Politics

It's time to say goodbye to low wage growth

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Low wage growth is a problem affecting many Australians, yet these three steps could resolve it (Image by Dan Jensen)

Since the Government is reluctant to do anything about the problem of low wage growth, Philip Soos suggests ways in which it can be solved.

ONE OF THE MOST important economic issues in recent times has been low wage growth. Barely a day goes by without the mass media, politicians, unions, economists, industry associations and workers discussing the topic.,

Industry and the Coalition are generally content with this outcome for obvious reasons. The long-term agenda to disempower and atomise unions and workers since the turn towards neoliberal economics in the 1980s has reaped predictable outcomes.

Unionists have argued that stronger bargaining power is the path to higher wage growth. This is true, but unfortunately the focus seems to be solely on strengthening union power and workplace rights to the detriment of other effective policies.

Raising wage growth is especially critical given the historically and globally large stock of household sector debt. Low wage inflation results in a large burden upon new borrowers, typically the young, than in previous generations; housing affordability is the worst on record.

 

The Coalition’s fraudulent jobs boom

Former PM Tony Abbott promised that the Coalition would create one million jobs. It happened.

This is a great achievement — if not for the fact that labour market underutilisation (the sum of the unemployment and underemployment rates) has actually increased since the Coalition formed Government in 2013.

 

 

During their time in power, the unemployment rate fell slightly, from 5.8% to 5.5%; the underemployment rate (people working fewer hours than desired) increased from 7.7% to 8.3%, resulting in the underutilisation rate rising from 13.5% to 13.8%. In effect, workers have gained slightly more jobs at the expense of a decreasing number of hours wanted.

Australia also has an unusually high proportion of part-time workers and about 25% of them want to work an additional average of 14 hours more per week, while around 40% were actively seeking more hours. Some of this is due to preference, but many would prefer full-time employment.

 

The Worst Wage Growth in the Post-War Era

The long-term trend in wage growth demonstrates that the workforce is experiencing the weakest spell in the post-war era, even more so than the credit crunch in the early 1960s and the early 1990s recession. This is saying something, considering the latter was the worst economic downturn since the Great Depression of the 1930s.

 

 

Average real compensation per employee (wages plus benefits) has stagnated in recent years, backtracking to levels last reached in 2011, quarter 3 (Q3). It is unlikely wage growth will pick up given the downturn in the mining sector and terms of trade, among other factors noted further on.

 

 

As can be expected, the unemployment rate is correlated with wage growth — the higher the rate, the lower the wage growth. Very high levels of unemployment, experienced during the 1890s and 1930s depressions, resulted in negative nominal wage growth.

 

 

The slow rise in underemployment over time has suppressed wage growth. Interestingly, underemployment has a greater negative relationship with wage growth than unemployment. This may be due to higher underemployment creating serious labour market weakness, even when the unemployment rate is below its long-run average.

 

 

What can be done about this state of affairs? As it turns out, a lot.

 

1. Implement a job guarantee program

The job guarantee (JG) is a full-employment policy designed to eliminate involuntary unemployment. Australia had similar policies during social democracy of the early post-war period to great effect — the unemployment rate remained very low. It was only abandoned due to the outbreak of inflation from the mid-1970s onwards.

Inflation has now declined to the point that institutions such as the RBA are advocating higher inflation from wage growth.

Under the JG, the government is the employer of last resort, providing jobs at the national and local levels to those who want them. Public bureaucrats target employment to areas of the economy where insufficient goods and services are currently produced due to existing arrangements.

Jobs are full-time and secure, generally attracting the minimum wage, including retaining some welfare payments. Employees are free to switch to another employer in the public or private sectors for a higher-paying job.

Recent estimates point to the output gap (the difference between theoretical and actual GDP) caused by unemployment at around $60bn annually, or 4% of GDP. The cost of the JG program would be around $22 billion (net), after accounting for higher income tax receipts, lower welfare spending and the abolition of the horribly fraudulent private “jobs provider” system. It would generate around 600,000 jobs and eliminate all involuntary and hidden unemployment, bringing down the unemployment rate to 2%.

While there are concerns that the JG would generate “workfare” or pointless jobs, this is hardly a reason to oppose the policy. The anthropologist David Graeber’s new book, Bullshit Jobs, demonstrates that many of these types of jobs already exist in the public, private and university sectors, at high levels of pay.

 

2. End the Extreme Immigration Policy

Population growth has ballooned since 2006, primarily through net immigration. Australia has had the highest average population growth rate in the OECD over the last decade, driving population growth far above the long-run average.

 

 

Record immigration numbers are having a corrosive effect upon the public. It has clearly outstripped the ability of the labour market to absorb so many immigrants, as evidenced by the slight uptick in underutilisation during the one million “jobs boom”. Two-thirds of all new jobs have gone to immigrants.

Infrastructure is at breaking point, evidenced by rising traffic congestion and overloaded public transportation. Hospitals and schools are likewise overrun, while state governments continue their obsession with running budget surpluses. The outcome is a spiralling infrastructure deficit never to be dealt with in the foreseeable future. There is a concurrent housing crisis with no end in sight, adversely impacting low-income households the most.

It is easy to see why political elites are in favour of what should be termed “population quantitative easing” or PopQE for short: Boosting headline GDP growth while ignoring per capita measures, which have stalled over the last decade. Economic elites are using PopQE to drive down wage growth, boosting profits from expanding markets and increasing real estate demand.

PopQE has the signs of a policy fraud given there has been no public debate, all major political parties and industry organisations are in favour of it, with benefits reaped by the wealthy while costs are forced upon everyone else.

The business news site MacroBusiness has thoroughly documented the negative effects of PopQE. Allowing millions of immigrants into the country, far above historical norms, has created permanent slack in the labour market.

As a consequence, wage theft is at epidemic proportions. Countless investigations have uncovered mass underpayment of wages and benefits. It has gotten so bad that some businesses end up with negative wage costs — immigrants effectively pay employers not to rescind their visas.

Immigrant workers come in two broad classes; skilled and low/unskilled. The former are replacing skilled citizens in droves on 400-class visas as firms use this method to drive down wages while ensuring greater obedience. The latter perform the grunt work, resulting in widespread exploitation — living in slum share houses, subsistence wages and long hours, all in violation of law.

It is far beyond the meagre resources of authorities to police this exploitation because it is everywhere. Advocating greater workplace protections is a non-starter; laws not enforced are, by definition, de facto decriminalised. Therefore, the best regulator of ensuring employers adhere to the rule of law is a tight labour market.

While it is understandable that conservatives are in favour of PopQE to drive down wages as part of the class war against labour, it is bizarre as to why those on the progressive side take the same position.

The ALP, Greens, ACTU, Guardian, Fairfax and many commentators refuse to acknowledge the adverse effects of PopQE, which is undermining their own labour supporter base. The only response is to scream “racism” any time that reducing immigration is brought up, along with fabrications about the “need” for supporting the ageing population.

A sane response by progressives is to advocate reducing immigration back to the long-term average of around 70,000 annually, down from the present 200,000 to 300,000. If anything, it should be reduced even more to compensate for the rampant overpopulation that has occurred since 2006.

 

#3 Modify the Tax and Transfer System

While conservatives portray Australia as having an out-of-control welfare system, the facts demonstrate otherwise. Australia has some of the smallest welfare expenditures relative to GDP, easily the most well-targeted and has the highest “target-efficiency” (each dollar in spending reduces income inequality the most) in the OECD.

When welfare recipients begin to earn small amounts, their modest payments are reduced. The result is that welfare recipients (the poorest) endure the highest effective marginal tax rates (EMTRs). Depending on the type of payment and earnings, these rates can range between 40% and 120%.

The increase in the minimum wage granted recently, of 3.5%, amounted to an extra $24.30 weekly for those working full-time. This may seem like a hefty increase over the rate of inflation if not for income tax and welfare payment clawbacks.

The economist David Plunkett has shown that in a situation of a household of two people, one of which is a full-time minimum wage earner, the increase of $24.30 turns into a net $2.70 — only 11% of the original rise. If that couple has two children, that increase turns into a negative net $3.10.

It gets even worse. Given many workers are on the minimum wage, the small rise in nominal income will eventually feed through into higher rents, further negating the benefit. Finally, with inflation running at 1.9%, the end result is surely a decrease in real net wage growth for the poor.

The Coalition’s $144 billion labour income tax cut will mostly go to high-income earners. A better policy would be to increase the tax-free threshold significantly above $18,200. This benefits all workers and those on low incomes proportionally more.

Part of this mega tax cut can be rescinded to adjust for the allowance of much higher earnings before reduction of welfare payments, thus lowering EMTRs. Similarly, low incomes can be boosted by making all welfare payments tax-free.

These changes will ensure that income tax and welfare clawbacks have a very limited effect upon net income growth for low and middle-income earners.

 

Conclusion

It is astounding is that the progressive side of the political economy has ignored these obvious solutions to end the slack in the labour market and improve wage growth. They have focused almost entirely upon rent-seeking for more union power to boost bargaining power against employers to the detriment of other effective policies.

The JG and tax/welfare modification policies are rarely, if ever, mentioned, and there is an almost hysterical reaction against anyone advocating reducing the extreme immigration numbers to more sensible and sustainable levels.

Refusing to confront these issues yields ground to the beneficiaries of low wage growth: employers, corporate Australia and the FIRE (finance, insurance and real estate) sector. The labour market is already weak; when the next recession hits and unemployment rises, this can drive disaffected workers into the hands of demagogues like One Nation. This dynamic occurred during the 1990s, when older workers lost their jobs to outsourcing and the recession.

The result can be an increase in racism, directed at those who have taken jobs and undermined wages and benefits — immigrants, whether real or imagined. This is an outcome that progressives should strive to avoid but are instead laying out the groundwork for!

Low wage growth and labour market slack are corrosive to the welfare of most Australians. Progressives can easily out-manoeuvre corporate interests and the Coalition by advocating these sensible policies, and gain more votes and support as a consequence. Unfortunately, there is no evidence this will happen anytime soon.

Philip Soos is an independent economist and PhD candidate investigating bank crime and mortgage control fraud. You can follow him on Twitter @PhilipSoos.

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