Weak consumption due to weak wages growth has been our biggest economic problem for several years. Weak consumption due to weak wages growth has been our biggest economic problem for several years.
Finance Finance News Michael Pascoe: The Great Wages Suppression is destroying trust Updated:

Michael Pascoe: The Great Wages Suppression is destroying trust

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Ask nearly any employer or read the Australian Financial Review and you’ll be told Australian wages are too high.

It’s a claim the federal government listens to and is acting upon, working to weaken wages growth – one of the policies worsening inequality here.

Yet a smarter employer might answer a little differently: They would like their wage costs to be lower so their profits could be higher, but they wish other employers would pay their employees more so that those employees – consumers – could buy more stuff.

Weak domestic consumption – the inevitable result of weak real after-tax wages growth – has been our biggest domestic economic problem for several years.

Pent-up demand during COVID and the government’s cash splash is providing a temporary Band-Aid for consumer spending, but that will pass soon enough, leaving the underlying problem worse.

The Reserve Bank has been hoping – in vain – for stronger wages growth for half a dozen years.

Two years ago, RBA governor Philip Lowe was calling for caps on public sector wages increases to be removed, with wage rises of 3 per cent in both the public and private sector “a reasonable medium-term aspiration”.

“My view is that a further pick up in wages growth is both affordable and desirable,” he told the House economics committee.

Instead of various public-sector wage rise caps being lifted, some state governments have reacted to COVID by introducing wage freezes.

The Morrison government is removing the cap – but that’s a ruse to cover cutting real wages.

Instead of a cap, public servant wages rises are linked to private sector movements, the government fully aware private-sector wages growth has collapsed and will remain weak with higher underemployment and unemployment.

On top of reducing penalty rates, encouraging greater casualisation and promising euphemistically phrased “greater industrial relations flexibility”, it adds up to wages suppression while profits overall are rising.

It’s nine years since Australia’s richest person, Gina Rinehart, released her infamous video about African workers being glad to work hard for $2 a day.

Ms Rinehart has been rather quiet about wages since then, with her own soaring wealth and mining expansion testimony to the falsity of her statement, but the Institute of Public Affairs that she funds and the politicians she favours can be relied upon to maintain the flavour of the spray.

The resistance to paying higher wages is continuing to play out most publicly in the agricultural sector, with farmers relying on Pacific Islanders and backpackers to work for less than Australians will accept.

During the 2019 election campaign, then finance minister Mathias Cormann attacked Labor’s “living wage” proposal with the standard line that higher wages would mean higher unemployment.

Labour force flexibility was government policy.

(Senator Cormann also fibbed a bit about wages growth – it was and is nothing for the government to be proud of.)

Dr Michael Keating exposed the shallowness of Treasury’s neoclassical model of the wages v jobs argument back in May when a wages freeze was being pushed.

“We’ve had 17 interest rate cuts in the past decade, the Treasury and Reserve Bank have continued to forecast wage growth while taking the cash rate all the way down from 4.75 per cent to close to zero,” he wrote in The Conversation.

And the forecast wage growth never happened.

Very large increases in real wages could certainly dent economic growth, as it did in the early 1970s.

“But mostly, wage rises boost consumer demand by more than they cut business investment,” Dr Keating wrote.

“Indeed, they can actually push business investment higher. This is because profits are often more responsive to the increase in capacity utilisation that results from increased consumer demand than to a lower profit share.

This seems to explain the economic stagnation we have experienced since the global financial crisis. Low wage growth has held back consumer demand, which has also held back business investment.”
Dr Michael Keating

Wages suppression has broader implications than economic growth, though. In a broader speech than normally associated with RBA governors, Dr Lowe explored the importance of “the community’s trust that real living standards will improve over time” in a 2018 speech.

Not everyone was sharing the positive assessment of economic growth that year. Dr Lowe produced a graph that showed why: Since 2012, there had been little change in real hourly earnings.

“The wage increases that have occurred have been broadly matched by inflation,” he said – and missed the fact that the real world was worse than that, because he overlooked the impact of the tax system.

As repeatedly explained in this space, a wage rise that matches inflation means take-home real wages – living standards – fall thanks to the tax man.

That regular mistake aside, Dr Lowe ventured into the role wages suppression plays in sowing the seeds of Trumpism: “Flat real wages are diminishing our sense of shared prosperity. The lack of real wage growth is one of the reasons why some in our community question whether they are benefitting from our economic success.

“This is not a uniquely Australian story. A similar thing has happened across most of the advanced economies.

“As a result, too many citizens around the world have diminished trust in the idea that the policies that have underpinned growth over the past 30 years are working for them.

“They feel more uncertain about the future and, in some countries, are also having to deal with very high housing prices. This unease is despite unemployment rates in many advanced economies being the lowest in many decades.

“The diminished trust in the idea that living standards will continue to improve is a major economic, social and political issue. It underlies some of the political changes we are seeing around the world. It is also making it harder to implement needed economic reform. It is in our collective interest that this trust is restored.”

Unfortunately, there is no sign of the Morrison government being committed to restoring that trust. The government seems to listen more closely to those who say wages are already too high.