Stubborn workers keep lid on wages, says Treasury research

Stubborn employees who ­refuse to move into more productive companies are a major cause of record-low wages growth, new research shows.

Treasury deputy secretary ­Meghan Quinn. Picture: David Geraghty

Stubborn employees who ­refuse to move into more productive companies are a major cause of the nation’s record-low wages growth, new Treasury research will reveal today.

Workers who stay with unproductive companies instead of switching to more dynamic firms are dragging down pay increases across the economy, with Australia’s top economic advisers urging Scott Morrison to embark on a ­series of wage-boosting reforms.

The nation’s most senior ­bureaucrats — appearing at the Economic Society of Australia’s annual conference in Melbourne — have also urged policymakers for “more honesty” in debates about the limits of economic modelling and to engage voters with “accessible” language that “demonstrates respect for the person you’re talking to”.

Speaking at the conference today, Treasury deputy secretary ­Meghan Quinn will launch the new analysis showing how the broken link between wages growth and company-level productivity could account for as much as a third of the “unexplained” weakness in wages growth over the past decade.

The research finds that, without structural reforms encouraging workers to move between jobs and drive innovation across companies and industries, wages growth will be “unlikely” to ­return to pre-global financial ­crisis levels.

“Treasury work highlights the fact more frequent job switching is associated with higher real wage growth, even for those that stay in their job,” Ms Quinn said.

The proposal to boost wages growth follows a sharp warning from the former Productivity Commission chair Karen Chester who last night said that effective government policymaking was vital to “avoid the risk of growing mistrust in public administration”.

“If we find ourselves in the ­absence of effective government, competitive markets delivering growth with fairness will become elusive,” Ms Chester told the Economic Society conference. “Our equality-enhancing tax and transfer system will become unaffordable. And our vision of handmade policies for the truly disadvantaged will be relegated to the Bardo world of policy intractables.”

Ms Quinn’s plan for workers to more easily switch jobs comes at a time of record low wages growth, with the trend stumping global policymakers. While wages in Australia were growing at a nominal rate of 4 per cent in the five years before the global ­financial crisis, they have since slowed to just 2.1 per cent.

The slowing of wages growth has been assisted by lower inflation, slower productivity growth and a ­weaker-than-usual labour market, but Ms Quinn said these factors could only partly explain the stalling of salaries.

As part of a new “microdata” project by the government’s key economic department, Treasury has stripped back “cyclical factors” from its analysis of wages growth to find the causes of the wages slowdown that have affect­ed workers “across income, ­education, age and occupation categories”.

The Treasury research has found that a one-­percentage-point fall in the job switching rate is roughly associated with a 0.5-percentage-point decline in average wage growth. The national job-switching rate has also fallen from 11 per cent in the early 2000s to the present 8 per cent.

Ms Quinn said that this “warrants further attention” and that much of the decline was attributable to workers staying put at older, less dynamic companies rather than jumping to new, more productive firms that have a high take up of technology.

“The rate at which labour is ­reallocated from low-productivity to high-productivity firms has ­declined by around two percentage points since the early 2000s,” Ms Quinn said.

Budget Officer Jenny Wilkinson yesterday told the conference that the economic reform agenda was stagnating because of the evolving nature of political ­debate, the contribution of the 24/7 media cycle and the “changing appetite among the decision makers” to champion ambitious policies.

She urged economists to “speak the language of the person you’re engaging with” and “use language that is accessible” and which “demonstrates respect for the person you’re talking to”.

“You have to articulate your argument or position in a way that is most likely to persuade the person you’re talking to,” she said.

According to acting Treasury secretary Maryanne Mrakovcic, a move to cut the corporate tax rate to 25 per cent was “dominated” by confusing competing economic modelling that muddied public debate and spurned the passage of the reform. Before the election Treasurer Josh Frydenberg flagged the government would not revive its proposal to cut the corporate tax rate for businesses with more than $50 million in annual turnover, after the policy was blocked by a hostile Senate.

But Ms Mrakovcic said public debate over the proposal was mired by “rival estimates”. “No model is perfect and they do not produce facts,” Ms Mrakovcic said.

“The winner was not a genuine or helpful debate. There was just confusion. If you followed the company tax debate at the time there was a lot of modelling that was done. It seemed for a period of time that every week or second week there was yet new modelling.”

Treasury’s own modelling showed reducing the corporate tax rate from 30 to 25 per cent would have boosted economic growth by about 1 per cent over the long run.

The cost of the forgone revenue would have seen the federal budget lose about $65 billion over a decade. Ms Mrakovcic said economists had a “responsibility for the way in which we tell a narrative” about policy proposals and “recognise the power of the anecdote”.

Treasury’s wishlist of policy reforms will also be outlined at the conference today. Some of the measures include an overhaul to city planning and zoning restrictions as well as the replacement of stamp duty in favour of a land tax.

The increased urgency for productivity boosting reform comes after Reserve Bank governor Philip Lowe sent a shot across the bow of the government to ­restore the growth potential of the economy after the central bank cut interest rates twice in the past two months to a record low of 1 per cent.