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If You Want Faster Wage Growth, Here's How to Get It

The only way isn't up.

01/06/2017 2:30 PM AEST | Updated 01/06/2017 2:31 PM AEST
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"If the government was serious about boosting wage growth back above 5 percent per year (and it should be), it needs to tackle both problems: with a powerful, integrated strategy to create more jobs, and better jobs."

Last month's Budget has come under sustained scrutiny for its optimistic assumptions of an imminent acceleration in wages for Australian workers.

Published data from the Australian Bureau of Statistics confirms that wage growth continues to plumb record lows. But that hasn't stopped Treasurer Scott Morrison from banking on a sudden, exuberant reversal of that trend, with higher assumed wages driving tax revenues and deficit reduction. He is forecasting a doubling of hourly wage growth and a tripling of growth in total wage payouts, to balance the Budget by 2020-21.

The Treasurer is absolutely correct that putting more money in the pockets of Australian workers is the most powerful (and painless) way to reduce the deficit. If more people were working, and their wages steadily growing, tax revenues would expand automatically -- and people wouldn't complain, since after-tax incomes would grow even faster. The only thing missing is a convincing explanation from the government about exactly how this reversal of wage trends might actually occur.

Mr Morrison doesn't really mean it when he says he expects a major, sustained rise in workers' incomes. But if his government adopted its own wage forecast as an actual target, and acted accordingly, it would be absolutely achievable.

Mr Morrison says wages will accelerate naturally as the economy completes its post-mining-boom "transition" and as his company tax cuts stimulate more hiring.

Speaking before Senate Estimates this week, his Treasury Secretary John Fraser invoked "a palpably more optimistic world" outlook that will automatically pull Australia along. In other words, we should put equal faith in an automatic market-driven macroeconomic recovery, and in the automatic trickle-down benefits of that recovery into Aussies' pay packets.

This complacency is unjustified and far-fetched on both counts.

Firstly, there is no evidence the post-mining-boom slowdown is just a transitory adjustment. Business investment is still falling, and is now at its lowest level since 2010. Meanwhile, housing investment -- the main economic driver in recent years -- is turning downward as the property bubble peaks.

Consumers are squeezed between stagnant wages and record debt, so they can't lead the way anymore. Some resource exports (especially LNG) are growing, but falling commodity prices negate the impact on revenue -- and resource exports don't translate well into higher wages anyway (as confirmed by the ABS's latest GDP report, which showed falling wages despite a resource-fueled GDP gain).

Secondly, even if GDP did improve, that won't automatically pull along wages, unless we take pro-active measures to ensure higher GDP is broadly distributed. Indeed, the disconnect between output, productivity and wages has been increasingly evident for years. The concentration of Australian GDP in minerals and banking (neither of which are labour-intensive) is part of the story.

Chronic unemployment and underemployment further undermine wage demands. The official unemployment rate is only the tip of the iceberg: counting involuntary part-time workers, discouraged workers, and the "marginally attached" (those who want to work, but don't believe any jobs are available), effective unemployment is around three times the official rate.

Finally, the deliberate, structural disempowerment of wage-supporting institutions (like minimum wages, penalty rates, and unions) throws a predictable, lasting damper on wages.

Australia's wage stagnation reflects a labour market suffering from sustained weakness, in both quantity and quality of work. There isn't enough work to go around. And the jobs that are available demonstrate decreasing stability, productivity, and compensation.

If the government was serious about boosting wage growth back above 5 percent per year (and it should be), it needs to tackle both problems: with a powerful, integrated strategy to create more jobs, and better jobs.

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On the quantity side, macroeconomic policy should emphasize job-creation rather than austerity. Fiscal policy should be relaxed, not tightened, until true unemployment comes way down -- including spending on both infrastructure and current programs. Monetary policy can use innovative ways to channel credit-creation into real investment rather than property speculation. Pragmatic measures to boost business investment and exports (instead of assuming that cutting taxes and signing trade deals will do the trick) would also help.

Stronger overall labour markets would help workers win a better share of the pie, but won't be sufficient to repair the damage done by years of lopsided labour laws. Government should acknowledge the necessity of higher wages for economic, social, and fiscal well-being, and then set about achieving that goal with appropriate policies.

A significant rise in the minimum wage would help, as would protecting penalty rates (and toughening their enforcement) rather than going the other way.

Regulating labour hire firms, applying employment standards to digital and "gig" businesses, and giving more protection to part-timers would all boost wages and prevent employers from treating workers like a throwaway, just-in-time resource.

Of course, collective bargaining must be enshrined, not criminalized, if unions are to play their proper role as a counter-vailing force, essential for the more equal distribution of income that Morrison's Budget timetable requires.

Needless to say, these measures would constitute a wrenching U-turn away from the policies of austerity and deregulation that are this government's guiding principles.

Mr Morrison doesn't really mean it when he says he expects a major, sustained rise in workers' incomes. But if his government adopted its own wage forecast as an actual target, and acted accordingly, it would be absolutely achievable.

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