Economic recovery here, but wage stagnation will linger until productivity improves

Paul Keating was right about slow wages growth. But the reasons behind it are linked to the big reforms he introduced.

Former Prime Minister Paul Keating says all labour productivity benefits have gone to the profit share. Picture: Nikki Short

On Wednesday the national accounts will confirm the recovery is under way, with a likely 2 per cent to 3 per cent rise in gross domestic product in the September quarter. But the COVID-19 shock has set off what economists call a “reallocation” and what for ordinary workers will be a long tail of hardship.

The next few years will be grim for income growth. Let’s not forget, the wages machine was busted before COVID-19 arrived as a global economic destroyer. The reasons for the wage malaise are complex, structural, and idiosyncratic, often at the level of individual firms.

Still, political warhorse Paul Keating, out to stud since 1996, always finds a way to leap over complexity. He told Leigh Sales on ABC’s 7.30 this week that the fix was in for the superannuation guarantee, which is legislated to rise in 0.5 per cent stages — or $8 a week, two coffees, according to Keating’s abacus — from 9.5 per cent to 12 per cent across the next five years.

The consensus of economists (what a paradox!) is that a rise in super means wages will be lower than they otherwise would be. Treasury’s Retirement Income Review said: “The weight of evidence suggests the majority of (super) increases come at the expense of growth in take-home wages.”

Surrounded by telltale notes and annotated documents, Keating argued labour productivity had improved by 10 per cent over eight years and bosses were too greedy to share that gain with workers, who’d seen no growth in real wages. He said an extra 2.5 per cent in super was a concession employers could afford.

Keating the father of super

Keating claimed with the China “premium” on the skids — no Chinese tourists or students and trade bans — Australia had two things going for it: iron ore and superannuation.

And here was the Morrison government wanting to “kill” one of the golden geese. Yet to understand what has been going on, with a rising share of national income going to profits, look no further than the former prime minister’s works ye true believers and despair.

Keating is one of the fathers of national super, architect of financial deregulation, slayer of protection, and workplace reformer. He claimed enterprise bargaining lifted real wages by 70 per cent since 1996. A lot of things were behind that surge. The “reform era”, as the wonks call it, helped to boost material living standards — for a time — and then came China. Yet all of those integrated factors play a part in the ensuing wages tragicomedy, as well as globalisation, market concentration and a lack of economic dynamism.

Earlier this year the Productivity Commission de­mystified the wages story. During the mining boom, wage growth outpaced labour productivity by a significant margin until 2012-13. Labour productivity continued to grow but wage growth stagnated. It was a problem the rich world over, with different causes.

Here, inter alia, our theorists nominated: underemployment, declining inflationary expectations, more migrants, structural change and institutional factors.

Under Bill Shorten, Labor’s critique of the problem was a labour market with too much casualisation, part-time work and job insecurity, with a wallop of class war thrown in to smack “fat cats” and the “top end of town”. Solution: a “living wage” by decree.

The Productivity Commission believes drilling down to what’s happening to individual workers and firms over a long period, could offer the best way of understanding what’s going on. Last year, Treasury showed evidence of a breaking of the link between productivity improve­ments and wages growth at the firm level.

What’s driving wage malaise?

In another paper, Treasury’s Meghan Quinn found weaker job switching at a firm level (falling from about 11 per cent to 8 per cent) being associated with slower wage growth, even for those who do not switch jobs.

But the biggest driver of the wage malaise according to the Produc­tivity Commission has been sagging labour productivity, accounting for half the slowdown, with relative inflation (one-quarter) and a fall in the labour share of income (one-fifth) accounting for the rest. Since 2000, the lab­our share of income for the whole economy has fallen by 4.4 percentage points to be about 51 per cent. Driving that has been structural change, the kind of thing that happens when you engineer the “recession we had to have” or remake the economy so that it is exposed to global competition.

The Productivity Commission believes about 80 per cent of the fall in the labour share of income in the market sector is due to the expansion in the size of mining, a highly capital-intensive industry. The rest is due to the fact the finance industry has become more profitable, clipping more tickets and owning more high-value assets. Hello compulsory superannuation, and its spectacular growth in funds under management and fees.

The shortcut way to get wages growing across the economy is to get unemployment down by spending a lot. A better way is to promote flexibility, competition and innovation, especially in services where 90 per cent of people work.

The Reserve Bank, which Keating blames for keeping unemployment too high for a decade, is expecting measly wage rises in the next few years: get used to income growth outcomes with a 1 in front of them. RBA deputy governor Guy Debelle advised governments this week to keep the stimulus running.

Josh Frydenberg has said fiscal repair won’t happen until unemployment is “comfortably below 6 per cent”. But don’t forget, pre-pandemic the economy wasn’t flash. A point the Treasurer won’t ever concede. Productivity actually fell last year.

Managing the makeover

Keating says we need to fire up enterprise bargaining, get it working the way it was intended to run. That’s proprietorship talking. We need to find a better set of workplace arrangements. So far the government’s union-business love-in has given us zilch.

Australia needs to manage a makeover, rather than settle for the one that the pandemic forces on us. Former Productivity Commission chairman Gary Banks told a gathering of economists this week it’s “burning platform” time. The slump in GDP was actually a “structural recession”. So if productivity is the key to higher living standards, there is no time like the present to get cracking. Not everyone in the official family of economic advisers is on board.

“Meeting employment targets is likely to depend more than ever on the adjustment capacity of firms/industries and the flexibility of the labour market — in other words, on the ‘dynamism’ of the economy’s supply side — not just on the state of aggregate demand,” Banks said.

Last week current Productivity Commission chairman Michael Brennan issued a wake-up call to policymakers: “Almost all of Australia’s long-term increases in income are due to productivity growth.” That’s the secret sauce and Brennan said our past provides clues about how to get match fit for a new era. This time the approach will be less big bang and more bespoke.

Getting the “macro” right is front of mind. But supply-side reform can actually add a bit of oomph to the recovery. Reform is out of vogue under this government, especially in a crisis where saving the private economy has taken everything the Coalition has got. But we need action that draws down political capital, brings temporary disruption for a long-term pay-off.

Frydenberg must drive a fresh agenda to lift wages and hold back the rent-seekers that are popping up as Canberra’s spending hits 35 per cent of GDP. Otherwise he’s just minding the shop and staring at the till.