Labor appears hellbent on trading work for wages

This really takes the cake: Labor’s finance spokesman Jim Chalmers thinks the solution to low wage growth is to have the Fair Work Commission “do the right thing”.

He says: “It’s the function of the Fair Work Commission who … would share the priorities of an incoming Labor government to deal with what is a wages crisis in this economy.”

That would be the supposedly independent FWC.

The real trouble for Chalmers and Opposition Leader Bill Shorten is they don’t seem to have a clue about why wages growth has been sluggish.

So let me explain the slow wage growth of the past several years, and note that there has been a slight uptick in the rate of growth in the wage-price index (the best measure of wage growth) in the two most recent quarters.

Firstly, low wage growth is not an Australian phenomenon; it has been a characteristic of a large number of developed economies. If we are looking for explanations, we need to look beyond just local factors. We know that, over the medium term, wages move in line with productivity and inflation expectations. The rate of growth of wages has fallen in line with movements in productivity, which have been close to flatlining since 2016. In combination with low inflation expectations, it is hardly surprising wage growth has slowed.

Of course, there are some complications to the story. Wages moved ahead of productivity during the height of the mining boom, so there was a need for some downward adjustment in wages to work off this overhang. But there is really nothing out of the ordinary to how wages have been behaving, apart from the slightly surprising unresponsiveness of wage growth to the state of the labour market.

With the unemployment rate at 5 per cent, it might be assumed competition for workers would push up wages. But recall that the rate of underemployment, the proportion of the workforce that wants to work more hours, is more than 8 per cent. In other words, there is a real possibility that the labour market is not as strong as the headline rate of unemployment would indicate.

So let’s go back to Chalmers’ suggestion the FWC just needs to do “the right thing”. Arguably, it tried to do the right thing in its two most recent adjustments to the national minimum wage: 3.3 per cent and 3.5 per cent. Both were well above the prevailing rates of inflation and were unjustified on the grounds of productivity.

But it’s not clear that either reasonably courageous decision actually affected the overall growth of wages. Bear in mind that only about 1.9 per cent of workers are paid according to the national minimum wage, ­although 2 million-odd workers are paid according to award wages, which are also adjusted according to the change in the national minimum wage.

The problem with Chalmers’ idea of doing the right thing and the FWC pushing up the minimum wage too much is that there is every chance low-paid workers will lose their jobs or will have their hours cut back.

The flip side is that hardworking small business owners operating in competitive markets will have to find the additional cash to pay the higher rates of pay and some may go broke. It won’t affect big businesses, many of which operate in oligopolistic markets (think banks, energy companies), because they don’t employ minimum wage workers.

The good thing is that Chalmers need only consult his colleague Andrew Leigh, opposition assistant to the treasury spokesman, as to what to expect. According to Leigh’s own research undertaken when he was a professor of economics, for every 1 per cent increase in minimum wages, we should expect a decline in employment of between 0.25 per cent and 0.4 per cent.

And for young women, the negative impact is much greater: a 1 per cent increase in minimum wages leads to a decline in their employment of 0.62 per cent.

So let’s think about a 5 per cent rise in the minimum wage. That would probably accord with Chalmers’ idea of doing the right thing, at least in the first year. That would lead to job losses of between 25,000 and 40,000 among those directly affected.

And presumably, the 5 per cent rise would be the beginning of the journey towards Labor’s living wage. So there would be ­additional job losses in subsequent years.

Unsurprisingly, Chalmers is very taken by the repeated references made by the governor of the Reserve Bank of the need for wages to grow more strongly. What Chalmers doesn’t realise is that the governor has a very weak grip on the economics of the ­labour market.

There is even a very strange appendix in the most recent RBA Statement on Monetary Policy on Minimum Wage Developments in Advanced Economies.

The efforts of several countries to increase their minimum wages by fiat is reviewed relatively favourably, although there is some hesitation when it comes to substantial hikes to minimum wages. The text is remarkably naive.

There is no understanding of the underlying market structures that would obviate the prospect of higher minimum wages leading to job losses.

Aside from the rare example of monopsony (single buyer of labour), there is no instance where higher minimum wages can lead to higher employment as well.

And think about it: a single buyer of labour could be the public sector in a particular area or a very large business. But wages are higher than the average in both these instances.

The combination of higher minimum wages and hopefully only slightly lower employment is a choice that can be made by a political party. You could call it a referendum on wages.

It will be bad luck for the workers who lose their jobs or have their hours cut and it will be bad luck for the firms which struggle to make a buck or are driven out of business. But that’s the trade-off.

Unless productivity lifts, the expectation is that wages will continue to grow relatively slowly. The preferred approach, rather than toying with the fanciful idea of a living wage without reference to employers’ capacity to pay is to use the tax and transfer system to improve the lot of the poorest households and foster stronger productivity growth.

That’s really the right thing to do, Jim.