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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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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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The RBA is spooked by pay rises. It should relax

By MILLIE MUROI, Economics Writer

When the Reserve Bank meets next week, it will probably cut interest rates. But it will be some time before it is comfortable enough to lower them to a level that isn’t grinding down economic growth.

Already, some economists have slammed the bank for being slow to cut rates, saying it’s causing more cost-of-living pain than necessary for people with home loans.

Now that the bank’s preferred measure of inflation is within its 2 per cent to 3 per cent target range and the economy has slowed to a crawl (with the risk of a further slowdown as US President Donald Trump’s tariffs hit home), those criticisms are growing louder.

So, why is the Reserve Bank still determined to keep the economy growing below its potential? A lot of it comes down to the bank’s phobia of pay rises – which, like many modern-day fears, served us well in the past but aren’t so useful today.

One of the first rules we learn in economics is that the prices we pay are determined by the balance between supply and demand: when supply of a good or service outstrips demand for it, prices fall, and when demand exceeds supply, prices rise.

Then, we learn all the reasons why this rule isn’t that simple. For example, if a business has a lot of power (maybe it has few competitors), it can charge more for its goods and services.

On the other hand, when customers hold more power, they can drive prices down. How do you think the Australian government manages to negotiate cheaper prices for medicines it buys from other countries? By acting as a single buyer, representing millions of Australians, which gives it a lot more bargaining power than if you or me, individually, tried to negotiate with the pharmaceutical giants. This is what’s called a “monopsony”.

Put simply: prices are determined by the balance of supply and demand – but also the power balance between buyers and sellers.

Our wages are determined in a similar way, which is what the Reserve Bank has been worried about. At almost every interest rate decision in the past couple of years, the bank has mentioned the strong labour market as a reason for its reluctance to cut rates.

Think of your wage as the price of the work you supply. Workers sell their labour to companies which buy – or employ labour. This is called the labour market.

When there’s more demand for workers than there is supply, we have a labour shortage and unemployment tends to be low. This is the position we’ve been in for the past few years, when unemployment dropped to a record low of 3.4 per cent and has remained historically low at roughly 4 per cent.

While this might seem like a good thing, the Reserve Bank is worried.

Its biggest concern is inflation, which it’s worried could follow the same path it did in the 1970s. That is, prices could spike back up if unemployment stays low and businesses give us big wage rises which, in turn, could feed into higher prices.

How do we know the bank is biting its nails? Because of how carefully it’s treading. While inflation hit nearly 8 per cent in 2022, that figure has fallen a lot over the past two years. Yet in that time, the central bank has cut interest rates only once (and raised them six times).

To be fair, employment is growing robustly (a huge 89,000 additional Australians were employed in April compared with March) and job vacancy data shows there’s still a big worker shortage.

But a “wage explosion” is unlikely given the labour market has changed radically since the 1970s.

Wages have finally started growing faster than inflation, but it’s been at a relatively modest pace of 3.4 per cent over the year – and following a year-and-a-half in which wage growth fell short of price rises.

So, what explains the Reserve Bank’s worries of excessive wage growth?

For one thing, the bank relies on a relatively neoclassical view of how the economy works, one in which demand and supply (in this case, of labour) determine price levels, including wages, with individual firms having little control over how much to pay their workers. It’s why the bank is constantly surprised by the strength of the labour market – and waiting (with little avail) for wages to spring up out of it like a jack in a box.

Meanwhile, this lack of a wage explosion comes as no surprise to a lot of labour economists, including Professor Emeritus David Peetz from the Carmichael Centre.

That’s because the neoclassical view of economics tends to assume everyone has roughly equal bargaining power, while many labour economists acknowledge that isn’t the case – especially in recent years.

Peetz argues that real wages – that is, wages adjusted for inflation – have been held back in Australia in recent decades because workers’ power to negotiate has been persistently eaten away.

“Workers have lost a lot of power since the last wages explosion in the 1970s,” he says, noting that from 2014 to 2022, government policies such as WorkChoices have taken away workers’ bargaining power.

The Reserve Bank isn’t totally blind to this. Their economists have written about bargaining power and its relationship with wages. But their justification of interest rate decisions suggests they don’t give much weight to it.

While the bank might worry the current skills shortage could lead to a wage spike and further inflation as in the 1970s, Peetz points out employers now rarely feel compelled to hand out pay rises in response to skills shortages.

In 2023, Jobs and Skills Australia, a federal government agency, asked employers what they do in response to a skills shortage. Only 1 per cent said they would adjust how much they paid their workers.

Why? Because there’s not as much pressure to do so when only one in seven Australian workers are part of a union (it was one in two during the 1970s). The threat of industrial action such as strikes is much smaller. Only 100,000 working days were lost in 2021 compared with 6.3 million working days lost to industrial action in 1974.

While workers in 1974-75 managed to win wage rises of 10 per cent accounting for inflation, workers went backwards by 3 per cent in 2021-22.

This is because of several changes including legal changes in recent decades which have made collective bargaining (in which workers across an entire industry band together to negotiate) less common than enterprise bargaining, in which workers negotiate directly with their employer.

Wage increases won through enterprise bargaining apply only to workers at a specific business or site, limiting those workers’ negotiating power as well as how far the wage rise, if won, can spread. While a wage rise at one company might put some pressure on another company to do the same, in practice, this kind of flow-on impact is limited.

While changes under the Albanese Labor government such as its same job, same pay policy have started to hand more power back to workers, rampant wage rises – and a resurgence in inflation – are far from a big threat to the economy. The Reserve Bank can, and probably should, relax a bit, too.

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Dutton's election campaign rout lets RBA off the hook

Reserve Bank governor Michele Bullock must be breathing a quiet sigh of relief now the Albanese government has been triumphantly returned to office. If you can’t think why she should be relieved, you’re helping make my point.

There was something strange in all the accusations hurled at the Labor government for doing little or nothing to ease the great cost-of-living pain so many voters had suffered over the three years of its first term in office.

And that was? Never once did Peter Dutton mention the Reserve Bank. The tough state of the economy was 100 per cent Labor’s fault. And never once did Anthony Albanese or Treasurer Jim Chalmers say what they could have: “Don’t blame us, it was the central bank wot dun it.”

“And there was nothing we could do to stop it doing what it did,” Labor didn’t say. “Had we tried to counter what the Reserve did in increasing mortgage interest rates by a massive 4.25 percentage points, it would just have raised rates even further.” (As every macroeconomist knows, such behaviour is dignified by the title “the monetary policy reaction function”.)

So Albo & Co. did what the system required of them: they stood there and took all the abuse on their own chin. Since the Reserve was granted independence of the elected government in the mid-1990s, the deal between the elected government and the Reserve is that the Reserve says nothing about the government’s conduct of fiscal (budgetary) policy, and the government says nothing about interest rates.

Albanese’s quite unexpected landslide win will tempt many people to start rewriting history in favour of the victors. “Ah yes, Labor was never really in any bother and there was never much risk that all the cost-of-living pain could see it tossed out.”

Bollocks. Before the formal start of the campaign in late March, the polls showed there was a big chance Labor would be tossed out. The Coalition was ahead in the polls, and Dutton’s personal approval rating was high.

It was only as the five-week campaign progressed, and voters got their first close look at Dutton and started listening to what he was saying, that the Coalition’s lead in the polls started sliding down and voters’ comparison of him with Albanese started shifting in Albo’s favour.

Both sides knew from their research that the cost of living was the only issue voters wanted to know about. So both sides vowed to talk about little else. Labor stuck to that resolve, but Dutton couldn’t make himself.

The truth is, throughout his long career in politics, Dutton has shown little expertise or interest in the management of the macroeconomy. He’d been a copper, who saw his life’s vocation as to “protect and serve”. He was on about the threat to our security from abroad and the threat on our own streets. And, as the campaign progressed, that’s what he kept returning to.

He was the wrong person to be leading the Coalition at a time when economics was all that mattered. He had a powerful (though misleading) line asking people if they felt better off than they were three years ago, but failed to keep pushing it. This left Labor room to push its antidote: “don’t worry, the worst is over, interest rates have started coming down, and soon everything will be back to normal”.

But what’s that got to do with the Reserve Bank? Just this: had the Coalition succeeded in getting Labor sacked, Labor would rightly have blamed the Reserve’s tardiness in cutting interest rates for that sacking, and its side of politics would have gone for at least a decade seeing the central bank as the enemy.

But don’t think the Coalition would have loved the Reserve forever. It would have thought: “If those blasted bureaucrats can trip up Labor, next time they might trip us up”. Get it? Both sides would have been looking for ways to clip the Reserve’s wings.

Two points. First, central bank independence and democracy make awkward bedfellows. They mean the Reserve has all care and no responsibility. Much as they may want to, the voters can’t sack Michele Bullock. The only people voters can take the Reserve’s performance out on is the elected government.

Second, the post-pandemic price surge is the first big spike in inflation in the 30 years since the rich economies adopted the policy of handing over primacy in the day-to-day management of the economy to an independent central bank with an inflation target.

So, only now has this regime been stress-tested. This test has revealed how hard it is for a democratically elected government to carry the can for a central bank taking a seeming eternity to use higher interest rates to get the inflation rate back into the target zone.

The truth is, all the seeds of the inflation surge were sown before Labor was elected in May 2022. But Labor didn’t waste its breath trying to mount that argument. The retort would have been obvious: surely three years is long enough for any macroeconomic problem to be fixed?

Good point. When Labor took over, the annual inflation rate stood at 5.1 per cent. By the end of 2022, it had peaked at 7.8 per cent. But by this time last year – 15 months later – it was down to 3.6 per cent. And now it’s back in the 2 to 3 per cent target range.

So, with consumer spending almost flat, the past year has seen inflation do what it could always have been expected to do: keep falling back to target. So why did the Reserve start cutting the official interest rate only in February?

The first rule of using interest rates to manage demand (spending in the economy) is that, because rate changes affect demand with a “long and variable” delay, you don’t wait until inflation reaches the target before you start cutting rates.

But the Reserve has ignored this rule because of its fear of a wage explosion that was never likely to happen. Its “blunt instrument” has hurt voters with mortgages more than was needed. Fortunately for the Reserve, however, its mismanagement hasn’t got an innocent government kicked out.

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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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The fine print costing Australians a pay rise

By MILLIE MUROI, Economics Writer

Hidden in the job contracts of about one in five Australians are little clauses weighing down their chances of landing a pay rise or a better-fitting role.

They might, for instance, ban you from working for any of your employer’s competitors for a set amount of time – even after leaving your job. Or, they can prevent you from setting up your own business in the same industry. These are called “non-compete” clauses, and they’ve been on the rise for the past five years.

From 2027, non-compete clauses on workers earning less than $175,000 a year could be banned by a Labor government. But why are these clauses so bad? And will banning them make much of a difference for workers or the economy?

Non-competes are mostly in place to protect business interests, but in some roles, they can be reasonable. For example, they might stop a big bank employee from sharing timely and confidential information or business secrets with a competitor or prevent them from taking client relationships they’ve developed through the bank to another bank.

But in some cases, these clauses simply handcuff low-paid workers to their jobs, stopping them from seeking better jobs. Roughly 3 million Australians are affected by these clauses, including childcare workers, construction workers and hairdressers. Who knew childcare was so full of sensitive trade secrets?

Non-competes are generally not enforceable – unless a court rules that it’s “reasonably required” to protect a “legitimate interest”. But as former Fair Work Commission president Iain Ross points out, these “interests” have expanded to concepts such as a “stable workforce”.

The open-endedness also tends to benefit employers because they usually have more resources to back them up, and workers aren’t often willing to foot the legal costs and spend time arguing their case in court. A 2013 study, for example, put the cost of legally challenging the validity of a non-compete at between $20,000 and $100,000 – a year’s worth of salary or more for some employees.

Another 2020 study in the US found that non-competes tended to discourage workers from leaving for a competitor by roughly the same degree regardless of whether it was enforceable or not.

That means workers tend to just suck it up and stay in their jobs – even if it means missing out on a pay rise. And it’s often the lower-skilled and lower-paid workers with weaker bargaining power who are hit hardest.

Economic research institute e61 found people who work for companies that use these clauses are paid 4 per cent less on average than similar workers at similar firms that don’t use them. Lower-skilled workers bound by non-competes were even harder hit, earning about 10 per cent less after five years than those who weren’t bound by these clauses.

For a worker on a median wage, banning non-compete clauses could lead to a wage increase of up to $2500 a year.

But non-competes aren’t just an issue for workers. They are also a drag on the economy.

Lower job mobility – that is, less ability for workers to switch jobs – can be a downer for productivity. Why? Because they’re less able to move to jobs they might be a better fit for, and because it dampens the incentive for businesses to better themselves in order to attract and retain their workers.

Ross also points out that some of the key barriers to Australia improving its productivity include weak business investment and a slowdown in business dynamism: meaning fewer new firms, less movement of workers between firms and weak adoption of new technologies.

Banning non-competes will boost productivity because it allows workers to move to jobs they may be better at. It also forces businesses to innovate and find ways to improve the way they do things – including investing in training and support they provide to their workers – in order to stay ahead of their competition and stay in business.

Research from the Productivity Commission suggests the proposed ban on non-compete clauses could fast-track productivity and add $5 billion – or 0.2 per cent – to Australia’s GDP.

Neither major party has been game to tackle the big issues such as tax reform (which are crucial to improving our productivity and living standards), but banning non-compete clauses for those earning less than $175,000 a year is a start.

Of course, the details of this change are yet to be ironed out. And business groups have been quick to leap out against it.

The Victorian Chamber of Commerce, for example, called it “workplace overreach” while the Council of Small Business of Australia said it made life harder for small businesses already struggling with skills shortages.

There’s valid criticism that banning non-compete clauses puts some confidential information at risk. But this could be covered by non-disclosure agreements, which are less of a drag on job mobility and wages – and, in any case, the positive impacts for the economy will outweigh the negatives.

Critics also claim non-compete clauses encourage businesses to invest in areas such training and upskilling their workforces because they can be less worried about losing their workers and wasting resources if those employees decide to leave the job.

But stronger competition could also drive businesses to offer better training opportunities and foster more productive work environments to maintain their edge over competitors.

The Coalition is on the fence about the proposed change, saying it believes employees shouldn’t be “unreasonably restrained” from changing employers or starting their own business, but that small businesses shouldn’t face having their sensitive commercial or customer information “taken by an employee and given to one of their competitors”.

It’s worth noting large businesses are twice as likely to use non-compete clauses as small businesses and that non-competes tend to favour large, existing businesses over small and new firms.

There are certainly limitations in the government’s proposed policy, and details yet to be ironed out. For instance, would the change apply only to new contracts drawn up from 2027 onwards, meaning it would have no effect for the millions of Australians currently bound by them? These questions won’t be answered until the government completes its consultation process.

There’s also evidence that a full ban on non-competes – not just for those earning under a certain threshold – can have widespread benefits. Evidence from California – home to the Silicon Valley – for instance, suggests a complete ban could foster a more dynamic labour market where workers can move around more freely and share knowledge.

It’s taken a long time for the government to care enough to pursue this change – most likely because of the backlash it knew would come from business owners. But if we want agile and innovative businesses, productive workers and a stronger economy, a ban on non-competes is a no-brainer.

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RBA is lost in the frightening territory of full employment

The Reserve Bank’s behaviour last week can only be described as bizarre. It’s a sign that it’s lost its bearings and isn’t sure what’s happening in the economy or where it’s headed. What has caused its befuddlement? Our unexpected return to near full employment. Sheesh. Whadda we do now?

The way “monetary policy” – the Reserve’s manipulation of interest rates – normally works is that, when the rate of price inflation gets too high, it raises interest rates to discourage borrowing and spending. Then, when the demand for goods and services has weakened and the rate of inflation has started slowing, the Reserve starts cutting interest rates back to their normal level.

But that’s not what began last week. After raising the official interest rate by 4.25 percentage points to 4.35 per cent and keeping it there for 15 months, the Reserve cut by 0.25 points, but made it clear it wasn’t sure it should have cut, and warned us not to assume further cuts would follow.

It would wait and see what happened. It didn’t say so, but it left open the possibility that, should inflation start going back up, it would resume raising the official rate.

Huh? What on Earth are these guys playing at? Are rates coming down or aren’t they? It was a case of bureaucratic arse-covering. Hosts of people – those with mortgages, the financial markets and many economists – were demanding a rate cut, and the Reserve didn’t want to get the blame should Anthony Albanese get tossed out at the looming election.

So it sent a signal that rates were coming down, then said it wasn’t a signal. It’s obvious the government was desperate for a rate cut, but note this: at all times Albanese and Treasurer Jim Chalmers have stuck to the agreed etiquette of never publicly expressing any opinion on what the Reserve should or shouldn’t do.

It’s not the first time the Reserve has engaged in arse-covering. Governor Michele Bullock admitted last week that the central bank waited too long before starting to raise rates in 2022. But it made sure it got the first increase in before the May 2022 election, at which the Morrison government got tossed out.

Had it waited until after the election, it would have been criticised for doing the Liberals a favour and, in the process, letting people think the inflation problem arose under Labor.

The point many otherworldly economists don’t get is that just because a central bank is independent of the elected government doesn’t mean it can escape politics. Why not? Because we live in a democracy.

The great contradiction of central bank independence is that, for the bank, it’s all care but no responsibility. If it stuffs up the economy, the governor doesn’t lose her job, the prime minister does. And that’s when the pollies – on both sides – tend to get vengeful.

When a central bank lacks independence, it can leave the politics to the pollies. But if it is independent, it has to do its own politics, which is what Bullock was doing last week.

But why is the Reserve so anxious about cutting rates when underlying inflation is heading down, isn’t far above the 2 to 3 per cent target range, and most economists think monetary policy should be eased? Short answer: because its boffins aren’t old enough to have lived in an economy that’s close to full employment.

Thanks to the excessive monetary and budgetary stimulus applied during the pandemic, the economy boomed and, just after the change of government, unemployment fell to 3.5 per cent, its lowest in almost 50 years. After more than two years of higher interest rates, it’s still only up to 4.1 per cent.

After the review of the Reserve Bank, it was decided to have the longstanding lip-service goal of full employment raised to equal status with the Reserve’s inflation target.

For the past five decades, we and the other rich economies have used a mathematical calculation called the “non-accelerating inflation” rate of unemployment, NAIRU, to give achieving low inflation priority over low unemployment.

This made it easy to get inflation down. You used interest rates to give the economy an almighty hit on the head, causing unemployment to shoot up and the rate of inflation to fall rapidly. Only small problem: you never got back to low unemployment.

This time, however, the Reserve sought to avoid a great worsening in unemployment by not hitting the economy too hard. The consequence has been a slower and less certain return to low inflation. And the jobs market has kept happily steaming along.

Despite flat consumer spending and weak business investment in capital equipment, employment’s still growing strongly and unemployment has risen only a little. The proportion of people with jobs is higher than ever, showing that supply has had no trouble keeping up with demand.

But this is scaring the pants off the Reserve’s boffins. With the labour market so “tight”, surely wages could take off at any moment, halting the fall in inflation – or worse, sending it back up. What’s unnerving them is an old ’70s-model NAIRU machine in the corner, with its red lights flashing and siren blaring. Panic stations. Assume the brace position.

This explains last week’s signal that the Reserve was cutting rates and not cutting them at the same time. When it says what it does next will depend on the data, it means “we’re not really sure what the hell’s going on”.

Trouble is, the world has changed a lot since the invention of the NAIRU machine in the 1970s. The unions used to be able to force excessive pay rises on their bosses, but globalisation, deregulation and the collapse in union membership have changed all that.

The Reserve’s boffins, however, have been so busy with their maths and modelling that they haven’t noticed how much the world has changed. They don’t even seem to have noticed that their regular forecasts of wage growth have been way too high for more than a decade.

No wonder they’re so worried. And until they get the memo, the Reserve will go on punishing everyone impertinent enough to have a mortgage.

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Why we'd be mugs to focus on the cost of living at the election

It’s a good thing I’m not a pessimist because I have forebodings about this year’s federal election. I fear we’ll waste it on expressing our dissatisfaction and resentment rather than carefully choosing the major party likely to do the least-worst job of fixing our many problems.

Rather than doing some hard thinking, we’ll just release some negative emotion. We’ll kick against the pricks – in both senses of the word.

We face a choice between a weak leader in Anthony Albanese (someone who knows what needs to be done, but lacks the courage to do much of it) and Peter Dutton (someone who doesn’t care what needs to be done, but thinks he can use division to snaffle the top job).

By far the most important problem we face – the one that does most to threaten our future – is climate change. We’re reminded frequently of that truth – the terrible Los Angeles fires; last year being the world’s hottest on record – but the problem’s been with us for so long and is so hard to fix that we’re always tempted to put it aside while we focus on some lesser but newer irritant.

Such as? The cost of living. All the polling shows it’s the biggest thing on voters’ minds, with climate change – and our children’s future – running well behind.

Trouble is, kicking Albanese for being the man in charge during this worldwide development may give us some momentary satisfaction, but it will do nothing to ease the pain. Is Dutton proposing some measure that would provide immediate relief? Nope.

Why not? Because no such measure exists. There are flashy things you could do – another big tax cut, for instance – but they’d soon backfire, prompting the Reserve Bank to delay its plans to cut interest rates, or even push them a bit higher.

We risk acting like an upset kid, kicking out to show our frustration without thinking about whether that will help or hinder their cause.

Rather than finding someone to kick, voters need to understand what caused consumer prices to surge, and what “the authorities” – in this case, Reserve Bank governor Michele Bullock and the board, not Albanese – are doing to stop prices rising so rapidly.

The surge was caused by temporary global effects of the pandemic – which have since largely gone away – plus what proved to be the authorities’ excessive response to the pandemic, which is taking longer to fix.

It’s primarily the Reserve Bank that’s fixing the cost of living, and doing it the only way it knows: using higher mortgage interest rates to squeeze inflation out of the system. But doesn’t that hurt people with mortgages? You bet it does.

What many voters don’t seem to realise is that, by now, the pain they’re continuing to feel is coming not from the disease but the cure. Not from further big price rises but from their much higher mortgage payments.

So it’s the unelected central bank that will decide when the present cost-of-living pain is eased by lowering interest rates, not Albanese or Dutton. A protest vote on the cost of living will achieve little. Of course, if you think it would put the frighteners on governor Bullock, go right ahead. She doesn’t look easily frightened to me.

But there’s another point that voters should get. When people complain about the cost of living, they’re focusing on rising prices (including the price of a home loan). What matters, however, is not just what’s happening to the prices they pay, but what’s happening to the wages they use to do the paying.

When wages are rising as fast as prices – or usually, a little faster – most people have little trouble coping with the cost of living. But until last year, wages rose for several years at rates well below the rise in prices. Get it? What’s really causing people to feel cost-of-living pain is not so much continuing big price rises or even high mortgage payments, but several years of weak wage growth.

Why does this different way of joining the dots matter? Because, when it comes to wages, there is a big difference between Albanese and Dutton.

Since returning to government in 2022, Labor has consistently urged the Fair Work Commission to grant generous annual increases in the minimum award pay rates applying to the bottom fifth of wage earners.

This will have helped higher-paid workers negotiate bigger rises – as would Labor’s various changes to industrial relations law. Indeed, this is why wages last year returned to growing a fraction faster than prices.

These efforts to increase wage rates are in marked distinction to the actions of the former Coalition government. So kicking Albanese for presiding over a cost-of-living crisis risks returning to power the party of lower wages.

But here’s the trick: it also risks us taking a backward step on climate change. The party that isn’t trying hard enough could be replaced by a Coalition that wants to stop trying for another decade, while it thinks about switching from renewables to nuclear energy.

From the perspective of our children and grandchildren, the best election outcome would be a minority government dependent on the support of the pollies who do get the urgency of climate action: the Greens and teal independents.

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Memo to RBA: If wages growth isn't the problem, what is?

 I can’t help wondering if the Reserve Bank isn’t misreading the economy. And it seems I’m not alone.

When you’re seeking to manage the economy through its ups and downs, it’s critically important to diagnose its problems correctly. If you’ve misread the symptoms, you can make things worse rather than better. Or, for instance, you can single out citizens who had the temerity to borrow heavily to buy their home and subject them to needless punishment.

Last week, several things made me start wondering if the Reserve needs a rethink. The first was a paper by America’s highly regarded Brookings Institution, that I should have got onto in August.

The world’s central banks – including ours – have concluded that this unexpected burst of inflation is explained partly by temporary disruption to the supply of goods caused by the pandemic (and Russia’s attack on Ukraine), and partly by excessive demand following the authorities’ excessive economic stimulus to counter the lockdowns.

Sorry, not true says the Brookings study, which looked at new data.

“The vast majority of the COVID-19 inflation surge is accounted for by supply-linked factors, especially a rise in company [profit] margins that followed severe delivery delays at the height of the pandemic. Demand-linked factors, notably indicators of labour market overheating, play almost no role.

“As a result, the argument that policy stimulus was excessive is weak,” the study says. And, since company profit margins have yet to return to their previous level, this suggests the inflation rate has yet to fall as the effects of the pandemic continue to unwind. If so, the US Federal Reserve may have overtightened.

Now, all that refers to the US economy and may not apply to ours. May not, but I doubt it.

Despite four successive quarters in which the economy’s rate of growth in “aggregate demand” has been very weak, our Reserve is delaying a reduction in interest rates because, it says, the level of demand is still higher than the level of supply. If so, the rate of inflation may not keep falling, or may even start rising.

How does the Reserve know the level of supply is too low? Mainly by looking at the measure of idle capacity in the jobs market – aka the rate of unemployment.

So, when we saw the figures for October last week, and they showed unemployment still stuck at an exceptionally low 4.1 per cent, no higher than it was in January, it wasn’t surprising that many concluded the Reserve wasn’t likely to start cutting the official interest rate until May next year.

But hang on. One good measure of the job market’s ability to supply more labour as required is the “participation rate” – the proportion of the working-age population willing to participate in the paid labour force by either having a job or actively seeking one.

Now, the econocrats have been predicting that the ageing of the population would cause the “part rate” to start falling for at least the past 20 years. But in that time, it has kept going up rather than down, and is now higher than ever. Last week’s figures show it’s risen by a strong 0.5 percentage points to 67.2 per cent over just the past year.

So where’s the evidence the economy’s reached the end of its capacity to supply more workers?

My guess is that all the Reserve’s unaccustomed talk about the level of supply being too low relative to demand is just a way for it to avoid admitting that its judgment about when to start cutting interest rates is still – as it has been for all macroeconomists for the past 40 years – heavily reliant on its calculation of the present NAIRU: the “non-accelerating-inflation rate of unemployment”, which is the lowest the unemployment rate can fall before shortages of labour cause wage inflation to start going back up.

I think the Reserve’s reluctance to cut is driven by its (undisclosed) calculation that the NAIRU is well above 4.1 per cent. But earlier this month, Treasury secretary Dr Steven Kennedy told a parliamentary committee that, though such calculations are “uncertain”, Treasury estimates that the NAIRU is “around 4.25 per cent, close to the current rate of unemployment”.

Another thing we learnt last week was that a key measure of the rate at which wages are rising, the wage price index, rose by 0.8 per cent during the September quarter, causing the annual rate to fall from 4.1 per cent to 3.5 per cent.

According to Adam Boyton and other economists at the ANZ Bank, this caused the six-month annualised rate of wages growth to be unchanged at 3.2 per cent. “Wages growth has slowed across awards, enterprise bargaining agreements and individual agreements, pointing to a broad-based slowdown,” they said.

This – combined with the lack of increase in the rate of unemployment over the past year, and allowing for the delay before what’s happening to unemployment affects wage rates – has led these economists to conclude the NAIRU is closer to 3.75 per cent.

Finally, Westpac chief economist Dr Luci Ellis noted last week that another measure of wages pressure, the cost of labour per unit (which takes account of changes in the productivity of workers), has fallen from an annualised rate of 7 per cent to 3.5 per cent in just the six months to September.

She said that even if the annual improvement in the productivity of labour averages a touch below 1 per cent, which would be worse than our recent performance, annual wages growth averaging 3.2 per cent – as it has for the past three quarters – is “well and truly consistent with inflation averaging 2.5 per cent or below”.

Get what all this says? Ever since the Reserve began raising interest rates in May 2022, it has worried about the possibility of excessive growth in wages keeping inflation above the Reserve’s target zone. In all that time, and particularly now, it’s shown absolutely no sign of doing so. Neither shortages of labour nor the (much reduced) power of the unions has caused a problem.

The Reserve needs to lose its hang-up about wages and think harder about the need to ease the pain on innocent bystanders.

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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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RBA worries too much about expectations of further high inflation

Other central banks have started cutting interest rates, yet our Reserve Bank is declining to join them because, as governor Michele Bullock explained on Friday, it doesn’t expect our rate of inflation to fall back to the mid-point of its target range “in a reasonable timeframe”.

Its latest forecasts don’t see the “underlying” (that is, smoothed) annual inflation rate returning to 3 per cent until the end of next year, and reaching the mid-point of 2.5 per cent until late in 2026.

Clearly, the Reserve doesn’t see such a timeframe as reasonable, so it’s keeping interest rates high for longer, until it can see inflation returning to target much earlier. And, Bullock warns, should the inflation outlook get worse, she won’t hesitate to raise rates further.

Obviously, the longer interest rates stay high, the greater the risk of forcing the economy into recession, with much higher unemployment and business failures, something Bullock swears she wants to avoid.

But what’s the hurry? Why is taking another two years to get inflation down an unreasonable timeframe? (Another question is, what’s so magical about 2.5 per cent? Why would 3 per cent or 3.5 per cent also be unreasonable? But I’ll leave that for another day.)

The hurry comes from central bankers’ longstanding fear that, should the inflation rate stay high for too long, the people who set prices and wages will come to expect that inflation will stay high rather than return to where it used to be.

Why do their expectations matter? Because, many economists believe, when enough people expect inflation to stay high, they act on their expectations and so make them a reality. Workers and their unions demand higher wages, and businesses pass their higher costs on to customers in higher prices.

This is the much-remarked “wage-price spiral”. It’s important to remember, however, that inflation expectations and wage-price spirals aren’t a longstanding tenet of either neoclassical or Keynesian economics.

They’re just a bit of pop psychology some economists came up with to explain why, in the mid-1970s, the developed economies found themselves beset by “stagflation” – both high inflation and high unemployment.

So how much we should worry about inflation expectations is an empirical question: is the idea borne out by the facts and figures?

In 2022, Dr John Bluedorn and colleagues at the International Monetary Fund conducted a study of the historical evidence for wage-price spirals in the developed economies, concluding that a jump in wage growth shouldn’t necessarily be seen as a sign that a wage-price spiral is taking hold.

Bluedorn elaborated on these finding at the Reserve Bank’s annual research conference last September. The discussant for his paper was Iain Ross, former president of the Fair Work Commission and now a member of the Reserve’s board.

Ross (and leading labour market economists, such as Melbourne University’s Professor Jeff Borland) readily agree that Australia experienced a wage-price spiral in the 1970s. But both men conclude that our circumstances 50 years later are “very different”, which means it should be possible to sustain steady wage growth without initiating a wage-price spiral.

In mid-2022, Borland listed three respects in which our present circumstances are different. First, upward pressure on wages is being limited on the supply side by employers’ ability to give extra hours of work to part-time workers who’d prefer more hours, and by drawing more participants into the jobs market.

Second, changes in the “institutional environment” since the 1970s have reduced the scope for people to get wage rises based on the principle of “comparative wage justice” – “Those workers have had a pay rise, so it’s only fair that we get the same.”

And third, a decline in the proportion of workers who are members of a union, and a range of other factors, have reduced workers’ bargaining power, thus limiting the size of wage increases likely to be obtained.

There could hardly be anyone in the country better qualified than Ross to explain how the institutional arrangements governing the way wages are set have changed over the decades. He told the conference that “these changes have been profound and substantially reduce the likelihood of a wage-price spiral”.

The central difference was that, in the 1970s and 1980s, the institutional arrangements facilitated the transmission of wage increases bargained at the enterprise level – usually by unions in the metal trades – to the relevant industry sector and then ultimately to the broader workforce.

There were four important respects in which the present rules are very different. First, the new “modern awards” operate as a minimum safety net and the circumstances in which minimum wages may be adjusted are limited. In effect, there is no scope to adjust minimum award rates to reflect the outcome of collective bargaining at the enterprise level.

Second, the Fair Work Act limits the general adjustment of all modern-award minimum wage rates to one annual wage review conducted by the Fair Work Commission.

Third, enterprise agreements need to be approved by the commission before they acquire legal force. The length of agreements averages three years, during which time employees covered by that agreement can’t lawfully engage in industrial action in pursuit of further wage rises.

Fourth, the sanctions against engaging in such industrial action are, Ross said, “readily accessible and effective”.

Ross noted that the proportion of all workers who are members of a union has fallen dramatically since the 1970s. From a little above 50 per cent, it has fallen to 12.5 per cent. And in the private sector it’s down to 8.2 per cent.

The manufacturing sector and its unions were central to the wage-price spiral of the 1970s. But manufacturing’s share of total employment has fallen from 22 per cent to 6 per cent, while the proportion of union members in manufacturing has fallen from 57 per cent to 10 per cent.

Whereas the annual number of working days lost to industrial disputes was about 800 per 1000 employees during the 1970s, these days it’s next to nothing.

Ross said the present enterprise bargaining arrangements operate as a shock absorber by constraining the bargaining capacity of employees subject to an agreement. “To date there is no evidence of the emergence of a wage-price spiral in the present circumstances and recent data suggests such an outcome is unlikely,” he concluded.

My point is, there’s no reason for the Reserve to live in fear of an imminent worsening in inflation expectations if workers and their unions’ ability to turn their expectations into higher wages is greatly constrained. That being so, we shouldn’t allow impatience to get the inflation rate back to target to worsen the risk we’ll end up in a recession, the depth and length of which could greatly impair our return to full employment.

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One reason for our inflation problem: weak merger law

Nothing excites the business section of this august organ more than news of another merger between two public companies. “Merger” is the polite word for it; usually the more accurate word is “takeover”.

So, is the dominant firm offering a good price for the firm being acquired? And should the shareholders in the dominant firm be pleased or worried about the deal? Will it benefit them, or just the company executives who organised it? A bigger company equals higher salaries and bonuses, no?

The financial press tends to regard takeovers as all good fun. Part of the thrills and spills or living and investing in a capitalist economy. But such mergers change the shape of the economy that provides us with our living. Do they make the economy better or worse?

According to the Albanese government’s Assistant Minister for Competition Dr Andrew Leigh, a former economics professor, some mergers improve the economy, whereas some worsen it.

As he explained in a speech this week, mergers are part of the market mechanism that allows financial capital to go where it’s most needed and will do most good to the consumers, workers and savers who make up an economy.

Most mergers are a healthy way for firms to achieve economies of scale and scope, and to access new resources, technology and expertise, Leigh says.

But mergers can do serious economic harm when firms are motivated by a desire to squeeze competitors out of the market and so capture a larger share of the particular market.

So “the small number of proposed mergers that raise competition concerns warrant close scrutiny” to see whether they should be allowed to proceed, he says.

The point is that, according to economic theory, the main thing ensuring ordinary people benefit from living and working in a capitalist economy is strong competition between the profit-making businesses providing our goods and services, which limits their ability to charge excessive prices and make excessive profits.

Competition obliges businesses to pass on to customers much of the savings they make from using improved technology to increase their economies of scale, while preserving the quality of service provided to their customers.

Similarly, competition between a reasonable number of alternative employers is needed to ensure their workers are fairly paid.

This is why laws controlling mergers are one of the main pillars of policy to keep competition between firms effective, along with prohibitions on the forming of cartels and other collusion between supposedly rival firms, and the misuse of “market power” – the power to keep prices above the competitive level.

Leigh says merger law is unique among those pillars because it’s the preventative medicine of competition law. While the other pillars deal with anticompetitive practices that are already being used, it deals with the likely effect of future anticompetitive actions the merger could make possible.

Fine. Trouble is, reformers have been batting for about 50 years to get effective restrictions on the ability of Australian companies to proceed with mergers designed to limit competition and enjoy excessive pricing power.

Leigh notes that a less-competitive market can add to the cost of doing business, and reduce the incentives and opportunities to invest, grow and innovate. For consumers, a less competitive market leads to higher prices, less choice, and lower growth in wages.

Big companies have resisted previous reforms – sometimes as represented by the (big) Business Council – sometimes, when Labor’s been in power, by big unions in bed with their big employers.

But now the Albanese government is making another attempt to get decent control over mergers that are expected to worsen competition.

And not before time. The challenge in Australia is to name more than a handful of industries not dominated by a few big firms.

Academic research Leigh has been associated with has shown that monopoly power worsens inequality by transferring resources from consumers to shareholders. He found evidence that market concentration – a few firms with a big share of the market – had worsened.

As well, profit margins had worsened and “monopsony hiring power” – few employers in an industry – was a problem in many industries.

After the Albanese government’s election in 2022, Treasurer Jim Chalmers and Leigh set up a Competition Taskforce within the Treasury focused on advising the government on actionable reforms to create a more dynamic and productive economy.

The taskforce’s top priority was to reform our merger laws. Consultations with industries said our piecemeal merger process was unfit for a modern economy and lagged best practice in other countries.

We were one of only three developed countries with a system of notifying proposed mergers that was merely voluntary. The Australian Competition and Consumer Commission (ACCC) complained about inadequate notification of proposed mergers, insufficient public information about the mergers, “a reactive, adversarial approach from some businesses” and limited opportunity to present evidence of likely economic harm arising from a particular merger.

In April this year, Chalmers and Leigh announced what they said were “the most significant reforms to merger rules in almost 50 years”. They would reduce three ways of reviewing merger proposals to a single, mandatory but streamlined path to approval, run by the ACCC.

For merger proposals above a monetary threshold or market-concentration threshold, this means those which would create, strengthen or entrench substantial market power will be identified and stopped. But those consistent with our national economic interest will be fast-tracked.

Challenges to the commission’s decisions will be the responsibility of an Australian Competition Tribunal, made up of a Federal Court judge, an economist and a business leader.

This should make it easier for the majority of mergers to be approved quickly, so the commission can focus on the minority that are a worry on competition grounds.

It’s the great number of our industries dominated by just a few firms that makes us especially susceptible to the inflation surge we’re still struggling to get back under control.

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Construction industry a honeypot that capital and labour fight over

Don’t fall for the bogeyman theory of our troubled major constructions industry: its union has gone rogue, been infiltrated by criminal elements, and must be cleaned out, so life can return to normal. There’s much more to it than that.

But first, let’s be clear. I’m trying to explain the phenomenon, not make excuses for thuggery and lawbreaking – even if perpetrated by the union movement, with successive Labor governments pretending not to have noticed.

Anyone who remembers the exploits of Eddie Obeid in NSW knows Labor has form when it comes to turning a blind eye to illegality. Like the ACTU, Labor does need to clean up its act. And as always, lawbreaking should be punished.

Like every prime minister, premier, politician and union secretary in the country, I’ve long known that the construction union engages in thuggish, often illegal behaviour (see three royal commissions below). When my superannuation fund merged with the huge construction industry fund, I moved my money elsewhere.

But if it’s just a matter of Labor governments failing to punish the crimes of their union mates, ask yourself this: how come the Liberals haven’t fixed it? John Howard had almost a decade to do so, but the Australian Building and Construction Commission he set up in 2005 didn’t get far in the seven years before Labor abolished it.

Likewise, the Abbott government’s re-established commission didn’t get far in the seven or so years before the Albanese government re-abolished it last year.

This problem’s been around for at least 40 years. The Hawke government deregistered the Builders Labourers Federation in the 1980s, but that didn’t work. Liberal federal and NSW governments have set up three royal commissions – in 1992, 2003 and 2015 – to no avail.

All of which should make you wonder why it’s so hard to fix such a seemingly simple problem. Could it be that the Libs aren’t fair dinkum either? Could it be that the big construction companies aren’t all that fussed about their union’s bad behaviour?

If so, could it be that they’re not privately pressing the Libs actually to fix the problem rather than just score political points against Labor?

We’re hearing about small contractors who aren’t game to stand up to union bullies for fear of retribution. I don’t doubt it’s true. But the construction companies running the show are huge. I don’t believe that, if they really wanted to rid themselves of union thugs, they lack the brains or the wherewithal to make it happen.

Remember too that when it comes to industrial relations, it’s always the unions that look bad, never the employers. That’s because the world is run by bosses. When everyone does what the boss tells them to, there’s never a problem.

But when the workers form a union to challenge the boss’s decision to pay them peanuts – or to run worksites where you could lose your life – it’s always the union that’s making trouble. It’s always greedy workers who strike and make you walk to work, never intransigent bosses. The media almost invariably fall for this characterisation.

We’re hearing that the rogue union’s disruptions and success in extracting excessive wages and conditions have forced up the cost of big city buildings, railways and motorways. It may look that way, but I’m not sure that it’s true.

Nor am I persuaded by the claim that high wages in the construction sector have flowed through to home building, and so explain why it’s so hard to afford to buy a place. This is a tricky way of claiming that employed carpenters, sparkies, plumbers, tilers and all the rest are grossly overpaid. Bulldust.

And Peter Dutton’s attempt to link union thuggery to the cost-of-living crisis is laughable. Whatever the union’s doing to construction costs, it’s been doing for 40 years, not just the past two.

Next they’ll be telling us the bullying will force the Reserve Bank to raise interest rates again.

But consider this thought experiment. I reckon that if Anthony Albanese could wave a wand and remove all union presence from the construction industry, the effect on the cost of major constructions would be minor.

Why? Because, although the untrained don’t know it, and some economists seem to have forgotten it, the biggest single message of conventional economics is that market prices aren’t just set by the cost of production – supply – but by the interaction of supply with demand.

If it’s true that a rogue union’s demands have been able to push up the costs of constructing office towers and all the rest quite excessively, how come employers have had no trouble passing those excessive costs on to their customers?

Partly because the union has imposed the higher cost on all the businesses in the industry, but mainly because any outfit that wants a city building, or government that wants a motorway, has no choice but to pay up. When economists say that the demand for the output of the construction industry is highly “price inelastic”, that’s what they mean.

But why can the industry get away with high costs? Why do its customers have no choice but to pay? Two reasons. First, the industry enjoys “natural protection”. That is, you can’t import office blocks.

Second, the industry is dominated by a just few big companies. It’s an oligopoly. It lacks effective competition between the local players.

Point is, magically remove the unions and none of that changes. If so, why would the big companies lower their prices? Why wouldn’t they keep charging the prices they know the market will bear?

Not enough people understand the unions’ role in the economy and how they go about advancing their members’ interests. The mistake is to imagine that the bosses represent capitalism, whereas the unions represent anti-capitalism.

No. Union bosses are capitalists too. The true contest is between the representatives of the two main “factors of production”: capital and labour. So unions are an integral part of the modern capitalist system. They’re a countervailing force that helps keep the system in balance.

Take out the unions, and capital ends up with almost all the money, and the households whose income comes from selling their labour have very little. In which case, the capitalists have no one to buy their products. Unions save the capitalists from their own excesses.

But get this: the unions are rogue capitalists who try to beat the real capitalists at their own game. The most successful capitalism comes from finding a business where it’s possible to make super-profits (in the jargon, to earn “economic rent”).

Turns out that’s also what the most successful unions do: find an industry whose circumstances allow it to earn super-profits and then demand a generous share for the workers. Guess what? A good example of an industry earning economic rent is construction.

And my guess is that the construction industry oligopoly finds it quite convenient to have a union that goes around bullying smaller businesses. Why? Because what they’re doing is policing the industry’s “barriers to entry”.

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OECD’s message to our inflation warriors: calm down, she’ll be right

Last week a bunch of international public servants in Paris launched a rocket that landed in Sydney’s Martin Place, near the Reserve Bank’s head office and the centre of our financial markets. It carried a message we should already know. Australia has a big problem with real wages: they’re too low. In which case, why are you guys so anxious about continuing high inflation?

The Organisation for Economic Co-operation and Development’s annual Employment Outlook says Australia’s real wages in May this year are still 4.8 per cent lower than they were in December 2019, just before the pandemic.

This is one of the largest drops among OECD countries. It compares with real falls of 2 per cent in Germany and Japan, and 0.8 per cent in the United States. Real wages have risen by 2.4 per cent in Canada and 3.1 per cent in Britain.

The organisation observes that, “as real wages are [now] recovering some of the lost ground, profits are beginning to buffer some of the increase in labour costs. In many countries, there is room for profits to absorb further wage increases, especially as there are no signs of a price-wage spiral”.

Just so. But this isn’t something you’re allowed to say out loud in Martin Place. When the Australia Institute copied various overseas authorities in calculating the contribution that rising profits had made to our rising prices, it was dismissed by the Reserve Bank and the financial press.

Apparently, it’s OK for the Reserve to say it must increase interest rates because demand is growing faster than supply and adding to inflation, but it’s not OK to say that businesses have used the opportunity to raise their prices and this has increased their profits.

No, in the Reserve’s eyes, the problem with prices soaring way above its inflation target has never been greedy bosses, but always the risk of greedy workers using their industrial muscle to prevent their real wages from falling and thus causing a price-wage spiral that perpetuates high inflation.

It was a worry that anyone who knew anything about the changed power balance between employers and workers and their unions – anyone who wasn’t still living in the 1970s – could never have entertained.

For many years, the Reserve Bank benefited greatly from having a senior union official appointed to its board along with the many business people. But John Howard soon put a stop to that.

Since then, the Reserve has had to fall back on the primitive understanding of how labour markets work that you gain from a degree in neoclassical economics. Fortunately, since last year the board has included Iain Ross, former president of the Fair Work Commission.

The Reserve’s great sense of urgency in getting the inflation rate back down since it began raising interest rates in May 2022 has been driven by two worries about wages. First, when excessive monetary and budgetary stimulus caused the post-lockdown economy to boom while our borders were closed to imported labour, it worried that shortages of skilled and even unskilled labour would cause wages to leap as employers sought to bid workers away from other firms.

Although job vacancies more than doubled, reaching a peak in May 2022, annual wage growth had risen no higher than 4.2 per cent in December last year, even though consumer price inflation had peaked at 7.8 per cent a year earlier.

So, though no one’s bothered to mention it, our first period of acute labour shortages in decades hardly caused a ripple. It’s probably fair to say, however, that had the shortages not occurred, wages would have fallen even further behind prices than they did.

The Reserve’s second reason for feeling a sense of urgency in getting inflation back down to the target range is its fear that, should we leave it too long, inflation expectations may rise, causing actual inflation to move to a permanently higher level.

Indeed, the signs that our return to target will be slow have been used by the Reserve’s urgers in the financial markets to call for another rate rise or two. Apparently, every week’s delay in getting inflation down could see inflation expectations jump.

But this is mere pop psychology. Even if the nation’s workers and unions were to expect that inflation will stay high, they lack the industrial muscle to raise wage rates accordingly. If you didn’t already know that, our outsized fall in real wages should be all the proof you need.

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Bosses are finding more innovative ways to handcuff their workers

When I joined the John Fairfax superannuation scheme 50 years ago on Wednesday, I little knew my new boss was trying to handcuff me. Fortunately, they were “golden handcuffs”. But these days, bosses use other, more blatant ways to tie their workers to them and stop wages growing so fast.

The Fairfax scheme I joined decades ago must have been fairly common among big companies in the years after World War II, when shortages of skilled labour were almost continuous.

From memory, the company offered to contribute an extra 6 per cent of my pay to the scheme, provided I contributed 4 per cent. That 4 per cent stopped many people joining the scheme, but not me.

What I didn’t realise was that, if you left the scheme before reaching retirement age, you got your own contributions back, with 3.75 per cent interest, but forfeited the company’s contributions and the accrued earnings on them.

But here’s the trick: the company didn’t keep the forfeited contributions and earnings, but transferred them to the scheme’s general fund, to be shared between those loyal employees who did stay until retirement.

Get it? The longer you’d worked for the company, the more you had to lose by leaving. Plus, the more you had to gain by staying on until retirement. You were bound to the company by golden handcuffs.

(A side-benefit to the Fairfax family was that much of the huge sum in the general fund was held in Fairfax shares, thereby increasing the family’s protection against a hostile takeover.)

Relax. My handcuffs are long gone, removed by Paul Keating’s introduction of compulsory super for employees and related reform of existing company super schemes, in the early 1990s. Today, all employer contributions and earnings are immediately "vested" in the employee, meaning you take them with you when you leave the company.

Now, I should remind you that mainstream economists are great believers in "the mobility of labour". The freer workers are to move to another employer offering a better job, or to start their own business, the more efficient the economy is likely to be, and the faster productivity will improve.

So the last thing economists approve of is employers being able to discourage, delay or even prevent their staff from moving on. That is, able to prevent market forces from working the way they should.

But as assistant minister for competition Dr Andrew Leigh reminded us last week, there’s much research showing that employers around the world are increasingly using "non-compete clauses" in their employees’ contracts. To get the job, you have to agree not to leave and work for one of its competitors for a set period, or to yourself set up in competition.

Couldn’t happen in a decent place like Australia? Don’t be so sure. Just as it’s taken longer for our chief executives to start believing they’re entitled to pay themselves many multiples more than they pay any of the company’s other employees, so they’ve been slower to follow the Yanks and Brits in handcuffing those who work under them.

Even so, an online survey conducted by Dan Andrews (not that one) from the e61 Institute, and Bjorn Jarvis from the Australian Bureau of Statistics, found that as many as one in five Australian workers is subject to a non-compete clause.

Smaller percentages of employees must agree not to poach the company’s workers after they’ve left, or not to solicit the business of their former employer’s clients.

The survey found that, as well as applying to senior executives, non-compete clauses may apply to many workers who have close contact with the customers: childcare workers, yoga instructors and specialists in IVF.

It also found that competition clauses applied to 39 per cent of managers, 26 per cent of community and personal service workers, and to 14 per cent of clerical and admin workers.

Leigh says that shifting jobs is typically associated with a substantial jump in pay. Yes, that’s probably why few recruits resist when the new boss slips in some clause about what happens if you leave. Leave? I haven’t even arrived yet.

But Leigh says even many low-paid workers are constrained from shifting to a better job. Don’t forget that, these days, many government-subsidised services are provided by small, for-profit providers.

I hire you to work in my childcare or aged care (or yoga) business, but you prove good at it, and popular with the parents or the oldies’ children, so you leave and set up for yourself, taking some of my customers with you.

Leigh says that, even if some non-compete clauses wouldn’t stand up in court, they are rarely tested. (That’s another yawning gap between theory and practice. In theory, we’re all equal before the law. In practice, lawyers cost big bucks – and the boss has a lot more bucks to play with than you do.)

“In most cases,” Leigh says, “workers subject to a non-compete clause will either choose to suffer the period of enforced ‘gardening leave’ [the months or years that you’ve agreed not to join a competitor or become one] or will stay with their existing employer.”

But this is about more than employers treating you like you’re their slave. It’s also about wages. Especially where workers possess skills that aren’t easy to come by, competition between employers pushes wages up. If you can find a way to dampen that competition, you’ve kept a lid on wage costs.

“This means that workers miss out on potential wage gains,” Leigh says. “It also makes it harder for start-up firms to attract the talent they need to challenge incumbents. In turn, productivity suffers.”

The Bureau of Statistics has added a question about non-compete clauses to its regular survey of employee earnings and hours, which it will publish later this month.

The competition taskforce within Treasury, set up by the government last year, will be looking closely at this information to learn more about the effects of non-compete clauses on workers and businesses in Australia.

Have you noticed how, whenever the (Big) Business Council reads us another lecture on the need for major reform to get our productivity improving again, non-compete clauses never rate a mention?

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Why populism hasn't taken off in Australia

One good thing about taking a break from work is that it gives you time to let your mind wander from all the pressing concerns of our fast-moving world – the preoccupation with this “crisis” and that “crisis” – to less immediate but more important problems. And it helps if you’ve used the time to read a good book or two.

On my recent long break – soon to be followed, I fear, by my summer holiday – I read The Crisis of Democratic Capitalism, by Martin Wolf. Wolf is the chief economics commentator of the Financial Times in London, and the global doyen of my tiny profession of economics editors.

Wolf has two worries. Democracy isn’t working well and neither is capitalism.

He sees many signs that faith in democracy is declining and voters are turning to authoritarian demagogues peddling populist solutions to difficult problems.

You can see that in the election of Donald Trump and the even more remarkable possibility that this self-serving con man could be given another turn at the wheel. You see it in Britain’s self-harming decision to leave the European Union.

And you see the rise of right-wing populism in an ever-growing number of European countries – from Hungary to the Netherlands, not to mention in South America – much of it involving resentment of immigrants, particularly Muslims, and the search for scapegoats.

Turning to capitalism, there is much dissatisfaction with the evident failure of “neoliberalism” – the doctrine that less government and more freedom for business is the path to prosperity.

The privatisation of government-owned businesses has often made things worse rather than better. The contracting of private businesses to provide government services hasn’t helped. Nor has the use of private consultants rather than the public service.

Wolf argues that the poor performance of the economy is the main explanation for the rise of populism in the rich democracies.

The global financial crisis of 2008 led to much disillusionment. Particularly in America, deregulation of the banks left them free to make many bad loans, but when the house of cards collapsed and plunged the advanced economies into the Great Recession, billions of taxpayers’ dollars had to be used to bail out the banks, but the bankers escaped unpunished.

Leaving aside the temporary disruption of the pandemic, the advanced economies have never since returned to healthy growth and rising living standards.

Then there’s globalisation. It has moved much manufacturing activity from America and Europe to China and other Asian countries, to the great benefit of consumers of manufactured goods throughout the rich world.

It lifted many millions of workers out of poverty in Asia, while robbing many American workers of their well-paid jobs in manufacturing.

Governments could easily have used their budgets to require those of us who benefited from cheaper cars, clothing and all the rest to compensate and help those who lost their jobs but, in the era of neoliberalism, they didn’t bother.

It was the decisions of the former blue-collar workers of the rust belt states to move their votes from Democrat to Trump that pushed him across the line in 2016.

Wolf says, “people expect the economy to deliver reasonable levels of prosperity and opportunity to themselves and their children”. When it doesn’t fulfil those expectations “they become frustrated and resentful”.

“Instead ... it has generated soaring inequality, dead-end jobs and [economic] instability.”

Whether you look at politics or the economy you see we’re moving to a plutocracy – government by the rich and powerful. You see powerful – but often harmful – industries buying favourable treatment with generous donations to political parties.

And you see the way our chief executive class has increased its remuneration out of all comparison, while holding down the wages of their fellow employees.

But Wolf’s story applies more fully to America, Britain and Europe than it does to us. While it’s true that living standards in Australia have hardly risen for the past decade, things here haven’t been as bad.

Our one great would-be populist saviour, Pauline Hanson, hasn’t got far. Our two big parties’ problems have been with the Greens and teals.

And while our incomes have become more unequal over the decades, they haven’t worsened much in the past two decades – except at the very top.

Part of that lack of deterioration is owed to our system of regularly – and fairly generously – increasing minimum award wages.

Another saviour has been the Labor governments’ umbilical cord to the union movement, something not matched by America’s Democrats.

Anthony Albanese hasn’t seemed terribly brave on many issues, but last week he pressed on with closing the legal loopholes employers have long been using to chisel their workers, against ferocious opposition from the (big) Business Council, the Mining Council and the employer groups.

According to them, Labor’s changes will destroy many jobs and kill the economy. Don’t stay up waiting for it to happen.

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