Grow productivity to avoid a wages-inflation spiral

In its decision granting 2.5 million award-reliant workers a 5.75 per cent pay rise, with a bumper 8.6 per cent for 184,000 workers on the minimum wage, the Fair Work Commission acknowledged that poor productivity was a serious problem. “In the medium to long term, it is desirable that modern award minimum wages maintain their real value and increase in line with the trend rate of national productivity growth,” the decision said. “A return to that path is likely to be possible in future reviews when there is a reversion to a lower inflationary environment and trend productivity growth.” There is nothing in this wage decision, however, tying the very significant pay rises to productivity gains. That was accepted practice in agreements reached through enterprise bargaining negotiations under previous IR systems enacted by the Hawke-Keating and Howard governments.

The ACTU and individual trade unions, understandably, are upbeat about the decision. But if the responses of business groups representing employers at the coalface are correct, the decision may rebound on the workers it is designed to help. Australian Chamber of Commerce and Industry chief executive Andrew McKellar said the increases, alongside the 0.5 per cent superannuation guarantee increase from July 1, risked “unlocking the floodgates for deep and prolonged economic pain”. It would be a “hammer blow for the 260,000 small and family-owned businesses (that) pay minimum and award wages”, he said. “An arbitrary increase of this magnitude consigns Australia to high inflation, mounting interest rates and fewer jobs.” Many businesses in the accommodation, food, construction, manufacturing and retail sectors would be unable to absorb the extra cost without raising prices. When discretionary spending was softening because of higher interest rates, and rent and utility costs were rising, many retailers would struggle to absorb the extra wages costs, Australian Retailers Association chief executive Paul Zahra warned.

The FWC’s decision gives substance to serious concerns raised this week by Reserve Bank governor Philip Lowe and business leaders about the lack of productivity growth. In what could be his last appearance before Senate estimates, Dr Lowe said the bank was trying to achieve an average inflation rate of 2.5 per cent. If the economy delivered 1 per cent productivity growth, wages growth of around 3.5 per cent was a reasonable benchmark. But across the past three years there has been no ­increase in the average output produced per hour worked in Australia. With zero productivity growth, Dr Lowe said, the bank was focused on unit labour costs, which across time tended to coincide with overall inflation.

Employment and Workplace Relations Minister Tony Burke’s jubilant reaction to the FWC decision showed a limited grasp of those problems. He welcomed “the best decision for the minimum wage in the history of these decisions”. But with his second round of workplace relations changes in the pipeline, which will affect casual and gig economy workers, businesses can gear up for additional labour costs. As Wesfarmers chief executive Rob Scott said this week, further inflexible industrial relations reforms proposed by the government would threaten the national economic dynamism. “Unless we can get productivity moving we won’t see sustainable wage growth; and the consequence of wage growth without productivity is that businesses become unviable and then unable to employ people and invest,” Mr Scott said. This was being made worse by a range of industrial relations reforms now being explored by the federal government relating to possible new rules about the gig economy and contract workers that could shake up the labour hire sector.

In reaching its decision on award wages, the FWC factored in the effect of inflation causing households financial stress. Moderating factors, it said, included the upcoming increase to the superannuation guarantee and weak productivity growth. The pay rises could come with a high price tag, however. Australian Industry Group chief executive Innes Willox said the decision “adds to the risks of an inflation blowout; is likely to see interest rates rise further than they would have otherwise, and; raises the likelihood that households will face further cost-of-living pressures”. Business Council of Australia chief executive Jennifer Westacott was correct when she said the 5.75 per cent rise was needed “as many Australians are doing it tough”. But, as she said, “unless we are willing to do the hard yards now to speed up economic growth and drive productivity, we run the risk of more persistent inflation and higher unemployment in the long term”. The potential unintended consequences of the decision cap off the big economic lesson of the week – the need for a growth agenda.