than it was in any quarter between December 2014 and December 2022.

Why the improvement? Peetz argues it’s because of the change in government industrial relations policy since the election of the Albanese government in mid-2022.

Whether voters know it or not, the federal government does influence the size of wage rises via its regulation of the wage-fixing rules. It can shift the balance of bargaining power between employees and employers. Under the Howard and subsequent Coalition governments it was shifted in favour of employers; under the Albanese Labor government it’s been shifted back in favour of employees and their unions.

And whether voters know it or not, the many hundreds of minimum wage rates set out in industrial awards – covering about the bottom quarter of workers – are increased on July 1 every year by an amount determined by the Fair Work Commission.

The federal government can influence these decisions by urging the commission to be generous or stingy. I’ll leave it to you to guess which side of politics likes to see bigger increases, and which prefers smaller.

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How to avoid being conned by business lobby groups

The obvious question arising from big business’s onslaught against Anthony Albanese and his government is: do Australia’s voters know which sides their bread is buttered on? Sorry, boss, I think they usually do.

Last week the (Big) Business Council let fly against Albanese & Co. with both barrels. According to its chief executive, rather than feeling confident in our growing national prosperity, many of the big-business chief executives who make up the council’s membership “feel we are losing our way”.

“Instead of taking big steps on the things that matter, we are taking incremental – but noticeable – steps backwards. We have let the balance shift too far away from encouraging Australians to grow, hire, innovate and be more competitive on the world stage,” he said.

What were the big steps Albanese was failing to take? Reducing red tape, making workplace laws more flexible, making planning systems simpler and the tax system more efficient.

But “abolishing multi-employer bargaining must be seen as a priority,” he said.

This fits with the equally vehement criticism from the Mining Council the previous week, which claimed Albanese’s “reckless” industrial relations laws were already bringing conflict “to every workplace in every industry”.

Ah. So that’s what’s biting big business. But the criticism doesn’t stop there. As the business press revealed, even former trade union leader Bill Kelty – who was virtually a member of the Hawke-Keating government’s cabinet – was highly critical.

The Albanese government “seems to have lost its way” and was “mired in mediocrity”, Kelty is reported to have said to a private business gathering. “We need a Labor Party agenda in which the big issues are confronted.”

What the business press didn’t seem to know is that Kelty’s “big issues” are hardly likely to have much in common with big business’s big issues. And I very much doubt that Albanese’s industrial relations changes would have been among them.

There are plenty of good reasons for being disappointed with this government’s performance. Also last week, former Labor heavy Gareth Evans has accused the Albanese government of political timidity, condemning its instinct to “move into cautious, defensive, wedge-avoiding mode”.

Evans said in a speech: “One can’t avoid the impression that more and more people are asking: what exactly is this Labor government for?”

Just so. Now that’s a criticism many of us could share, without bearing the government any ill-will and, unlike the business lobby groups, without our disappointment concealing some purely self-interested barrow we’re pushing.

I think it’s past time voters were told more about the major role the many lobby groups play in federal politics. It’s as though lobbying has become Canberra’s second-biggest industry.

The business, employer and industry lobby groups engage in three main activities. First, they lobby the government, top bureaucrats and key senators in private, without any of us noticing. They press for policy changes that would make it easier for their businesses to increase their profits, and press against policy changes that would make it harder for their businesses to increase profits.

After just about every proposal to change a government policy, Treasury or some other department opens a “consultation”, inviting interested parties to say (in private) what they think about the merits and practicality of the proposed changes.

This is when the Canberra-based lobby groups, and private firms of lobbyists (many of them former politicians or ministerial staffers from the party that happens to be in power) swing into action. Responding to these offers of private consultation with the bureaucracy is the main way they earn their living.

Their objective is always to persuade the bureaucrats to persuade the government to tone down the change, making it less restrictive and costly to the businesses they’re representing. Often their argument will be that it’s a nice idea but, unfortunately, hugely impractical. Would cost them millions to comply.

A second role of the lobby groups is to respond publicly to changes their clients don’t like with exaggerated claims about the death and destruction the changes will cause. Just about any increase in the minimum wage will lead to thousands of Australians losing their jobs, we’re told. The latest changes to industrial relations rules will “bring conflict to every workplace in every industry”.

They exaggerate to ensure their press releases are picked up by the media. Their purpose is partly to put pressure on the government (or the Fair Work Commission), but mainly to use the media to send a signal back to their fee-paying member businesses around the country: “Don’t worry, you’re getting good value for having us here in Canberra fighting tirelessly to protect your interests against the wicked government.”

The lobby groups’ third role is the one we saw last week. Once all your private lobbying has failed to deter the government from doing something your clients really hate, take the fight public.

You try to pressure the government via the voters, by cooking up an argument that the people who’ll suffer most from the changes you don’t like aren’t the shareholders and bosses of the businesses you represent, but the country’s ordinary workers and consumers.

“We’ll be forced to pass all the new tax on to our customers. So we’ll be right, but we’re really worried about what the government’s doing to our poor customers.” (In which case, why are you fighting the tax so hard?)

As for all the industrial relations changes designed to reduce the insecurity of so many workers and to give workers in smaller businesses the ability to gain some bargaining power by uniting with workers in other businesses, this won’t improve workers’ job security, pay or conditions, but will stifle investment and productivity, make Australian businesses less competitive against the sweat shops of Asia, and cause many people to be unemployed, we’re told.

Some of these arguments contain a grain of truth, but they’re attempts to use concocted, pseudo-economic arguments to con ordinary voters into believing their interests coincide with the interests of big business, and so get them to pressure the government to stop doing things that business objects to.

A big part of this con involves the use of code words that sound more innocuous than they are. “Flexible” means flexibility for the boss, but inflexibility for the worker. “Reform” means a change that benefits business at someone else’s expense. “Populism” means a change that benefits many ordinary people at business’s expense.

“Red tape” should mean excessive form-filling that serves no useful purpose. In the mouths of big-business people, however, it means laws and regulations that limit their freedom to build new mines and other projects in places that would do great damage to the natural environment.

The Albanese government’s timidity in all but industrial relations is disappointing, but I doubt it’s so hopeless it fails to ensure voters know that what big business wants for itself is contrary to their interests.

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Reach into your pocket, rise of the care economy will come at a cost

From even before the days early last century when people began leaving the farm to work in city factories, the industry structure of our economy has always been changing. In the ’80s, we saw the decline of manufacturing and the rise and rise of the service industries.

We’re probably kidding ourselves, but it seems the pace at which the economy is changing is faster than ever before. What’s certain is that change is occurring in several fields.

As explained in a part of this month’s budget papers I call Treasury’s sermon, it’s happening on at least three fronts. What gets the most attention is our transition from fossil fuels to renewable energy. Then there’s all the change coming from the digital revolution, which is working its way through many industries, with the use of artificial intelligence expected to bring much more change.

But the industry trend that’s doing the most to change how we live our lives is the rise of the “care economy”. On the surface we see childcare, disability care and aged care, but looking deeper we see nurses, allied health professionals, social workers and welfare workers. There are those who work directly with people receiving care, and an army of support workers in clinics, kitchens, laundries and cleaning stations.

By Treasury’s reckoning, the proportion of our workforce employed in the care economy has gone from 2 per cent in the ’60s to 10 per cent today. About 80 per cent of these workers are women, and more than 16 per cent of all working women work in the care economy.

Treasury offers three main reasons for this rise. Most obvious is the ageing of the population, which is greatly increasing the demand for healthcare and aged care.

Less obvious, but more significant, is what Treasury calls “a transition from informal to formal care”. In the old days, women stayed at home to look after young kids, aged parents and anyone with a disability.

But once girls became better educated, more of them wanted to put their education to work in paid employment. So young children went to childcare, oldies went off to a home and, particularly since the advent of the National Disability Insurance Scheme a decade ago, people with disabilities got more professional care.

One of the simple truths of economics is that economies are circular. On the one hand, more women wanted to go out to paid employment. On the other, this created more paid jobs for women in childcare, aged care and disability care.

As medical science advanced, there were more jobs for women in hospitals and clinics, in the allied professions as well as medicine and nursing – which now requires a degree.

Our greater understanding of the way brains develop has prompted us to begin schooling one or two years earlier, and turn childcare into “early childhood education and care”. Play-based learning became a thing. And more childcare workers needed teacher training.

Treasury’s final explanation for the inexorable rise of the care economy is “increased citizen expectations of government”. Just so. Our growing affluence has involved increased demand for services best paid for via the public purse.

All this has a lot further to go. A former government agency expected the demand for care economy workers to double over the next 25 years or so. Fine – but that says we’ll all be paying a lot more tax to cover it.

And there are other reasons the cost of care will be increasing. One is the weird notion that women should be paid as much as men. Another is that we can’t go on exploiting the motherly instincts of women by paying those in caring jobs less than those in uncaring jobs (so to speak).

One reason we can’t go on underpaying care economy workers is that they ain’t taking it any more. There are shortages of workers, and those who do sign up often don’t stay long once they see how tough the work is.

This budget includes the cost of a special, 15 per cent pay rise for aged care workers, awarded by the Fair Work Commission because their work had been undervalued. Nothing to do with the cost of living – that’s on top. Don’t think there won’t be more work-value cases elsewhere in the care economy.

Then there’s the fate of the theory that getting the care delivered by private businesses would be more efficient and so save money. Wrong. They made their profits by cutting quality.

As for the runaway cost of the NDIS, I think it’s more a matter of providers seeing the government as an easy mark. The government’s hoping to limit the cost growth to a mere 8 per cent a year – but we’ll see about that.

In recent times, much of the nationwide growth in jobs has come from the care economy. Which should be a comfort to those wondering where the jobs will come from in future. I don’t see our kids and oldies being left to the care of robots any time soon.

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Both sides exaggerate significance of wage bargaining changes

Do you realise, in just the six months it’s been in office, the Albanese government has passed 61 bills, covering most of what it promised to do at the May election?

Just last week it passed the National Anti-Corruption Commission Bill and the controversial Secure Jobs, Better Pay bill. According to Anthony Albanese, the latter involved “the biggest workplace reforms since the 1970s” and its passing made last Friday “a huge day for working Australians”.

Sorry, this government’s degree of effort and expedition far exceeds anything achieved by its predecessor and some of its measures are truly memorable, but its industrial relations changes are nothing like that monumental.

For one thing, Albanese has yet to act on his promises to regulate the gig economy, act decisively to reduce wage theft and reduce the use of casuals and labour-hire companies.

But it’s not just Albanese who’s been laying it on too thick. Indeed, the prize for the biggest storm-in-a-teacup of the year must surely go to the Secure Jobs, Better Pay bill. Its passing was certainly “controversial” – the enormous fuss made by the various employer groups made sure of that – but the degree of controversy generated is an unreliable guide to the likely threat – or promise – from the changes made.

Two fearless predictions. First, the changes won’t be nearly as bad as the lobbyists’ scaremongering claimed. But equally, they won’t have nearly as much effect on the jobs and pay of “working Australians” as the government wants us to believe.

The employer groups’ repeated claims that the government’s efforts to increase the scope for “multi-employer bargaining” would lead to widespread strikes and job losses seems intended to bamboozle those not old enough to remember industrial relations when they really were red in tooth and claw.

Strike action peaked in the 1970s, when the number of strikes averaged 2370 a year, with total days of work lost averaging 3.1 million a year, and days lost per 1000 workers averaging 540. As in all the rich countries, strike action has declined markedly since then, with the 2010s seeing only 200 strikes per year, costing 145,000 days lost, or 14 days per 1000 workers.

The notion that Albanese’s modest changes will return us to anything remotely approaching the 1970s is risible.

In those days, when inflation was far higher than it is now, our long-gone system of compulsory arbitration had the perverse effect of encouraging many quite short strikes. These days, old IR hands know that if a strike lasts more than a day or two it’s a sign the union has lost. It will then take years for whatever small pay rise the workers end up getting to make up for the many days’ pay they lost.

Ask yourself this: how are widespread strikes supposed to lead directly to widespread job losses? They don’t. They lead to some workers losing their jobs only because the majority who don’t lose their jobs are getting wage rises so big that employers genuinely can’t afford them. It’s not a reasoned argument, it’s an attempt to frighten the unthinking.

What employers really fear is a move from bargaining at the level of the individual business or enterprise to bargaining at an industry-wide level, which would make it easier for the unions to achieve pay rises in businesses with few union members.

Although industry-wide bargaining remains outlawed by the Fair Work Act, the employer groups have chosen to pretend that the government’s cautious extension of access to multi-enterprise bargaining is pretty much the same thing.

Nonsense. As Adelaide University’s Professor Andrew Stewart explains, the new provision for “single- (or common-) interest” multi-employer bargaining is hedged about with limitations and protections. Unions will not be able to rope in small businesses employing fewer than 20 workers. Larger employers can only be included without their consent if a majority of their workers wants to bargain.

Access to this form of bargaining must be approved by the Fair Work Commission, which will permit employers to participate only if they are sufficiently “comparable” to the other employers. An employer with an existing single-enterprise agreement won’t be able to switch to a multi-employer agreement.

But those employers included in such bargaining will be required to bargain in “good faith” – be genuinely committed to reaching an agreement, and unions will be permitted to strike – provided this is approved by a secret ballot of employees.

A significant change is that, when either single- or multi-enterprise bargaining becomes intractable, the commission will resolve the dispute by arbitration.

The other new provision for “supported bargaining” of multi-employer agreements is aimed at helping low-paid workers in strongly female industries such as childcare and aged care. This is likely to produce some significant pay rises. Why? Because the “support” will come from the third party that will end up covering the cost of the pay rise – the federal government.

Apart from that, the low union membership in most of the relevant enterprises says there’ll be few strikes and few big pay rises.

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Business volunteers its staff to take one for the shareholders' team

An increase in wages sufficient to prevent a further fall in real wages would do little harm to the economy and much good to businesses hoping their sales will keep going up rather than start going down.

It’s hard enough to figure out what’s going on in the economy – and where it’s headed – without media people who should know better misrepresenting what Reserve Bank governor Dr Philip Lowe said last week about wages and inflation.

One outlet turned it into a good guys versus bad guys morality tale, where Lowe rebuked the evil, inflation-mongering unions planning to impose 5 or 7 per cent wage rises on the nation’s hapless businesses by instituting a “3.5 per cent cap” on the would-be wreckers, with even the new Labor government “bowing” to Lowe’s order that real wages be cut, and the ACTU “conceding” that 5 per cent wage claims would not go forward.

ACTU boss Sally McManus was on the money in dismissing this version of events as coming from “Boomer fantasy land”. What she meant was that this conception of what’s happening today must have come from the mind of someone whose view of how wage-fixing works was formed in the 1970s and ’80s, and who hadn’t noticed one or two minor changes in the following 30 years.

No one younger than a Baby Boomer could possibly delude themselves that workers could simply demand some huge pay rise and keep striking – or merely threatening to strike – until their employer caved in and granted it.

Or believe that, as really was the case in the 1970s and 1980s, the quarterly or half-yearly “national wage case” awarded almost every worker in the country a wage rise indexed to the consumer price index. Paul Keating abolished this “centralised wage-fixing system” in the early ’90s and replaced it with collective bargaining at the enterprise level.

John Howard’s changes, culminating in the Work Choices changes in 2005, took this a lot further, outlawing compulsory unionism, tightly constraining the unions’ ability to strike, allowing employers to lock out their employees, removing union officials’ right to enter the workplace and check that employers were complying with award provisions (now does the surge in “accidental” wage theft surprise you?) and sought to diminish employees’ bargaining power by encouraging individual contracts rather than collective bargaining.

Julia Gillard’s Fair Work changes in 2009 reversed some of the more anti-union elements of Work Choices but, as part of modern Labor’s eternal desire to avoid getting off-side with big business, let too many of them stand.

As both business and the unions agree, enterprise bargaining is falling into disuse. On paper, about a third of the nation’s employees are subject to enterprise agreements. But McManus claims that, in practice, it’s down to about 15 per cent.

All these changes in the “institution arrangements” for wage-fixing are before you take account of the way organised labour’s bargaining power has been diminished by globalisation and technological change making it so much easier to move work – particularly in manufacturing, but increasingly in services – to countries where labour is cheaper.

In the ’80s, about half of all workers were union members. Today, it’s down to 14 per cent, with many of those concentrated in public sector jobs such as nursing, teaching and coppering.

All this is why fears that we risk returning to the “stagflation” of the 1970s are indeed out of fantasy land. Only a Boomer who hasn’t been paying attention, or a youngster with no idea of how much the world has changed since then, could worry about such a thing.

The claim that Lowe has stopped the union madness in its tracks by imposing a “3.5 per cent cap” on wage rises misrepresents what he said. It ignores his qualification that 3.5 per cent – that is, 2.5 per cent as the mid-point of the inflation target plus 1 per cent for the average annual improvement in the productivity of labour – is “a medium-term point that I’ve been making for some years” (my emphasis) that “remains relevant, over time,” (ditto) and is the “steady-state wage increase”.

Like the inflation target itself, it’s an average to be achieved “over the medium term” – that is, over 10 years or so – not an annual “cap” that you can fall short of for most of the past decade, but must never ever exceed.

Supposedly, it’s a “cap” because of Lowe’s remark that “if wage increases become common in the 4 to 5 per cent range, then it’s going to be harder to return inflation to 2.5 per cent.”

That’s not the imposition of a cap – which, in any case, Lowe doesn’t have to power to do, even if he wanted to – it’s a statement of the bleeding obvious. It’s simple arithmetic.

But it’s also an utterly imaginary problem. It ain’t gonna happen. Why not? Because, as McManus “conceded”, no matter how unfair the unions regard it to force workers to bear the cost of the abandon with which businesses have been protecting their profits by whacking up their prices, workers simply lack the industrial muscle to extract pay rises any higher than the nation’s chief executives can be shamed into granting.

While we’re talking arithmetic, however, don’t fall for the line – widely propagated – that if prices rise by 5 per cent, and then wages rise by 5 per cent, the inflation rate stays at 5 per cent. As the Bureau of Statistics has calculated, labour costs account for just 25 per cent of all business costs.

So, only if all other, non-labour costs have also risen by 5 per cent does a 5 per cent rise in wage rates justify a 5 per cent rise in prices, thus preventing the annual inflation rate from falling back.

In other words, what we’re arguing about is how soon inflation falls back to the target range. Commentators with an unacknowledged pro-business bias (probably because they work for big business) are arguing that it should happen ASAP by making the nation’s households take a huge hit to their real incomes. This, apparently, will be great for the economy.

Those in the financial markets want to hasten the return to target by having the Reserve raise interest rates so far and so fast it puts the economy into recession. Another great idea.

Meanwhile, Lowe says he expects the return to target inflation to take “some years”. What a wimp.

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Inflation: workers being unreasonable, or bosses on the make?

When you think about it clearly, the case for minimum award wages to be raised by 5.1 per cent is open-and-shut. So is the case for all workers to get the same. This wouldn’t stop the rate of inflation from falling back towards the Reserve Bank’s 2 to 3 per cent target zone.

But if, as seems likely, the nation’s employers contrive to ensure that this opportunity is used to continue and deepen the existing fall in real wages, the nation’s businesses will have shot themselves in the foot.

What, in their short-sightedness, they fondly imagined was a chance to increase their profits, would backfire as this blow to households’ chief source of income, crimped those households’ ability to increase or even maintain their spending on all the things businesses want to sell them.

The recovery from the “coronacession” would falter as households’ pool of savings left from the lockdowns was quickly used up, and their declining confidence in the future sapped their willingness to run down their savings any further.

Should the economy slow or even contract, unemployment could rise and the hoped-for gain in profits would be lost. Cheating your customers ain’t a smart business plan.

Such short-sighted thinking by businesses involves a “fallacy of composition” common in macro-economics: what seems “rational” behaviour by an individual firm doesn’t make sense for firms as a whole. It’s a form of “free-riding”: it won’t matter if I screw my workers because all the other businesses won’t screw theirs.

But back to wages. If all workers got a 5.1 per cent pay rise to compensate them for the 5.1 per cent rise in consumer prices over the year to March, thus preserving their wage’s purchasing power, surely that means the inflation rate would stay at 5.1 per cent?

Firms would have to raise their prices by 5.1 per cent. But many small businesses wouldn’t be able to afford such a huge pay rise and would give up, putting all their workers out of a job.

Is that what you think? It’s certainly what the employer-group spruikers want you to think. But it’s nonsense. Hidden within it is a mad assumption, that wages are the only cost a business faces.

Unless all those other costs have also risen by 5.1 per cent, the business can pass on to its customers all the extra wage cost with a price rise of much less than 5.1 per cent.

How much less? That’s a question any competent economist could give you a reasonably accurate answer to by looking up the Australian Bureau of Statistics’ most recent (for 2018-19) “input-output” tables and doing a little arithmetic.

The tables divide the economy into 115 industries, showing the value of all the many inputs of raw materials, machinery, labour, rent and other overheads to the process by which the industry produces its output of goods or services.

Any competent economist (which doesn’t include me, I’m just a journo) could do this, but only two economists from the Australia Institute, Matt Saunders and Dr Richard Denniss, have bothered, in a paper forthcoming this week, Wage price spiral or price wage spiral?

The official tables show that the proportion of total business costs accounted for by labour costs (that is, not just wages, but also “on-costs” such as employer super contributions and workers comp insurance) varies greatly between industries, ranging from less than 3 per cent in petroleum refining to almost 71 per cent in aged care.

But this “labour/cost ratio” averages just 25.3 per cent across all 115 industries.

Now, let’s assume all workers in all industries received a 5 per cent pay rise, and all businesses chose to pass all the extra cost through to prices. By how much would prices rise overall? By 1.27 per cent.

That’s going to keep inflation soaring? It’s well below the Reserve’s 2 to 3 per cent target range.

Of course, that’s just what economists call “the first-round effect”. What about when all a firm’s suppliers put their prices up to cover their wage rises? The “second-round effect” takes the overall rise in prices from 1.27 per cent to 1.85 per cent – still below the target.

Do you remember when the ABC quoted some spruiker saying the cost of a cup of coffee in a cafe could rise to $7? The authors use the tables to show that passing on a 5 per cent pay rise could increase the retail price of a $4-cup by 9 cents.

(Such people are always telling us a crop failure in South America has doubled or trebled the price of coffee beans. It’s the same trick: they never mention that the cost of beans is the least part of the price of a coffee. The biggest cost is often renting the cafe.)

Now get this. That 1.85 per cent rise in prices probably overstates the effect of a universal 5 per cent wage rise, for three reasons.

First, because it assumes zero improvement in the productivity of labour. It’s not great at present, but it’s not non-existent. Second, it assumes firms don’t respond to higher costs by shifting to cheaper substitutes.

And third, because six of the 10 “industries” with the highest labour cost pass-through are either government departments (which don’t actually charge a price that shows up in the consumer price index) or are heavily subsidised by government. Effect on the budget isn’t the same as effect on inflation.

Note that whereas the Fair Work Commission has the ability simply to order a 5 per cent rise in the many minimum award rates covering the lowest-paid quarter of the workforce, should it choose to, the public and private sector employers of the remaining three-quarters of workers are unlikely to be anything like that generous.

That’s a fourth reason the effect of wage rises is likely to be (a lot) less than the authors’ simple calculation of a 1.85 per cent rise in retail prices.

But don’t get the idea wages are the only reason consumer prices rise. Wage rises would explain little of the 5.1 per cent rise in consumer prices over the year to March.

The great bulk of the rise is explained by businesses passing on to retail customers the higher prices of imported goods and services caused the pandemic’s various supply disruptions and the Ukraine war’s effect on energy and food prices.

But some part of that 5.1 per cent rise in prices is explained by businesses deciding now would be a good time to raise their prices and fatten their profit margins. This may not be a big factor so far, but I won’t be surprised if it’s a much bigger one this quarter and in future.

For months the media have been telling us how much a problem inflation has become, with a lot worse to come. Top business leaders and industry lobbyists have used naive reporters to, first, send their competitors a message that “we’re planning big prices rises so why don’t you do the same” and, second, soften up their customers. “Prices are rising everywhere – don’t pick on me.”

It’s quite possible we’ll have trouble getting inflation back into the target range. If so, it won’t be caused by big pay rises – but it’s a safe bet people will be using a compliant media to blame it on greedy workers.

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Cutting real wages will help inflation, but weaken the economy

At last, as the election campaign reaches the final stretch, we’ve found something worth debating. Anthony Albanese has found his spine and supported a big rise in award wages, while Scott Morrison says a decent rise for the masses is a terrible idea that would damage the economy.

First the politics, then the economics. My guess is history will judge this to be the misstep that did most to cost Morrison the election. Successful Liberal leaders – John Howard, for instance – know never to be caught within cooee of a sign saying “wages should be lowered”. It’s not the way to woo outer-suburbs battlers to the Liberal cause.

That Morrison should defy this precedent in a campaign where the cost of living has become by far the biggest issue is all the more surprising.

Between them, the two contenders have revived and highlighted the oldest stereotype in Australia’s two-party politics: the Labor Party is - surprise, surprise – the party of ordinary workers, and will always champion their interests, whereas the Liberals are the party of business, and will always champion the interests of business.

It’s because the Libs are seen as the bosses’ party that they’re instinctively regarded as better at managing the budget and the economy – a mindset Morrison is desperately seeking to exploit in “these uncertain times”.

But the other side of the penny is that Labor, the party of the workers, is the party that cares, and will spend more on providing government services. Which party’s best at industrial relations and wages? One guess.

But how do the minimum wage arrangements work? And what are the broader economic implications of a rise high enough to cover the 5.1 per cent rise in consumer prices over the year to March - or not high enough, so that wages fall in “real terms”?

The Fair Work Commission conducts an annual wage review to determine the increase in the national minimum wage on July 1. Last year’s increase of 2.5 per cent applied to the 2 per cent of employees on the national minimum rate, but also the 23 per cent of employees whose wage is set by one of the various minimum rates for workers in different job classifications set out in each of the more than 100 industrial awards established by the commission.

The national minimum wage rate is about $20 an hour, or about $40,000 a year for a full-time worker. About 2.7 million workers have their wage set in this way.

A 5 per cent increase in the national minimum wage would be worth about $1 an hour or about $2000 a year. Note, however, that many of those in more skilled award classifications would be earning much more than that.

The rises the industrial parties ask for in hearings before the commission are always “ambit claims”. The Australian Council of Trade Unions wants a rise of 5.5 per cent.

On the employer side, the Australian Industry Group says the most its member businesses could possibly afford is 2.5 per cent. The Australian Chamber of Commerce and Industry says the most it could run to is 3 per cent.

Morrison has implied it would be quite improper for a federal Labor government to seek to influence the decision of the independent commission. But the fact is federal and state governments routinely make submissions to provide information about the state of the economy and indicate how generous or tight-fisted they think the commission should be – though they rarely suggest a specific figure.

The commission will give due consideration to a government’s submission but, rest assured, it will do as it sees fit, usually awarding an increase somewhere between the employers’ lowball and the unions’ highball.

My guess is this year’s decision will be a lot higher than last year’s 2.5 per cent, but not nearly as high as 5.5 per cent.

That’s particularly because the commission can be expected to allow for the 0.5 percentage-point increase in employers’ compulsory contributions to their workers’ superannuation accounts this July. The unions would love to have their cake and eat it, but I doubt they’ll be allowed to.

Albanese says, “the idea that people who are doing it really tough at the moment should have a further cut in their cost of living is, in my view, simply untenable”.

Morrison claims a minimum-wage increase sufficient to stop wages falling behind the rise in consumer prices would be “reckless and dangerous”.

The Ai Group warns that “an excessive minimum wage increase would fuel inflation and lead to higher interest rates . . . than would otherwise be the case”. It would be detrimental to economic growth and job creation.

The chamber of commerce says “any increase of 5 per cent or more would inflict further pain on small business, and the millions of jobs they sustain and create. Small business cannot afford it”.

So, what do I think? I think it’s easy to exaggerate the economic cost of giving our lowest-paid workers a decent pay rise. Small business always cries poor and warns jobs will be lost. But there’s little empirical evidence that higher wages lead to job losses.

It’s true that giving a quarter of our workers little or no compensation for the jump in prices caused by pandemic supply disruptions and the Ukraine war would be the quickest and easiest way to get inflation back down to the Reserve Bank’s 2 to 3 per cent target range.

But it would also be hugely unfair to load that burden onto our lowest paid workers, while business profits escaped untouched. The Reserve will just have to be more patient if it doesn’t want to crunch the economy with big rate rises.

And here’s the bit the business lobby groups seem too short-sighted to see. The more we cut the real incomes of our businesses’ customers, the less businesses will be able to sell to them, and the more the economy will be in anything but the “strong” condition Morrison keeps claiming it’s in.

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Cutting workers' pay and conditions worsens productivity

It’s a long weekend, so let’s relax and think more laterally than usual. I’ve been pondering one of the great mysteries puzzling the rich world’s economists: why has there been so little improvement in the productivity of our businesses over the past decade or two?

I’m wondering if a big part of the explanation is that business people have been finding easier ways to make a bigger buck.

Economists worry about productivity – producing more output of goods and services from a given quantity of inputs of labour, physical capital and raw materials – because it’s the secret sauce that’s made market capitalism so hugely successful over the past 200 years. That’s made us many times more well-off materially than we were back then.

The key driver of productivity improvement is technological advance: mainly bigger and better machines, but also better roads, railways and other infrastructure, as well as more efficiently organised farms, mines, factories, offices and shops. Not to mention increased investment in “human capital”: better educated and trained - and thus more highly skilled - workers.

You’d expect the digital revolution that’s working its way round the economy – disrupting industry after industry while creating new or improved products that meet customers’ needs much better – to be causing a marked improvement in productivity, but it’s not showing up in the figures.

So, why has productivity – most simply measured as gross domestic product per hour worked – been improving much more slowly in the past decade or two than in earlier times, not just in our economy but in all the advanced economies? Why is our material standard of living improving only very slowly – if at all?

As I say, that’s something economists are still debating. But I’ve been thinking much of the explanation may lie in the changed way our business people are going about their business.

If you listen to the business lobby groups, productivity isn’t improving because of successive governments’ failure to “reform” the economy. Nonsense. A moment’s thought reveals that the efficiency with which inputs are turned into outputs is determined primarily by the collective actions of each of the nation’s businesses.

Firms improve their productivity as part of their efforts to increase their profits. But their ultimate goal is higher profits, not necessarily being more productive. And, since improving productivity can often be quite hard, I’ve been wondering if productivity isn’t improving much because firms have found easier ways of increasing their profits.

Such as? Just by cutting costs. Particularly the cost of labour. One way to cut labour costs is to install better labour-saving machines. Doing so does improve the productivity of the workers who remain – and will show up in the productivity figures.

But if you find ways to limit the increase in – or even cut – your workers’ hourly wage rate, this does nothing to improve your productivity, but does increase your profits. Many employers have moved from fixing their wage rates by “collective bargaining” – which involves workers pressing for higher wages by having their union threaten to go on strike – to “individual contracts”, which often involve no bargaining at all.

Or you could cut your labour “on-costs” (including sick leave, annual leave, workers compensation insurance and superannuation contributions) by changing your workers from employees into (supposedly) independent contractors.

This, of course, is a big part of the motive for the rise of the “gig economy”. And there must surely be cost savings associated with the use of labour-hire firms.

Businesses have become a lot more conscious of the costly risks involved in running a business. They’ve sought better ways of “managing” those risks – which, in practice, has often involved shifting risks from the firm to its workers. For instance, moving to independent contractors shifts to workers the costs associated with the risks of them getting sick, being injured on the job, or even not having saved enough for retirement.

The move to firms carrying much lower inventories of raw materials and spare parts – “just-in-time” inventory management – means that the risk of interruptions to a firm’s supply chain can cause workers to be stood down on no pay until the problem’s fixed.

Yet another way firms have been saving on labour costs is by spending less on training their own workers and then, when they’re short of skilled workers, bringing them in from overseas on temporary work visas.

The trick is, these cost-saving measures don’t just fail to improve the productivity of labour, they can actually worsen it. Textbook economics sees firms continually comparing the cost of employing workers to perform tasks with the cost of using a machine to do it.

When wage costs are rising strongly, firms are more inclined to invest in labour-saving equipment. When wage costs are low or falling, however, firms become more inclined to avoid investing in machines and just hire more workers – even to perform quite menial tasks.

Before the pandemic, economists were continually surprised to see employment growing at a faster rate than the fairly weak growth in production (real GDP) would imply. That’s good news for employment but – as a matter of simple arithmetic - bad news for labour productivity: GDP per hour worked.

But it’s worse than that. For technological advances to improve our living standards, you don’t just need people inventing new and better machines, you need businesses across the economy regularly buying and using the latest, whiz-bang models to produce whatever it is they do.

That’s just what hasn’t been happening. As Reserve Bank governor Dr Philip Lowe noted recently, business investment in plant and structures has averaged just 9 per cent of GDP since 2010, compared with 12 per cent over the previous three decades.

Sometimes I think that, while businesses’ modern obsession with finding any and every means to minimise their wage costs no doubt fattens their profits in the short term, one day we’ll realise it’s been hugely destructive of our living standards.

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Mistreating workers isn’t a smart path to prosperity

Sometimes I think that, when it comes to industrial relations, we’ve gone from one extreme to the other. We used to be pushed around – and frequently inconvenienced – by overly powerful unions, but now the employers are on top and want it all their own way.

We’ve gone from often inflexible and unreasonable unions to “workplace flexibility” that’s all about making life easier – and more hugely remunerated – for bosses, while making work unpleasant and unrewarding – emotionally and monetarily – for far too many of our workers.

I guess what it proves is that when one side or the other acquires too much power, the temptation to abuse it is irresistible.

The push to “reform” Australia’s highly centralised wage fixing began with the Hawke-Keating government and its accord with the union movement. It was taken a lot further – and became a lot more overtly anti-union – under the Howard government.

At the time, many of these “reforms” seemed sensible. What we didn’t realise then was the way globalisation (“Why don’t I move my factory to Asia where wages are lower?”) and the digital revolution (“Why employ a worker when you can farm stuff out to some unknown slave on the internet?”) would undercut the unions without any help from reforming legislators.

The result is, unions are now a shadow of their former selves, clinging to their role in industry super funds to keep themselves relevant. The proportion of workers who belong to unions has gone from half to 15 per cent and falling.

On the other hand, one unintended consequence of the now-ended era of neoliberalism has been to convince our manager class they have a divine right to be given whatever they think necessary to their greater success.

Which brings us to the latest batch of “reforms” being proposed by Scott Morrison and his Attorney-General, the misleadingly advertised Christian Porter, of Robodebt fame. With Parliament now off on Christmas holidays, the much-debated bill has gone to a parliamentary committee, and won’t resurface until March.

If you listen to some people, the proposed reforms are nothing more than an employers’ wish list. Fortunately, they’re not that bad. With one notable exception, the changes are the product of Porter’s extensive joint discussions with the unions and employer groups.

No Liberal government is capable of doing other than making changes that lean in favour of the employers, but the measures are the result of those discussions – so no surprise to the unions – and include some wins for the union side.

The big, undiscussed surprise is the plan to suspend – temporarily, of course; take my word for it – the requirement that enterprise agreements leave workers “better off overall” despite any reduction in particular benefits.

The unions aren’t buying that one. But, in any case, Porter has already signalled his willingness to drop it. This is no WorkChoices 2.0. The Libs are still smarting over the real WorkChoices’ role in the Howard government’s defeat in 2007. Whatever else he may be, Morrison is no crazy brave when it comes to pushing through controversial economic reforms.

No, the other changes are more modest and less objectionable. One is to include in the legislation the first-ever (weak) definition of what it means to be a “casual”. Another is a sunset provision to kill off enterprise agreements that are decades old and out of date.

Truth is, the changes we need to our labour laws are much more sweeping. Although you need to dig deep into the official statistics to find evidence, the unions and labour economists are right to say we have a growing problem with precarious employment, of which the “gig economy” is just the tip.

Outfits such as Uber are a strange combination of highly beneficial innovation (a more efficient way of bringing riders and drivers together) and an arrogant attempt to sidestep the labour laws that give much-needed protection to employees (and the taxman).

Then there’s the proliferation of franchising and labour hire companies. And the epidemic of wage theft – prompted by business people’s belief that, whatever some law may say, as God’s gift to the economy they are protected from prosecution.

I think we’re getting muddled between means and ends. The business proposition is: if only you’ll let me give my workers a hard time, my business will be more successful and everyone will benefit. If only you’ll accept an insecure job with hours that change from one week to the next according to my needs, the economy will be much better off.

But if you take the workers and their dependents out of the economy, you don’t have much left. People rightly crave job security. Make their working lives a misery and a pay rise is poor consolation. (And right now, of course, we can’t afford the pay rise either.)

We’re getting the cart before the horse, turning the people who are supposed to be the chief beneficiaries of a good economy into the people who, we’re told, must suffer to bring the good economy about. That’s what needs reform.

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Budget warning: more rent-seeking won't create jobs

While we wait to see next week’s budget, think about this: economists must shoulder much of the blame for past "reforms" that ended up doing more harm than good. But more of the blame should go to the politicians who allowed lobbying by generous industries to subvert reform and turn it into rent-seeking, or worse.

Lefty academics who bang on about the evils of what they love calling "neoliberalism" seem to see it as some kind of conspiracy between the economics profession and big business.

There’s some truth to this – after all, many economic practitioners work for or produce "independent" consultant reports for big business. But the old rule from politics applies: what may look like a conspiracy is more likely to be just a stuff-up.

The term neoliberalism – a pompous, hipster word only a "problematic" academic could love – conceals more truth than it reveals. The words we used in Australia when this way of thinking became dominant in the 1980s were "economic rationalism" in pursuit of "micro-economic reform" – the very thing Productivity Commission boss Michael Brennan advocated a return to in a speech last week.

The more revealing label, however, is the one preferred by two leading British economics professors, Paul Collier and John Kay, in their new and enlightening book, Greed is Dead: "market fundamentalism".

The economic rationalist thinking that drove extensive economic policy change in the ‘80s and ‘90s took the profession’s ubiquitous neo-classical, demand-and-supply model of how markets work and assumed it was all you needed to know about how the economy worked.

It thus overemphasised the role of competition between "self-interested" (selfish, greedy) individuals, but underestimated the role of co-operation and community spirit and the importance of touchy-feely things such as job security, loyalty and our trust in economic and political institutions in making the economy work well.

The simple model’s assumption that all individuals and firms unfailingly act with full foresight of their best interests implies that government intervention is unnecessary and may well make things worse.

So the greatest crime of the rationalists (including, until far too late, yours truly) was naivety. They saw reforms that worked well in theory and assumed they’d work just as well in practice. In many cases they did work well enough, but in too many others they failed badly.

Unintended consequences abounded, the greatest of which was what I call "the sanctification of selfishness". When the econocrats were planning the removal of import protection they confidently predicted a benefit would be to discourage "rent-seeking" – businesses incessantly lobbying the government for favours when they should be getting on with running their businesses more efficiently.

In reality, rent-seeking has become rife. Since the mid-80s, the Canberra-based lobbying industry must surely have been one of our fastest growing and most lucrative. The economists’ greatest naivety has been their assumption that successive governments would faithfully implement their reform plans while resisting the temptation to do favours for generous mates.

Which brings us to next week’s budget. Recent days have seen big business campaigning for tax breaks, a further shift in the industrial relations power balance in favour of employers, and the removal of "burdensome regulations", all to create jobs.

Trouble is, years of bitter experience have taught us to recognise rent-seeking when we see it. Because economic rationalists have left people with the notion that economic progress is driven solely by self-interest, the rich and powerful now see themselves as justified in demanding that the economy be re-organised in ways that facilitate their efforts to get richer and more powerful.

Among the various micro-economic reforms advocated last week by the Productivity Commission’s Brennan as ways of speeding up the recovery were: removing rigidities in the labour market, streamlining the approvals process for new businesses and improving the “culture” of regulators.

I have no doubt there are plenty of anachronistic, pettifogging, cumbersome provisions of industrial relations law that both sides could readily agree to remove. But I doubt that’s what the employers are seeking. They want their quid without any quo.

Equally, I don’t doubt that much could be done to minimise the time-wasting involved in the regulation of business, without compromising other public policy goals. But too often removing "green tape" is code for sacrificing long-term protection of our environmental assets in favour of letting a few developers temporarily create a few hundred jobs while they build some highly automated mining project.

And while the culture of pushing people around at Centrelink or the local council should definitely be corrected, the last time the pollies went down this road they left the banking and corporate regulators with the clear impression that what they wanted was a buddy-buddy culture. The banks concluded that, for them, obeying the law was optional, and we all remember what happened next.

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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.

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Economy’s health requires reform of earlier wage reforms

Can you believe that many economists were disappointed by this week’s news from the Australian Bureau of Statistics that consumer prices rose by only 2.1 per cent over the year to June?

Why would anyone wish inflation was higher than it is? Well, not because there’s anything intrinsically terrific about fast-rising prices, but because of what a slow rate of increase tells us about the state of the economy.

It’s usually a symptom of weak growth in economic activity and, in particular, of weak growth in wages. Prices and wages have a chicken-and-egg relationship. By far the most important factor that pushes up prices is rising wages.

But, as measured by the bureau’s wage price index, wages rose by just 2.1 per cent over the year to March, roughly keeping up with prices, but not getting ahead of them.

We’re used to wages growing each year by 1 per cent-plus faster than prices, but such “real” growth hasn’t happened for the past four years or so (which probably explains why so many people are complaining about the high “cost of living” even when price rises are so small).

It’s important to understand that wages can grow faster than prices without that causing higher inflation, provided there is sufficient improvement in workers’ productivity – output per hour worked – to cover the real increase.

Of late we’ve had that productivity improvement, but all the benefit of it has stayed with business profits, rather than being shared between capital and labour by means of increases in real wages.

I’ve said it before and I’ll keep saying it until it’s no longer relevant: the economy won’t be back to healthy growth until we’re back to healthy growth in real wages. That’s for two reasons.

First, in a capitalist economy like ours, the “social contract” between the capitalists and the rest of us says that the people without much capital get their reward mainly via higher real wages leading to higher living standards.

Second, consumer spending accounts for more than half the demand for goods and services in the economy; consumer spending is done from households’ income, and by far the greatest source of household income is wages.

So, as a general proposition, if wages aren’t growing in real terms, there won’t be much real growth in household income and, in that case, there won’t be much real growth in consumer spending. And the less enthusiastic we are about buying their stuff, the less keen businesses will be to invest in expansion.

Get it? Of all the drivers of economic growth, by far the most important is real wage growth. If your economy’s real wage growth’s on the blink, you’ve got a problem. You won’t get far.

Economists used to believe that real wage growth in line with trend improvement in the productivity of labour was built into the equilibrating mechanism of a capitalist economy. A chap called Alfred Marshall first came up with that idea.

But with each further quarter of weak price and wage increase it’s becoming clearer it was a product of industrial relations laws that boosted workers’ economic power by helping them form unions and bargain collectively with employers.

As has happened in most rich countries, our governments, Labor and Coalition, have been “reforming” our wage-fixing process since the early 1990s by reducing union rights and encouraging workers to bargain as individuals rather than groups.

Trouble is, governments have been weakening legislative support for workers and their unions at just the time that powerful natural economic forces – globalisation and greater trade between rich and poor countries, “skill-biased” technological change, the shift from manufacturing to services – have been weakening the bargaining power of labour.

Whoops. In hindsight, maybe not such a smart “reform”. My guess is it won’t be long before governments decide they need to promote real wage growth by restoring legislative support for unions and collective bargaining.

But how could they go about this? Well, Joe Isaac, a distinguished professor of labour economics at Monash and Melbourne universities and a former deputy president of the Industrial Relations Commission, outlines a plan in the latest issue of the Australian Economic Review.

Isaac proposes four main reforms of the reforms. First, the Fair Work Act should be less prescriptive, giving the Fair Work Commission greater discretion to intervene in industrial disputes, to conciliate and, if necessary, impose an arbitrated resolution on both sides.

Second, the present restrictions on unions’ right to enter workplaces should be eased to allow them to check the payments made to union and non-union employees, as well as to recruit members.

The widespread allegations of illegal underpayment of wages suggest “a serious lack of inspection of pay records” – formerly a task in which unions had a major role. “These breaches in award conditions cannot be discounted as a factor in the slow wages growth,” Isaac says.

Third, legislation against “sham contracting” – employers reducing their workers’ entitlements by pretending those employees are independent contractors – should be tightened.

Fourth, the present procedures and delays before workers are allowed to strike while negotiating new wage agreements should be reduced.

As well, bargaining and striking over multiple-employer or industry-wide agreements should be permitted. As economists long ago established, real wage rises should reflect the economy-wide rate of productivity improvement, not the experience of particular firms.

Industry-wide and multiple-employer agreements allow unions to support people working in small and medium businesses, not just those in big businesses and government departments.

Such bargains are known as “pattern bargaining” and are illegal at present. It’s true that pattern bargaining was pressed and extended to other industries unjustifiably in years past, but the commission should have the power to prevent pattern bargaining where it’s not justified.

Now, many employers may view Isaac’s proposed “reregulation” of wage fixing with alarm. What’s to stop the return of unreasonable union behaviour and excessive wage rises?

Ah, that’s just the point. What will prevent it is all those other developments that have weakened workers’ bargaining power.

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Unions play their cards wrong in hopes for higher pay

You don't need to read much between the lines to suspect that Reserve Bank governor Dr Philip Lowe and his offsiders think the workers and their unions should be pushing harder for a decent pay rise.

Why else would he volunteer the opinion, in his testimony to a parliamentary committee on Friday, that average wage growth of 3.5 per cent a year would be no threat to the Reserve's inflation target?

This while employers are crying poor and Scott Morrison makes the extraordinary claim that big business needs a cut in company tax so it can afford to pay higher wages.

Why should Lowe care about how well the workers are doing? Because, as one of his assistant governors, Dr Luci Ellis, pointed out last week, our economic worries are shared by most of the other rich economies, except in one vital respect: they have reasonably strong growth in consumer spending, but we don't.

What's making our households especially parsimonious? No prize for remembering our world-beating level of household debt. Trouble is, consumer spending accounts for well over half the demand that drives economic growth.

Our economy won't be sparking on all four cylinders until consumption spending recovers, and that's not likely until our households return to annual wage growth that's a percent or more higher than inflation. That's why Lowe's encouraging workers to think bigger in their wage demands.

Even so, his proposed pay norm of 3.5 per cent, errs on the cautious side. That figure comes from 2.5 percentage points for the mid-point of the inflation target, plus 1 percentage point for the medium-term trend rate of improvement in the productivity of labour.

But 4 per cent a year would be nearer the mark because the trend rate of productivity improvement is nearer 1.5 per cent a year.

Even so, Lowe is acknowledging a point employers and conservative politicians have obfuscated for decades: national productivity improvement justifies pay rises above inflation, not just nominal increases to compensate for inflation (as is happening at present).

Lowe's concern that the present annual wage growth of about 2 per cent not be accepted as "the new norm" is an important point from behavioural economics: rather than calculate the appropriate size of pay rises based on the specific circumstances of the particular enterprise, as textbooks assume, there's a strong tendency for bargainers to settle for whatever rise most other people are getting.

That is, there's more psychology – more "animal spirits", as Lowe likes to say; more herd behaviour – and less objective assessment, in wage fixing than it suits many employers and mainstream economists to admit.

Which implies that, if the unions would prefer a wage norm closer to 4 per cent than 2 per cent, they should be doing a better job of managing their troops' fears and expectations.

In the Reserve's search for explanations of the four-year period of weak wage growth, it puts much emphasis on increased competitive pressure, present or prospective.

But in her speech last week, Ellis qualified her reference to the more challenging "competitive landscape" by adding ". . . or at least how it is perceived". Just so. It's about perceptions of reality.

It's easier for firms worried about a future of more intense competition to take the precaution of awarding minimal wage rises if they can play on their employees' own fears about losing their jobs to Asian sweatshops or robots or the internet.

There's little sign in the figures for business profitability that most firms couldn't afford much bigger pay rises than they're granting. But it's no skin off the employers' nose if their fears of future adversity prove exaggerated. Only their workers had to pay for the excessive fearfulness.

Workers - particularly those in industries with enterprise bargaining – are meekly accepting smaller pay rises than their employers' circumstances could sustain because the union movement has done too little to counter the alarmists telling their members they've lost the power to ask for more.

They've played along with the nonsense about 40 per cent of jobs being lost to robots, and that there's nothing to stop greedy businesses from making us all members of some imaginary "gig economy".

Worse, they've exaggerated the spread of "precarious employment" and encouraged the still-speculative belief that weak wage growth is explained almost exclusively by anti-union industrial relations "reform", which has stripped workers' bargaining power to the point where the right to strike has been lost.

Presumably, their game is to advantage their Labor mates by heightening disaffection with the Turnbull government, but this is coming at the expense of the economy's recovery, not to mention workers' pay packets.

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Wage growth the key to lasting economic strength in 2018

So, no train strike in Sydney because unionists were ordered to keep working by the Fair Work Commission. Is that good news or bad? Depends on the point from which you view it – but don't assume you have only one of 'em.

And if your viewpoint's from somewhere in Victoria, don't assume it's a matter of little relevance to your own pay packet.

A 24-hour train strike would have caused great inconvenience to commuters and disruption to many businesses – which is precisely why the unionists were ordered to abandon their strike. Thank goodness. Damage averted.

Or maybe not. The union wanted to strike for better wages and conditions during the very brief period following the end of an enterprise agreement when industrial action is legally protected.

I don't want to shock you, but all strikes are designed to impose financial costs on an employer – that's what gives bosses an incentive to agree to pay rises they don't fancy. Inconvenience to the employer's customers is usually unavoidable.

It's no bad thing that such disruption has become rare – always provided employers and their workers are able to reach agreement on reasonable wages and conditions without the need for disruption.

That's what gives the averted rail strike its wider significance. If the rail workers can't strike even during their brief "bargaining period", when can they? Maybe never. In which case, what's to stop employers driving ever more one-sided bargains?

The union movement's response is to claim that the right to strike is "very nearly dead". I'm not convinced. But, equally, I'm not certain it contains no element of truth.

And get this: if it is true that the past few decades of industrial relations "reform" have robbed the nation's workers of much of their power to bargain collectively, that's not just bad news for more than 12 million employees, and their dependents, it's bad news for the entire economy – including most of the nation's grossly overpaid chief executives.

This is an issue we'll keep hearing about this year. Much – even the fate of the Turnbull government – will turn on an issue it doesn't want to talk about: what happens to wages.

There's great optimism among economists and business people about a return to strong growth in the economy this year.

Everyone's convinced the world economy will grow faster than it has in years and, at home, the amazingly strong growth in employment last year – most of it in full-time jobs – is expected to continue.

What could be better calculated to lift the survival prospects of Malcolm Turnbull and his band of not-so-happy siblings, who must face an election by the middle of next year at the latest?

While economists and business people sing eternal praises to the great god of Growth in the size of the economy, voters care most about increased Jobs. The two usually go together, but they're not the same.

There's just one problem with the rosy prospects for Jobson Grothe this year: wages have grown no faster than consumer prices for the past four years. Employees have gained nothing from the improvement in productivity during that time, with all the lolly going to profits.

Does that sound like heaven on a stick for our business people? Many are yet to realise it's a fool's paradise. But, rest assured, if it keeps up for another year, light will dawn.

There are rival explanations for the weakness in wage growth. Some say it's temporary, others that it's lasting.

The econocrats – whose forecasts for wage growth have been way too high for years – say it's just a result of the economy's slow recovery from the resources boom, plus maybe a little digital disruption, and will go away if we're patient a bit longer.

They say it's simple supply-and-demand: as employment keeps growing, suitable labour becomes harder to find, obliging employers to pay higher wages to attract the staff they want.

Others fear the problem is deeper and long-lasting: it has been only the collective bargaining strength conferred on employees by industrial relations law that has allowed them to extract from employers the wage growth (above inflation) that has been their rightful share of improved productivity.

By now, however, years of "reform" have swung the industrial relations pendulum too far in favour of employers, thus allowing them to avoid sharing any of the productivity gains with their workers.

What do I think? My guess is it's a bit of both. It's too soon to be sure how much of the problem is temporary and how much is permanent, requiring governments to do more to roll back the Howard government's measures to discourage collective bargaining.

But time's running out for the not-to-worry brigade. If we don't see some quickening in wage growth as the year progresses, suspicions will increase that the economy's stopped working the way it's supposed to.

It's weak growth in wages that's really driving voters' complaints about the rising cost of living.

Worse, consumer spending is by far the biggest contributor to growth in the economy. Consumer spending is driven by the growth in household incomes, which in turn is driven partly by rising employment, but mainly by real wage rises.

Take away the real growth in wages and neither the economy nor jobs will stay growing strongly for long. If so, neither voters nor business people are likely to be happy.

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Radical policy change may be needed to fix wages

It's too early to be sure, but not too early to suspect that, if we and the other developed economies keep travelling the way we are, conventional wisdom about what constitutes good economic policy may soon need to be turned on its head.

We're living through very strange times. Each developed economy has its own story, but there are strong similarities. One is exceptionally low inflation, which doesn't seem temporary.

Another is surprisingly weak rates of measured productivity improvement, although our rate of improvement in the productivity of labour isn't too bad.

My guess is a fair bit of this is mis-measurement arising from our quite radical shift to a digital economy.

But the other explanation may be a decline in price competition in many industries, thanks to several decades of both natural and government-facilitated rent-seeking by big businesses, in ever-more concentrated industries.

Next, wages. It's too soon to conclude that wage growth – which in Oz has been slowing since mid-2012 and been pathetically weak for three years – is down for the count.

We don't yet know how much of the weakness is merely cyclical and how much is due to deeper, longer-lasting, structural causes.

Even so, it's hard not to suspect that a fair bit of the wage weakness is structural. My guess is that while we've been busy decentralising wage-fixing and removing all provisions thought to favour unions, globalisation and technological change have conspired to rob the nation's employees of any collective bargaining power.

This may sound like a dream come true for business and its high-paid executives but, if it's true, it's deeply destabilising overkill.

Wages are a key variable in the economy. Allow them to be either too high or too low and the economy gets out of kilter.

Allow the profits share of national income to keep continually expanding at the expense of the wages share and expect to pay a price economically, socially and politically.

And that's before you remember that wages are the chief source of governments' tax revenue. Not only personal income tax, but all the indirect taxes – notably, the goods and services tax – that households pay when they spend their labour incomes.

Low nominal wage growth isn't necessarily a worry if, at the same time, the rise in consumer prices is low.

What matters to working households and the rest of the economy (but not governments) is what's happening to real wages.

In a healthily functioning economy, real wages should rise pretty much in line with the improvement in the productivity of labour.

That way, both labour and capital get their fair share of the fruits of economic progress.

Trouble is, in the US this relationship broke down maybe 30 years ago, explaining why the top few per cent of households have captured most of the growth in the nation's real income over that time.

This doesn't just widen the gap between rich and poor. By directing so much income growth away from the high spenders at the bottom and middle to the high savers at the top, it slows growth in consumption and thus production.

It also adds to the disillusionment of ordinary voters, making them more likely to lash out and vote for the cunning wacko celebrity-de-jour candidate, such as Clive Palmer, Pauline Hanson or Donald somebody​.

Get this: there are tentative signs the relationship between real wage growth and labour productivity may be breaking down in Oz.

The relevant indicator, the index of real labour costs per unit, should hover around 100. It fell by 3.3 per cent during 2016, reaching 98.1, equal lowest since the series began in 1985.

If this weakness persists, it will raise the question of whether the formerly healthy relationship was a product of market forces, or the industrial relations system's achievement of a fine balance between employer and union bargaining power.

If it does persist, how could we return to a healthy relationship? By reversing the dominant wisdom of many decades, that governments must never do anything that adds to the regulatory burden on employers. By acting (very carefully) to strengthen the hand of union collective bargainers.

Final point: governments of all colours secretly rely on bracket creep to help tax collections keep up with the inexorable growth in government spending.

But bracket creep depends on both reasonable inflation and real wage growth to work its barely noticed fiscal magic.

What happens if inflation stays low and real wages stop growing? You have to junk your rhetoric about smaller government and keep doing what Malcolm Turnbull did in this budget: justify explicit tax increases.

Either that, or get wages growing properly.

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It's official: the labour market is different

Any report that the hardline commentators brand as "mushy drivel" can't be all bad. And, indeed, the Productivity Commissions' draft report on the Workplace Relations Framework is far more enlightened, balanced and sensible than we've come to expect from that highly model-bound institution.

For several years, militant employer groups and the national dailies have been claiming that Julia Gillard's Fair Work Act reregulated the labour market, put the unions back on top and caused the slowdown in productivity improvement.

The report puts those people back in their box, rejecting outright their claim that the industrial relations system has become dysfunctional.

"Many features work well, especially given the need to find a balance between the conflicting goals of the parties involved," the commission's chairman, Peter Harris, said.

"Changes to the workplace relations framework have to recognise that it's not just about the economics. There are ethical and community norms about the way in which a country treats its employees."

The report's conclusion is that industrial relations needs "repair not replacement". So it does propose a lot of changes – most of which go the employers' way – which are worth debating, but not today. Today let's just record the full extent to which the scales have fallen from the commission's eyes.

Its first realisation is that the labour market isn't the same as other markets and labour is not just an ordinary input to the production process.

"Labour economists [those economists who specialise in studying the labour market] generally recognise that labour markets work somewhat differently from the pure competition model. Of course, no market aligns completely with the basic and tractable model described in introductory economic textbooks, and some of the common divergences from the competitive model arise in labour markets too," the report says.

"However, labour markets additionally have some particularly distinctive features. These features provide a potential economic rationale for different aspects of labour market regulation . . ."

What's distinctive about the labour market is that "units" of labour being added to the production process inescapably come with fallible humans attached. What's more, the human units work for fallible human managers. This makes the labour market far less impersonal than textbooks describe.

"In the real world, employers and employees are people with all their various flaws and virtues, and these can collide in workplaces in ways that have ramifications for how labour markets function."

For one thing, "people make mistakes". For instance, employers and employees may form an employment contract without doing enough to check the other side out.

For another, "employers and employees have values that are important to the way they do their work. An employee may want to work many additional hours at no cost because of professional pride. Employers may want to pay bonuses, provide better staff facilities or assist an employee facing family problems (say domestic abuse) because they are dealing with human beings who they wish to help and please.

"Employers and employees dealing with each other are not merely doing so as part of a calculated business strategy, and in some cases this opens the door for one party to exploit the other's goodwill and non-monetary motivations. (One less altruistic formulation of this is that employers may sometimes set higher prices for labour to motivate trust and to increase the cost of shirking – one example of so-called 'efficiency wages'.)"

The simple model assumes units of input and even units of output are homogeneous (all the same). But "there are few 'representative' employers and employees. People have heterogeneous [different] tastes for workplace conditions and heterogeneous abilities, even when paid the same wage rate.

"Some businesses are poorly managed, and most are not at the technological and managerial frontier [not best-practice]."

Some of these complexities "suggest a need for regulation, others not. For example, regulation of blatantly unfair dismissal is justified, not only because the act itself is problematic but also because the potential to do it allows leverage by an employer to exploit vulnerable employees".

The commission "considers that, on average, employers have stronger bargaining power than employees, with consequences for wages and conditions, unless countered by regulations or (constrained) employee collective bargaining".

Get that? The commission acknowledges the legitimacy of collective bargaining. It also accepts the relevance of ethical and social considerations.

"Labour market outcomes do not just affect economic performance – they also have a substantial impact on equality of opportunity, the stability of family relationships and social cohesion more generally.

"The ethical and social dimensions of the labour market form a basis for many aspects of the workplace relations system that differentiate it from the regulation of other markets. For example, the 'price' of labour differs from the price of most other inputs in an economy.

"A broad principle underpinning Australia's competition policy framework is that lower prices from competition are almost always desirable. In labour markets it is less clear that a lower price is necessary desirable, given that many people's incomes and wellbeing depend to a considerable extent on the price of labour and it can be costly to use alternative mechanisms to redistribute income.

"Indeed, the existence of a minimum wage – a 'floor price' set by regulation, which would usually be seen as contrary to the public interest for other goods and services – illustrates this distinction."

Returning to the commission's dismissal of the militant employers' claims, it finds that "contrary to perceptions, Australia's labour market performance and flexibility is relatively good by global standards, and many of the concerns that pervade historical arrangements have now abated.

"Strike activity is low, wages are responsive to economic downturns and there are multiple forms of employment arrangements that offer employees and employers flexible options for working."

But my favourite quote is this: "Toxic relationships between employers and employees can sometimes surface due to poor relationship management rather than flaws in the workplace relations framework."

Ain't that the truth.

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