PC does the numbers on corporate greed and wages

The Productivity Commission has provided a welcome reality check against fashionable claims that companies have deliberately held back wages to boost profits. Treasurer Jim Chalmers has said persistently that low wages were a design feature of the economy under the Coalition government. ACTU secretary Sally McManus has attempted to shift the blame for inflation to what she has called a “corporate greed-price spiral”.

According to the unions, corporate Australia’s demand for higher profits is driving inflation, not working people and their sluggish wages.

This sort of thinking lets governments off the hook for their profligate spending during a period of record low interest rates and rising inflation. And it excuses the current government in its push for industrial relations reforms designed to punish companies and deal unions back into the workplace. Most of all, it takes the pressure off what is really needed to grow the economy and increase wages – a higher rate of productivity growth.

The Productivity Commission drilled down into the debate about the link between real wages and productivity growth, which has become more intense as productivity growth has slowed and real wages have fallen in a high-inflation period. It finds that for 95 per cent of the workforce, had we been able to maintain productivity growth from 1995 to 2023 at the 2.2 per cent average level seen in the 1990s, then real annual average incomes today would be $25,000 higher. It found that in the long run, growth in real wages is driven almost entirely by labour productivity growth.

In the shorter term, factors such as relative bargaining power and economic shocks – such as large movements in the terms of trade – can lead to deviations in the relationship between real wages and productivity.

Arguments that workers have been ripped off in favour of profits relies on what is called wage decoupling, where productivity is growing, output is growing and national income is growing but wages are not growing as quickly. The Productivity Commission finds that the situation in Australia is skewed by what is happening in the primary production sectors of agriculture and mining. When these are stripped out, for over 95 per cent of the working population the average experience of wage decoupling and income share changes since 1995 is relatively low.

Contrary to union claims, the impact of boosting productivity far outweighs the impact of bridging the observed productivity-wage gap. Productivity remains the key to continued wage growth and long-term prosperity. This message is consistent with the one being delivered by outgoing Reserve Bank governor Philip Lowe, who has said that lifting productivity should be the government’s key focus and is central to our future prosperity. The evidence is there in the PC numbers.

Dr Chalmers can celebrate Thursday’s unemployment figures showing the jobless rate held steady at 3.7 per cent in August but inevitably he must turn his attention to boosting productivity. His surprise pick for a new productivity commissioner, Danielle Wood, must not derail the push. The Productivity Commission must continue to deliver frank advice to government. The challenge is there for Ms Wood to champion productivity growth and consequent higher wages rather than higher taxes on retirees, and for a debate on death duties for large estates, which she championed in her former job as CEO of the Grattan Institute.