Over time, real wages in the economy can only grow in line with productivity. Government ministers – I’m looking at Murray Watt, Minister for Employment and Workplace Relations – may try to wish this proposition away. But it’s akin to denying the law of gravity.
Watt maintains that there are some academic economists who don’t agree. I’m inclined to a Maggie Thatcher response here: name these people, please.
Let’s think this through. If real wages grow at a pace greater than productivity, several possibilities emerge. The labour share of GDP might increase, at least temporarily, but the lower returns to capital will mean less investment and fewer jobs. Recall here the importance the Treasurer, Jim Chalmers, is attaching to the role the private sector must play to drive future economic growth. This would be an unfortunate outcome.
Another possibility is the higher mandated wages simply flow into higher prices. In this case, the improvement in real wages is fleeting and the Reserve Bank will be much less likely to cut the cash rate – indeed it may even increase it. In this event, a higher cash rate would flow into higher mortgage bills.
The governor of the Reserve Bank, Michele Bullock, clearly understands the link between productivity and real wages. Speaking after Tuesday’s decision to hold the cash rate at 4.1 per cent, she made the point that “if productivity didn’t pick up, then that means that the rate of nominal wages growth that can be sustained and be in line with the inflation target is lower”.
Of course, if you are passenger on a plane suffering complete engine failure, you really would try to wish away the law of gravity. The laughable efforts of some think-tankers have been akin to this, declaring that the labour share of GDP has noticeably shrunk and that price gouging is rampant in the economy.
On the first point, it’s important to take out the impact of mining (where wages are extremely high, incidentally). The non-mining labour share has shown no real change. As for price gouging being the explanation for the recent bout of inflation, the careful research of the Reserve Bank has shown this is simply not the case.
The link between productivity and real wages has emerged as a live issue because the government has finalised its submission to the annual national minimum wage case. While failing to nominate a precise figure, the recommendation is made that the Fair Work Commission “award an economically sustainable real wage increase to Australia’s award workers”.
It goes on to add that “an increase in the minimum and award wages should be consistent with inflation returning sustainably to the target band this year, while providing further relief to lower-income workers who continue to face cost-of-living pressures. Labor submits that this outcome is both fair and economically responsible”.
(Sadly, in the heat of an election campaign, Opposition Leader Peter Dutton has declared he supports a wage rise although he also doesn’t specify a figure. The fear of looking like Scrooge has won out even though the case deserves much more nuanced debate.)
But let’s do the math. According the budget forecasts, inflation is expected to be 3 per cent for the through-the-year growth rate to the June quarter of 2026. Note here that this is the absolute top of bank’s target, so there is no room for error.
But here’s the thing, the latest print on productivity has an annual reduction of 1.2 per cent in GDP per hour worked. You read that correctly: a reduction. If nominal wages were allowed to rise by more than 3 per cent – and presumably the government has this in mind – and productivity continues to fall, there is every prospect that inflation will exceed the target. In turn, this would induce the bank to hold the cash rate, at best, and possibly raise it. It seems a very long time since the economic sense of Bob Hawke and Paul Keating dominated the political narrative. They understood that real wages are only one component of living standards and that real wage growth was only possible with improving productivity. The Albanese government has placed far too much emphasis on small rises in real wages while ignoring the other components of living standards – think particularly mortgage costs and bracket-creep induced tax rises.
The National Accounts tell us this more comprehensive story where GDP per capita fell for seven consecutive quarters and rose by a mere 0.1 per cent in the December quarter of last year. The fall in living standards is what people have experienced even if their wages have increased slightly.
A final point to note is that the annual case before the Fair Work Commission, with all the slightly unnecessary accompaniment of dubious submissions, amateurish economic assessments and public hearings, produces a decision that applies to all award wage workers, not just low-paid workers. We are the only country apart from Puerto Rico that does it this way.
The consequences of a bad decision are potentially large, therefore. Moreover, the decision sets a floor above which enterprise agreements are finalised. It’s also why achieving a rise in productivity is so important. This is the central failing of the Labor government’s term in office.
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