Wage growth has been abysmal, cut tax to boost incomes

The government has one policy lever to improve wage growth — cut personal tax far more substantial than is proposed.

Wage growth, where the bloody hell are you? You needed to get the microscope out to join in the celebrations over the “pick-up” in wage growth reported this week.

Wage growth increased from 0.47 per cent to 0.54 per cent. Scott Morrison said it was the best result in four years, which is true if you don’t round the figures to two decimal places.

If you round them to one, which is customary, then for 12 of the past 14 quarters, private sector wages — the ones that better reflect the economy’s performance — have increased only 0.5 per cent. For the other two, they increased 0.4 per cent. That gives us a smidgen more than 2 per cent on an annual basis, or less than the current rate of inflation of 2.1 per cent. This is pretty abysmal.

“Real wages”, as economists call them when the prices of goods and services are factored in, fell over the 2018 financial year — the second time that’s happened in the past two years.

If you think that lily is hard to gild, read on.

The Fair Work Commission increased the minimum wage by 3.3 per cent in July last year, which rippled across all the “awards” in the economy. The Reserve Bank said about 23 per cent of workers in the private sector were affected.

Let’s assume employers obeyed the Fair Work Commission and passed on the wage increase in full last financial year.

In order to get a 2 per cent overall wage increase for private sector workers, everyone else’s wages must have increased by only 1.6 per cent. That’s right, around 7.5 million workers experienced wage growth of around 1.6 per cent, significantly lower than inflation.

This might explain some of the discontent with the major political parties.

Anyway, compare that increase with that enjoyed by bureaucrats, teachers, politicians and remaining public sector workers: 2.4 per cent. In fact, public servants’ wages have been growing faster than their fellow private sector workers continually for almost five years now.

It’s a fact that is inexcusable politically, and bad economic policy to boot, but testament to the power of public sector unions and the greed of government itself.

The wage price index, ABS’s measure of wage growth, adjusts for the composition of the labour force, including hours worked, and in characteristics of employees. So it’s not the case that better qualified people are pouring into the bureaucracy, demanding higher wages.

And, don’t forget the average salary of public servants is higher than in the private sector too. So these percentage increases are leading to more dollars in the hand for these workers. Do senior public servants, already among the world’s highest paid, really need an extra $10,000 to $20,000 a year?

I digress. The government and the Reserve Bank are both expecting wage growth to accelerate, but I wouldn’t bet on it. For a start, they’ve been wrong for seven years in a row, hardly a strong endorsement of their economics models.

Indeed, when the Australian dollar falls, as it’s been doing in recent weeks, workers’ purchasing powers decline. To the extent more and more people are buying more and more of their goods ­online, in foreign currencies, their wage experience over the past year has been worse again. Economists once thought the unemployment rate was the best indicator of how “tight” the labour market was. The lower it fell, the more employers would have to pay more to attract workers. It’s proving to have been a naive assumption.

The unemployment rate in the US is below 4 per cent, near the lowest levels in 20 years, yet wage growth remains a historically modest 2.7 per cent. That’s lower than US inflation too. In Britain, workers’ real wages have been going backwards for many years. They are almost 7 per cent lower than they were 10 years ago.

Economists have put various explanations forward for weak real wage growth: weaker trade unions, automation, competition from workers in developing countries, the growth of the low-wage (and lower skill) service sector. There’s no definitive answer.

So far the policy response has mainly been hope, and more optimistic forecasts. A recent IMF paper, while erudite, concluded that weak productivity growth was mainly responsible for sluggish wage growth. The problem is there’s no policy button for “more productivity growth”. In fact, even measuring productivity is extremely difficult because it depends on arbitrary measurements of levels of output, which hinge on arbitrary judgments about how much quality has improved.

Some economists point out that statistical bureaus are finding it harder and harder to factor in quality improvements in digital and computing technology, and even new digital services themselves. Just because no one pays for Google Maps, for instance, doesn’t mean it’s not improving our standard of living.

It doesn’t matter.

Wage growth has become politically, if not economically, the most important statistic in the land. The one policy lever the government does have to improve wage growth would be to cut income tax far more substantially than is proposed. Transferring the cost of cutting corporate tax, however theoretically wise, to bigger personal income tax cuts is the only lever it has, to boost measured disposable income.