Wages from Howard to Morrison (and the $80 billion a year deficit).

 

Since the Howard government was elected in 1996, there has been a massive transfer of wealth from wage-earners to the owners and managers of capital.

By the beginning of the pandemic, that transfer stood at around $80 billion a year, or 15.9% of GDP.

If the wage sector had retained the same proportion of GDP as it had in the mid-1990s, someone on average full-time earnings would be getting an extra $168.55 a week, or $8,764.38 a year.

To maintain the same share of economic output, wages need to grow at the rate of inflation plus productivity (as this Treasury paper explains). Over the past 25 years, that has not happened:

  

It’s a common myth that wages have not kept pace with inflation. Except in the past couple of years, they have. But that’s to ignore productivity, the real source of economic growth.

By 2020, the gap between wages and real economic growth had widened so far that the wage sector would have to increase by 9.64% just to get back to the level of 1998. That’s a big number – $80 billion a year, 15.9% of GDP.

Here’s another way of looking at that gap. If wages had kept up with the economy, GDP and the wage price index would have grown, over time, at about the same rate. But they didn’t. Over 20 years, GDP grew by an average of 2.99% a year and wages by only 2.37%:

Productivity is another word for efficiency. If, say, the production of goods and services increases by 3% and the inputs of labour and money go up by only 1%, then overall (multifactor) productivity can be said to increase by 2%.

The ABS breaks this down further. Labour productivity rises when employees work harder and smarter, increasing their output with the same number of hours. Capital productivity rises when investment is used more cleverly, with each dollar working harder than it did before. This can happen when a company buys new, more efficient equipment – an airline, perhaps, buying larger and more fuel-efficient aircraft.

Employees have indeed worked more efficiently than ever. Over the last 20 years, labour productivity improved by an annual average of 1.19%.

But we can’t say the same about capital. Over the same period, capital productivity went down by 1.04% a year. All the efficiencies of the past 20 years have been produced by workers, not by investors:

The fruits of that improvement in labour efficiency, though, have gone not to the workers who were responsible for it but to the owners and managers of capital, whose own performance cannot be described as particularly clever:

 

WHAT’S GOING ON?

The cost-of-living crunch, now made critical by the soaring costs of housing, food and fuel, has been brewing for at least the past 25 years. It’s the inevitable result of policies that favour investors at the expense of wage-earners.

Fifty years ago, the imbalance went the other way. The wage share of economic output was unusually high and the share going to capital was consequently low. Corporate profits suffered and there was less money to invest in new productive capacity. The lesson of the time was that the benefits of economic growth needed to be shared equitably and predictably between employees and employers.

This was still the situation in 1983, when the Hawke-Keating government came to power. Key policies, such as the Accord with the unions, secured lower wage growth in return for social benefits such as Medicare and superannuation. For investors, franking credits greatly increased returns. By the time the Howard government was elected in 1996, a reasonable balance between labour and capital had been restored.

Wages did not need to be suppressed any further. But they were.

From its earliest days, the government introduced a long list of measures to curb the power of unions and limit the negotiating power of employees. In its first year, these included tight limits on strike action and the introduction of individual employment contracts. Other measures followed.

At the same time, various capital-friendly initiatives were introduced, including company tax cuts and the 50% discount on capital gains tax.

By 2010, according to a study by the US Congressional Budget Office, the effective tax rate being paid by Australian companies was only 10.4%. But the income tax paid by an average wage-earner is 30.3%, according to Tax Office data. And that doesn’t include the GST.

The string of laws suppressing union power have worked. Union membership, already falling during the Hawke-Keating period, plummeted. Today, only about 14% of all employees belong to a union.

 

It is another myth that casuals form an ever-greater proportion of the workforce: in fact, that proportion has been decreasing for about the past 15 years – although 23% of all employees are casually employed (that is, without leave entitlements). The proportion of independent contractors has also declined slightly, though they still account for 10% of the workforce.

What has happened is that many of these insecure workers are far easier to exploit, with no effective bargaining power and no ability to reject low wages and poor conditions.

Protections under enterprise bargaining agreements (EBAs), introduced in 1991 as part of the Hawke-Keating government’s Accord with the unions, are in sharp decline. A loophole in the Fair Work Act allows employers to apply to terminate an EBA, forcing employees to revert to the lower pay and conditions of “safety-net” awards. And the number of new and renewed EBAs are also in decline. A report by the Centre for Future Work found the number of EBAs fell by 46% in just the five years to 2018.

WHAT IT MEANS FOR THE ECONOMY

Over the past 25 years, the transfer of wealth from employees to the owners of capital has grown to about $80 billion a year, or 15.9% of GDP. That distortion has inevitably held back economic growth for the nation, and reduced prosperity both for workers and investors.

The reduction of over $6,000 a year in the average worker’s pay-packet has obviously suppressed the standard of living for anyone who relies on a wage to make a living. Less obviously, that imbalance also suppresses private-sector production and, therefore, earnings.

Extra money going to an investor is more likely to be saved than spent, so it does not contribute to the demand for extra goods and services. When companies cut costs by cutting wages, that money will not be spent on new productive capacity unless there’s the demand for it. It’s a classic Catch-22.

But when employees get a wage rise, they’re likely to spend it – because they must. That’s always true, but the current cost-of-living squeeze makes it even more so now.

It will take substantial, difficult reform – and a long time – to bring the productive economy back into balance. A huge and sudden injection of money into the demand side of the economy would create serious problems with inflation and interest rates.

That’s not going to happen. But wage-earners have been short-changed for a quarter of a century. If the pendulum does not start to swing back now, when will it?