If you really want to do something patriotic this year, if your fervent wish is to help our economy recover from the debilitating impact of the pandemic, you have the power to do something.
Demand a pay rise!
There is a growing groundswell of opinion among economists, from the Reserve Bank governor down, that our economic salvation rests upon a return of decent wages growth.
Right now, salary growth is bouncing around the basement; with each successive year laying claim to the lowest growth on record.
In the past year, wages were on the mat rising a paltry 1.4 per cent. During the past four years, the snail’s pace increments in pay rises for most Australians has been a key factor in the Reserve Bank’s inability to achieve its inflation targets.
At the moment, annual inflation is sitting at 1.2 per cent, around half what the governor Phillip Lowe would like. And with interest rates at 0.1 per cent, he’s run out of conventional monetary tools.
Sure, we’ve just gone through an incredibly tumultuous period.
But that’s not the reason for the predicament in which we now find ourselves.
Low inflation, excess capacity, burgeoning debt, underemployment and weak wages growth was putting a handbrake on the economy long before last summer’s fires ravaged the east coast and the pandemic forced Australia shut itself off to the rest of the world.
Rather than fix the problem, however, we seem destined to stick to all the policy quick fixes that led us here in the first place.
Is it time for a policy rethink?
If there was one good thing that emerged from the pandemic, it was that governments of all persuasions were forced to tip economic orthodoxy on its head.
Austerity — which turned a crisis into a disaster during the global financial crisis a decade ago — was abandoned. Governments everywhere turned on the spending.
Here at home, we pursued an isolationist policy to eradicate the virus. Prime Minister Scott Morrison may have preached containment but in reality he’s gone for eradication.
And it’s worked. Our economy has emerged amongst the strongest in the world. So has New Zealand.
The government spending, despite causing a blowout in the deficit and a massive debt, has left us in a much stronger economic position than anyone anticipated.
It will still take years to fully recover, but it could have been much worse.
We were also lucky. Our commodity exports have surged, both in value and volume despite a worrying deterioration in our relationship with China.
But perhaps the time has come to question the theories and policies that have dominated our thinking for the past half-century instead of simply returning to the old ways that clearly don’t work.
Immigration and the GDP growth myth
Wages have been kept in check for the past 30 years for a variety of measures.
The industrial relations system is far less tolerant of union action and strikes, the number of workers signing up as union members is dwindling and our large immigration program — which constantly adds new workers — keeps a lid on wage growth.
Ask most Australians, and they’ll tell you we’re tough on border control and immigration.
But it’s not the case. We’re tough on a tiny number of desperate refugees fleeing political turmoil and war.
But that’s all for show. When it comes to immigration, it’s pretty much open slather.
Immigration was a boon for Australia in the post-war era. But during the past 20 years, it has been used as a cheap and easy way to make it look as though our economy was growing.
In fact, we’ve been running one of the biggest immigration policies per head of population in the developed world.
More people, by definition, equals a bigger economy and it gives the impression of strong GDP growth.
While the economy overall may be getting bigger, individually, we can end up worse off.
The graph below shows exactly that. While we officially enjoyed 30 years of uninterrupted GDP growth until the pandemic hit, if you strip out the impact of population growth, we slipped into recession on three occasions during that time; in 2000, 2006 and 2018. Plus, there were close calls in 1995 and 2008.
This happens partly because governments, state and federal, are happy to take the kudos for an expanding economy but are reluctant to invest in the infrastructure necessary to ensure our cities and towns work efficiently. Overcrowding leads to a slump in productivity.
But there are other impacts too. One of the big impacts is on wages. With greater competition for jobs, wages tend to stall. And that’s bad for the economy.
Why low pay rates are hurting growth
For the past 40 years, most Western economies, including ours, have done their best to keep wages in check.
The theory was that cheaper wages would boost profits which would allow companies to invest more, boosting economic activity and creating ever more jobs.
It was called the “trickle-down effect”.
But in attempting to limit wages, the share of earnings here and in the US has tipped overwhelmingly in favour of profits. And that now is beginning to have an impact on spending and, ultimately, profits.
Just as the increased JobSeeker payments helped us power through the worst of the pandemic lockdowns last year, as the unemployed spent that extra cash, most economists now argue that higher wages would result in more spending that eventually would lead to bigger profits. A “trickle-up effect”.
As you’d expect, business lobby groups are dead against the idea. They argue that we need to see an increase in labour productivity to justify higher wages. But it’s a dud argument. Labour productivity has been rising for years.
Wages simply haven’t kept pace as this graph below shows.
The situation is particularly bad for those under 35.
The Productivity Commission last year found that wages and hours worked for under-35s went backwards in the decade after the global financial crisis.
Later retirement from older workers and more tertiary graduates competing for skilled work were fundamental drivers, it found.
The slowdown in the economy in the aftermath of the mining boom didn’t help and it appears greater competition for starter positions allowed firms to cut pay rates for those straight out of school or university while maintaining pay for older workers.
This doesn’t bode well for the future.
Ages and wages
The commission found that younger workers never quite make up the gap.
They are forever left behind the previous cohort as they grow older and more experienced.
And that means, as they grow older, they’ll have less disposable income which will inhibit their ability to spend.
For businesses to prosper into the future, it might be time to recognise that workers are also their customers.