Rival visions for the engine room

The Coalition and Labor are testing very different economic messages.

The political risks to the country were on display this week, with Scott Morrison alluding to the danger of recession under Labor and Bill Shorten declaring the election to be a referendum on wages — proof of an economy now struggling.

The first message is the election-eve economic vulnerability of the Morrison government, a vulnerability thrown into daylight with December quarter growth limping along at 0.2 per cent and data putting Australia into a “per capita recession” with two quarters of gross domestic product per person going backwards (a measure not the same, however, as wages per person).

The upshot is the Prime Minister’s pivot: he warns that with the economy facing “stiff headwinds”, Labor is a greater risk than ever. Its tax and industrial policies would return people to “when we had ­recession in this country” in the early 1990s.

The Opposition Leader, with his opportunistic skill, said Australian values were at risk with “record lows” in wages growth, stagnant real wages, “inequality at historic highs”, the enterprise bargaining system “collapsing” and, as a consequence, the “next election will be a referendum on wages”. If this is true in a narrow sense then Labor, presumably, would win.

The second message, however, is Shorten’s vulnerability — jobs. His pledges to boost wages growth are devoid from productivity gains, raising the inevitable risk such actions by regulation and government intervention will see unemployment, now at a historic 5 per cent low, march upwards. That would be sufficient to leave a new ALP government in tatters courtesy of its own folly.

Shorten’s dual identity was on brilliant display this week as he flirted with the ACTU’s extreme idea of a “living wage”, only to backtrack. Having waged a ruthless class warfare campaign, bashing the banks and business, for two years, Shorten, dressing for office, now channelled Bob Hawke, the master of reconciliation.

“My party and I, we are not class warriors,” Shorten vowed. Indeed, how could anybody have got such a fanciful idea? Shorten said his real values were “consensus and negotiation, the spirit of the Accord”, and that he stands ready to work “with business, big and small”. Could business have any doubts?

This penetrates to the high-wire performance now conducted by the Labor leader — he must talk the talk with the trade unions but be very careful about how far he walks the walk. He has no need to sell out to the unions. He is positioned to win the election. Yet how many leaders destroy their prospects in office by crazy pledges in opposition. Will Shorten succumb by offering the unions so much that his prospects in office are fatally compromised? His future is being decided by his actions now.

The third message is implicit from both sides. With Morrison and Treasurer Josh Frydenberg on the defensive over wages and Shorten blowing his trumpet, the stage is set for a personal income tax cut campaign, with both sides rolling out their agendas, using the justification of weak wages growth. This election will be heavy with tax cuts.

The fourth message came from Reserve Bank governor Philip Lowe, long worried about weak wages growth, with his warning that “something deep and structural is going on and in my view it is not really coming from the industrial relations system”. The phenomenon of weak wages with economic growth is a global event — Lowe’s warning clashes with the demands of the ACTU and much of Shorten’s prescription centred on the IR system.

Illustration: Eric Lobbecke

The fifth message comes from Deloitte Access Economics guru Chris Richardson, who advises there is no magic policy answer to the Australian dilemma. This is dangerous news on election eve. “The size of the economic pie has slowed down, it is not growing as fast as before,” Richardson says. “And as a proportion of the pie, profits are outperforming wages. The share of the pie going to wages is smaller.”

What is the policy answer? According to Richardson, “it is not fast, not cheap and not easy”. Immediate options are limited. Tax cuts will help at the margin; investment in human capital is a long-run dividend with returns years down the track. Productivity gains are essential but their politics seems too hard these days. If the wages problem doesn’t recover, the Reserve Bank will be under pressure to cut rates — not a palatable option now.

Morrison and Frydenberg seek to steady the ship and ask for perspective. They point out the wage price index is growing at 2.3 per cent. Wages are not going backwards, contrary to some claims. There was a real wage increase of 0.5 per cent over the year to the December quarter, the strongest since September 2016. The economy still grew at 2.7 per cent in 2018, faster than every G7 nation except the US.

Analysing the data, head of the Australian Industry Group’s economics team, Julie Toth, argued “the glass still seems to be closer to half full than to half empty”.

However, Industry Super Australia chief economist Stephen Anthony said: “An economic downturn is under way. A recession is now more probable than not over the next two years, subject to robust pre-emptive policy responses in Beijing and Canberra. Governments should start thinking about no-regrets policy responses.”

There is, however, one certainty: the demise of ACTU’s analytical credibility. Data from the government blows up the nonsense being pumped out by the ACTU in its “living wage” campaign and reveals the risk for Shorten in getting burnt.

taus inquirer kelly real gdp

taus inquirer kelly wage growth

Because Australia’s dilemma has been years in the making — the product of public indifference, the abandonment of policy reform and bedrock complacency off the back of the China boom — the adjustment will be long and painful. The sharp decline in the quality of public debate and refusal to tell the brutal truth to the public raises the real danger of more counterproductive measures by governments.

Discussing the origin of the malaise, Anthony says: “It dates back to the start of the mining boom and so-called ‘reform fatigue’. The 2002-03 Intergenerational Report told us that to improve living standards and to achieve fiscal sustainability, we needed to be laser-like in our focus on productivity-enhancing reforms. But then the rivers of gold from the China boom began to flow. Unfortunately, we wasted most of the fiscal dividend from the mining boom before, during and after the GFC and then handed the big four banks control of credit creation for a decade, which has left us with household debt levels the highest in the world.”

Evidence points to a structural change in the relationship between unemployment and wages. The advice this week from the Reserve Bank governor is that the problem is partly structural — “there are global factors at work that are holding down growth in wages” — but the laws of demand and supply will eventually work.

“If you tighten up the labour market sufficiently, wage growth will pick up,” Lowe says. “That’s our hope and that’s really our strategy.”

These remarks hint at the uncertain terrain Western economies have entered in the world of globalisation, technological change and weak executive governments. Richardson says that in the past, today’s unemployment rate of 5 per cent would be more associated with wage increases of about 4 per cent rather than the current 2.3 per cent.

The story at present is the strength of the labour market. “Jobs growth is performing while wages growth is underperforming,” Richardson said. The upshot, however, is that workers are getting angry. While Morrison and Frydenberg naturally talk up the government’s record in terms of economic and jobs growth, they have a problem — the lived experience of people who face weak real wages growth, high housing and high energy prices.

“Wages growth will come with economic growth,” Morrison said in defence of traditional laws of demand and supply. No doubt he is right, but with gains so incremental they can hardly save his political position. The government has no immediate answer because no immediate answer exists.

Meanwhile Shorten, with his usual hyperbole, announces the end of an “economic orthodoxy” — the idea “that supply and demand in the labour market is enough to boost wages” — accepting the ACTU’s justification for a new wages model. Shorten’s statement raises more questions than it answers and he seems anxious to avoid any such answers.

What is happening here is that the trade unions, growing weaker by the day in the national marketplace, need a Shorten government to restore by law and policy their negotiating power, prestige and membership traction. The ACTU needs two things — an ALP government, and a government that walks a long way down the road of union power restoration. Nothing else will suffice.

The ACTU technique is to ­demand a Shorten government deliver what the Fair Work Commission, to a significant extent, has refused to deliver, witness the “living wage” demand. This is the context for the ACTU-organised national protests on April 10, with national secretary Sally McManus saying she expects 250,000 workers to march.

This is a political demonstration against the Morrison government but its real impact is to show the ALP what the ACTU can deliver and ensure the unions have a high-profile role in any Labor victory. Ultimately, it is about negotiating power with a Shorten government.

Shorten has already made an important series of commitments to boost wages and union power. He will overrule the Fair Work Commission to restore Sunday and public holiday penalty rates for 700,000 workers, crack down on sham contracting, limit the impact of the labour hire system and make wage equality for working women a priority. He is pledged to abolish the Australian Building and Construction Commission.

But the unions want far more. They have persuaded Shorten the Keating government model of enterprise bargaining no longer works and demand a return to industry-wide bargaining in the low pay sectors, an issue where Labor is sympathetic but guarded.

Shorten’s flirtation with the “living wage” concept refers to the ACTU demand for restoration of the principles established by Justice HB Higgins in the famous 1907 Harvester judgment, with the union movement seeking an increase in the minimum wage to equate to 60 per cent of the median wage. The Fair Work Commission rejected this last year.

The facts are that ACTU claims about the collapse of Australian living standards are nonsense. Living standards today are about 65 per cent higher than in 1991-92, a record extremely few other rich nations can match.

Wages have outstripped living costs in Australia by any measure — the past 10 years, the past five years or the most recent year. The claim by McManus that “real wages are going backwards” is false. The gain in real wages is modest — but a modest gain does not constitute going backwards.

The point about a per capita ­income recession is that this ­measure includes incomes from all sources and is a volatile measure affected by commodity price fluctuations. It is not a wages measure as such.

Australia has the third highest minimum wage in the world. It is far above its equivalents in Canada, New Zealand, the US and most of Europe. The minimum wage is set by the Fair Work Commission and the last increase was 3.5 per cent, well above the inflation rate at the time of 2.1 per cent. There are only about 200,000 workers on the minimum wage ($37,398 a year) because Australia has a system of minimum award wages, most of which are higher than the minimum wage.

Shorten’s “dual identity” dilemma was on obvious display at week’s end. His rhetoric was even more powerful — we need a minimum wage people can live on, Labor wants “to see a minimum wage in Australia which is a living wage”, Labor wants guidelines to ensure the minimum wage will lift people “out of poverty”.

There are no details beyond this except Shorten said the wage will still be set by the Fair Work Commission, a point of reassurance for some employers. Nothing Shorten said recognised any link between wage rises without a productivity basis and job losses.

This issue is pivotal because the relationship between the Labor Party and the trade unions now amounts to mutual hostage-­taking on a scale without precedent since World War II. Comparisons with the serious and autonomous ALP-ACTU negotiations of the Hawke-Keating era are a farce. This is another world.

More than ever, Labor needs the power of the unions for its campaigning. It needs their money, skills and on-the-ground numbers. The unions are weaker in industrial terms but powerful in political terms. At the same time, the unions need the support of a Labor government to deliver what they cannot obtain otherwise. The test for Shorten is how he manages this relationship of excessive, unhealthy, mutual dependence that, in the end, will become poisonous for both sides.

In the election context, however, Shorten will exploit the growth slowdown and weak wage outcomes to run his own scare campaign against Morrison. The task for Morrison and Frydenberg is to strike the right balance between running on a sound economic performance and warning that the economic dangers are too serious to experiment with a change of government.

Their message — you drive wages higher by creating more jobs — remains true. But the electorate is disengaged. If the voters punt on a change of government, the conundrum awaits: what version of Bill Shorten will they get?