An “unholy coalition” is attacking the planned increase in the superannuation guarantee, Opposition Leader Anthony Albanese says in his latest “vision statement”, pledging to resist any attempt to stop the legislated rise to 12% going ahead.
In a speech on older Australians – released ahead of Wednesday’s delivery in Brisbane – Albanese says critics “want to see super wound back or abolished. They say that the pension should be enough, or that it reduces wages.
“I absolutely reject this binary approach. With economic growth and productivity you can have both higher super and higher wages.”
The rise in the guarantee, at present 9.5%, would take it in increments to 12% by 2025. The increase has strong critics within government ranks (where some would favour making superannuation voluntary) and outside, among them the Grattan Institute. The government has an inquiry into retirement incomes running.
The Australian Council of Social Service has argued that “any increase in compulsory retirement saving above 10% of wages should be based on a careful assessment of the needs of low and middle-income workers before and after retirement”.
ACOSS also says the guarantee should not rise above 10% until tax breaks for super contributions are reformed to make them fair.
Interviewed on Sky on Tuesday, government senator Gerard Rennick, from Queensland, agreed there was a growing push among Liberals to stop the increase.
Albanese says the prescriptions of ACOSS and others play into the government’s hands.
Supporting the guarantee going to 12%, he says: “Having established the superannuation system we will not stand by and see it chipped away. We want to make it better.”
In his speech Albanese also says a Labor government would charge its proposed body Jobs and Skills Australia with strengthening the workforce for the aged care sector.
This is one of “the workforces of the future”, and needs proper pay and training to be able “to provide culturally and linguistically appropriate care”.
Albanese attacks the government’s plan to privatise aged care assessments. “The first interaction the elderly and their families have with the aged care system is through an aged care assessment or ACAT. It is the first step to getting a home care package or entering a residential aged care facility.
“Our aged care system is broken – and this government wants to make it worse by subjecting ACAT to the indifference of the market. There is a role for the market. But markets have no conscience.”
Albanese also endorses the concept of “intergenerational care”.
“The ABC program ‘Old People’s Home for 4 Year Olds’ made me laugh and made me cry – but it also made me imagine a future where intergenerational care is the answer to our aged care crisis.
“Imagine a future where we co-locate aged care facilities including day respites with kinders and preschools.
“Day respite for our elderly is a missing piece of the puzzle. For many families, they want mum or dad to stay at home or live with them, but they worry about the long days when they are at work.
“Imagine being able to drop your child and grandmother off to the same location.
“Imagine knowing their day would be enjoyable and safe, with activities led by well-paid staff.
“The benefits of intergenerational care are immense. It can help our elderly re-engage with the world, minimise their isolation and the effects of their health issues.”
On the issue of older workers who have trouble getting jobs, Albanese says the answer for some is “to upgrade their skills, which underscores the urgency of rebuilding our TAFEs in particular and our VET system in general”.
But cultural change is also needed, he says, and employers must play their part.
“According to Deloitte Access Economics, a 3% increase in workforce participation by Australians aged over 55 would generate a A$33 billion boost to the economy each year.
“Volunteering is great. But to build a stronger economy we must harness the talents of everybody – and that includes older Australians who are sources of wisdom and experience for their employers and co-workers.”
The Queensland government’s in-principle agreement to pay A$190 million in compensation for the wages withheld from more than 10,000 Indigenous workers is a watershed moment for the stolen wages movement.
Indigenous people across Australia have been fighting for their denied and withheld wages for decades, both on the streets and in the courts. There have been some victories along the way and many setbacks.
The significance of the Queensland settlement (to settle a class action) is that it marks the first recognition these claims have legal as well as moral and political merit. Its ramifications are potentially limited, however, given the full injustice of how Indigenous wages were stolen.
A significant contribution
Historically Aboriginal and Torres Strait Islander men and women found work in farming, mining, roadbuilding, irrigation, fencing, gardening, pearling, sealing, fishing and domestic duties. But they were most concentrated in the cattle industry of northern Australia, from Western Australia to Queensland.
Tens of thousands worked on cattle stations from the 1880s to 1970s. The beef industry could not have survived without them. In 1913, the federal government’s Chief Protector of Aborigines, Baldwin Spencer, noted that “under present conditions, the majority of cattle stations are largely dependent on the work done by black “boys”. In the 1930s, when the rest of the economy floundered in the Great Depression, Indigenous labour helped keep the industry profitable.
Indigenous workers were entitled to be paid two-thirds of other workers, but even then employers often paid them less. Sometimes the low value of their wages was disguised by being paid in food and clothing rations. Sometimes workers were provided “store credit”, which could only be used to buy exorbitantly priced items.
Station managers may have justified under-payment on the basis they were “caring” for workers through providing scant food, clothing and accommodation.
Governments, meanwhile, “withheld” income – often putting money into trust funds that Indigenous people were unable to access. The Queensland government’s $190 million offer is to settle a class action claim for it misappropriating such trust funds.
The fact Indigenous people were vulnerable to such exploitation for decades was made possible by an intricate legislative regime that gave the state expansive powers over their lives. In all states and territories, Aboriginal Protection Acts gave the government officials the power to control the money earned by Indigenous workers.
In Queensland, historian Rosalind Kidd has estimated that 4,500 to 5,500 Indigenous pastoral workers may have lost wage entitlements worth more than $500 million between 1920 and 1968.
There have been redress schemes in Western Australia, Queensland and New South Wales.
The Queensland government set up the first redress scheme in 2002. It set aside $55.6 million to compensate any individuals who could supply documentary evidence their wages or savings were taken by the Queensland government. If they could do so – and there was a deadline of 2006 on claims – the scheme provided an ex gratia payment of $2,000 to $4,000.
These conditions set a high bar, and $21 million went unclaimed.
Western Australia established its scheme in 2012. It also involved a small ex gratia payment ($2,000) with a limited window to make claims. Claimants called the scheme insulting and mean-spirited. The ABC reported a source that said state treasury officials agreed individuals were owed as much as $78,000, and the government kept the work of its stolen wages taskforce quiet for years, waiting for potential claimants to die.
In distinction to these two schemes, the NSW Trust Funds Repayment Scheme (2006 and 2010) matched the wages withheld in trust funds between 1900 and 1969. It paid $3,521 for every $100 owed, or an $11,000 lump sum where the amount could not be established. This was the closest model to a reparations scheme, though also inhibited by bureaucratic requirements and time limitations.
Due to the limitations of all these state redress schemes, in 2006 a Senate Inquiry into Stolen Wages recommended a national scheme. But no federal government since has acted on this recommendation.
Stolen wages claimants have taken their cases to court in Western Australia, New South Wales and Queensland – but it is only in Queensland that they have had some success.
One of those is the case of James Stanley Baird, who sued the Queensland government for withheld wages on the basis that paying under-award wages to Indigenous workers was in breach of the Racial Discrimination Act 1975. The state government compensated Baird and other plaintiffs the difference owed to them in damages and provided an apology.
The current settlement is based on a legal claim that the Queensland government breached its duty as a trustee and fiduciary in not paying out wages that were held in trust. The outcome is the most significant repayment for stolen wages plaintiffs in Australian history. Yet the benefits may be confined.
First, in Queensland there is a rich archive of documents (substantially unearthed and analysed by historian Rosalind Kidd) to prove the government misappropriated funds. Such a record may not exist elsewhere.
Second, the settlement only applies to wages placed in “trust accounts”. It has no implications for wages denied to Indigenous workers in other ways, such as by private employers who booked down wages or otherwise refused to pay.
For justice for all wronged Indigenous workers, there needs to be broad-based reparations for stolen wages. This requires truth commissions and a commitment by governments and anyone else that profited from that theft to restore what is owed.
The Australian economy will remain healthy for long enough to enable the government to claim it as a strength in the lead-up to the May election, but the first Conversation Economic Survey points to a fairly flat outlook beyond that, with a 25% chance of a recession in the next two years.
The Conversation has assembled a forecasting team of 19 academic economists from 12 universities across six states. Among them are macroeconomists, economic modellers, former Treasury and Reserve Bank economists, and a former member of the Reserve Bank board.
Taken together their forecasts point to no recovery in the share market during 2019, no recovery in wage growth, no further improvement in the unemployment rate, further modest home price falls in Sydney and Melbourne, and to a budget deficit next financial year despite the official forecast of a surplus and Treasurer Josh Frydenberg’s commitment that the government will fight the election continuing to forecast a surplus.
Weighing heavily on Australia’s economy during 2019 will be a much weaker US economy, with what the forecasting team says is the possibility of a US recession, and weaker growth in China. Australian consumer spending is forecast to continue to grow during 2019, but no faster than it did during 2018. The best measure of living standards is forecast to advance at a crawl.
Most of the team expect the Reserve Bank to sit on its hands throughout all of 2019, leaving its cash rate unchanged at the all-time low of 1.5% for what will be a record 40 months.
The panel expects the Australian economy to grow more slowly in the year ahead, by 2.6%, down from recent annual growth of 2.8% and 3.1%. None of the panel expects growth to exceed 3%. One, Steve Keen, formerly of the University of Western Sydney and now at University College London, expects growth of only 1%.
Most of the panel expect China’s growth to continue to slow, from the annual growth of 6.7% typical over recent years to just 6.2%, the weakest growth since the 2008 global financial crisis and the weakest calendar year growth since 1990.
Former Treasury economist Nigel Stapledon now at the University of NSW nominates China as the biggest threat to Australian and global growth. He says it has a good record of stimulating its economy to get out of difficult corners but one day it might get it wrong.
The panel expects US economic growth to hold up at 2.8% during the year ahead but to weaken or go into reverse by year’s end as the “sugar hit” from the Trump tax cuts goes into reverse.
Former Treasury and International Monetary Fund economist Tony Makin points to US high public debt that will need to be rolled over, soaking up funds that could have been more productively used for investment, to higher US interest rates imposed by a central bank concerned about inflation, and to the escalating trade war with China.
ANU modeller and former Reserve Bank board member Warwick McKibbin says the US economy is “very likely” to begin to go backwards towards the end of the year. Craig Emerson, a former Australian trade minister now with Victoria University, says the US is likely to enter a recession in 2020. Former Treasury economist Mark Crosby at Monash University says if there is a US recession, it won’t hit until late 2019, with the impact greatest in 2020.
Rebecca Cassells from the Bankwest Curtin Economics Centre says a lot depends on the outcome of the US-China trade war: “The two biggest economies are going head to head, but both are almost as reliant on the other to sustain their growth trajectories,” she says.
Australia should look to other parts of the world to drive its economic growth. “India is one of them, and is rising rapidly with no downgrading of its growth trajectory of 7.75% for 2019.”
Nominal GDP, the money earned in Australia unadjusted for price changes, is forecast to grow more slowly in 2019, by 4.5%, down from recent growth in excess of 5%, reflecting weaker iron ore prices.
The best measure of living standards, real net disposable income per capita, is expected to barely grow, climbing just 1.1% over the year to December, much less than recent growth in excess of 3%, but much more than its performance in the dismal years between 2012 and 2016 when it went backwards.
Forecasts for the unemployment rate cluster around its present 5.1%, with only four below 5% and one above 6%.
Wage growth is forecast to climb no further in 2019, finishing the year at its present 2.3% instead of climbing to 2.75% on its way to 3% by mid 2020 as forecast in the budget update.
Rebecca Cassells points out that much of the increase we have had has been driven by the Fair Work Commission’s decision to lift the minimum wage 3.5% from June 2018, suggesting very low growth elsewhere. Disturbingly, she says more and more enterprise bargains are being terminated, with employees falling back on awards.
Overwhelmingly, our panel is of the view that the only thing that will lift wage growth out of its slump (and budgets have been incorrectly forecasting a bounce out of the slump for eight years now) is higher productivity: producing more per worker.
Victoria University economic modeller Janine Dixon notes that the December budget update actually downgraded its forecast of productivity growth, from 1.5% to 1%, and so is not optimistic.
She says even if productivity growth did pick up, excessive market power in some industries combined with weakness in labour market institutions means it might not easily be passed on to workers.
Tony Makin, a supporter of company tax cuts, says the best thing to lift productivity would be new (perhaps foreign) investment embodying productivity-enhancing technology.
The saving grace for workers facing yet another year of historically-low wage growth is that price increases will also remain low.
Inflation has been right at the bottom of (or below) the Reserve Bank’s 2% to 3% target band for four years now, meaning that even at the continuing low rates of wage growth forecast, wages should continue to climb just faster than prices.
The panel expects consumer spending to climb by only 2.5% in real terms in 2019, most of which will reflect population growth of 1.6%.
The average forecast for inflation is at the very bottom of the Reserve Bank’s target band. Only two panel members expect inflation to edge back up to the middle of the band. They are Warwick McKibbin and former Treasury and ANZ Bank chief economist Warren Hogan, at the University of Technology Sydney.
Interest rates and the budget
Without either a lift in inflation or a substantial weakening in the economy there is little reason for the Reserve Bank to move interest rates in either direction.
Governor Philip Lowe took the job in September 2016, just after the board cut the cash rate to a record low of 1.5%. He hasn’t moved the cash rate since, although on several occasions he has said the next move is most likely to be up.
Five of the panel do expect at least move up this year, including the two who think inflation might approach the bank’s target. Three expect cuts, taking the rate below 1.5%.
The government says it will deliver a budget surplus next financial year, of A$4.1 billion, the first surplus in a decade.
The panel doesn’t think so, all but one member predicting a lower budget surplus than the government, and seven predicting deficits. The average forecast is for a deficit of A$3.5 billion rather than a surplus of A$4.1 billion.
Monash University macroeconomist Solmaz Moslehi identifies optimistic wage growth, weaker than expected mining investment and a hit to consumer spending from the housing downturn as the biggest risks to the forecast surplus.
Julie Toth, adjunct professor at Deakin University’s Master of Business Administration program and chief economist at the Australian Industry Group, says the latest indicators suggest that neither employment nor wage growth will accelerate by as much as the government expects.
Michael O’Neil from the South Australian Centre for Economic Studies says the biggest immediate risk to the forecast surplus is thermal coal prices, given China’s efforts to cut coal imports and the shift to renewables in China and India.
The biggest long term risk is the scale of the company tax cuts and the ongoing shift of income from highly-taxed labour to more lightly-taxed capital.
Margaret McKenzie of Federation University identifies the biggest risk to the surplus as a change of government, something she says she welcomes because with extensive idle capacity and underemployment, a surplus would be unhelpful.
The panel expects Sydney home prices to fall by another 5.8% and Melbourne prices by another 5.1% in 2019, taking the slides over two years to 14.7% and 12.1%.
Only Macquarie University and former Reserve Bank economist Jeffrey Sheen expects prices to move back up throughout 2019, by 2% and 3%.
Reassuringly, none of the forecast falls are bigger than 10%. The biggest are predicted by Steve Keen, Tony Makin, Margaret Mckenzie and Craig Emerson.
The lower prices will be accompanied by much slower growth in housing investment, expected to climb only 2.1% in 2019 after climbing more than 7% in the year to September 2018.
Non-mining business investment is forecast to grow more slowly this year, by 5.7% instead of 11.4%, and mining investment is expected to keep sliding, losing a further 3.4% after losing 11.2% last year rather than climbing as the government’s budget update predicts.
Five of the team believe that mining investment to turn the corner in line with the budget forecast. Nine expect it to fall further.
The Australian share market will for practical purposes not grow not at all during 2019 according to the average forecast, which is for barely perceptible growth of 0.1%. A steady share market would come as a relief to super funds and share owners after last year’s slide of about 7%.
The range of forecasts for the ASX 200 is wide, from slides of more than 6% to gains of more than 6%.
Fortunately for a government the panel expects to need to continue to borrow more in order run continued budget deficits, what it pays for to borrow via the 10-year bond rate is expected to remain little changed at 2.6%. Only Warwick McKibbin expects a much higher bond rate, of 3.5%.
The panel’s average forecast is for an broadly unchanged Australian dollar, of around 70.5 US cents. The highest forecast is for US$0.80, the lowest for US$0.62.
The iron ore price, at present close to US$74 a tonne, is expected to fall to around US$64. Only one panelist, Warwick Mckibbin, expects it to stay near where it is, at US$75. The government itself is cautious, using a price of US$55 in its budget forecasts, a number it might lift in the April budget, allowing it to forecast more revenue.
A recession is conventionally defined as two consecutive quarters in which gross domestic product falls instead of rises. Australia hasn’t had two consecutive quarters of negative growth since 1991.
The most recent negative quarter was in September 2016. Before that there was one in March 2011, and before that in during the global financial crisis in December 2008.
Ross Guest of Griffith University makes the point that his estimate of 20% should be considered low. There will always be a risk of a recession. By itself two quarters of negative growth needn’t be a disaster. The impacts on the government and on consumer and business confidence would be more important than the downturn itself.
Guay Lim of the Melbourne Institute of Applied Economic and Social Research assigns the lowest probability of any of our panel to a recession, 5%, saying the most likely catalyst would be a global trade war.
Warren Hogan assigns the highest probability to a recession after Steve Keen, 40%, saying Australia is facing the end of a major construction boom and has heavily indebted households. It will be vulnerable to any negative shocks and especially vulnerable to higher inflation and interest rates.
Steve Keen says the only thing that has kept Australia afloat since the China boom has been the housing bubble, which the banking royal commission has been discovering was built on fragile, and in places fraudulent, foundations.
Nigel Stapledon says the biggest drag on the economy will be the collapse in the construction of residential investment units. Labor’s proposed increase in capital gains tax will make it worse, notwithstanding Labor’s decision to exempt new construction from its crackdown on negative gearing.
Rebecca Cassells says on the bright side Australia is set to become the world’s biggest exporter of liquefied natural gas, the biggest exporter of iron ore to India and the world’s biggest producer of lithium, needed for batteries.
And if there is a global economic downturn within the next few years, she says another positive is that Labor is likely to be in power, making the successful deployment of a stimulus package more likely than if the Coalition had been in office.
In its long-awaited final report on the efficiency and competitiveness of Australia’s leaky superannuation system, Australia’s Productivity Commission provides a roadmap.
Weeding out scores of persistently underperforming funds, clamping down on unwanted multiple accounts and insurance policies, and letting workers choose funds from a simple list of top performers would give the typical worker entering the workforce today an extra A$533,000 in retirement.
Even Australians at present in their mid fifties would gain an extra A$79,000.
If this government or the next cares about the welfare of Australians rather than looking after the superannuation industry it’ll use the recommendations to drive retirement incomes higher.
So why the continued talk (from Labor) about lifting compulsory super contributions from the present 9.5% of salary to 12%, and then perhaps an unprecedented 15%?
It’s probably because (and Paul Keating, the former treasurer and prime minister who is the father of Australia’s compulsory superannuation system says this) they think the contributions don’t come from workers, but from employers.
To date, they’ve been dead wrong. And with workers’ bargaining power arguably weaker than in the past, there’s no reason whatsoever to think they’ll be right from here on.
Past super increases have come out of wages
Australia’s superannuation system requires employers to make the compulsory contributions on behalf of their workers. Right now that contribution is set at 9.5% of wages and is scheduled to increase incrementally to 12% by July 2025.
So, for workers, what’s not to like?
It’s that while employers hand over the cheque, workers pay for almost all of it via lower wages. Bill Shorten, then assistant treasurer, made this point in a speech in 2010:
Because it’s wages, not profits, that will fund super increases in the next few years. Wages are the seedbed of the whole operation. An increase in super is not, absolutely not, a tax on business. Essentially, both employers and employees would consider the Superannuation Guarantee increases to be a different way of receiving a wage increase.
The Henry Tax Review and other investigations have found this is exactly what happens. Increases in the compulsory super contributions have led to wages being lower than they otherwise would have been.
Even Paul Keating, speaking in 2007, made this point. Compulsory super contributions come out of wages, not from the pockets of employers:
The cost of superannuation was never borne by employers. It was absorbed into the overall wage cost […] In other words, had employers not paid nine percentage points of wages, as superannuation contributions, they would have paid it in cash as wages.
This is more than mere theory. Compulsory super was designed to forestall wage rises. Concerned about a wages breakout in 1985, then Treasurer Paul Keating and ACTU President Bill Kelty struck a deal to defer wage rises in exchange for super contributions.
When the Super Guarantee climbed from 9% to 9.25% in 2013, the Fair Work Commission stated in its minimum wage decision of that year that the increase was “lower than it otherwise would have been in the absence of the super guarantee increase”.
The pay of 40% of Australian workers is based on an award or the National Minimum Wage and is therefore affected by the Commission’s decisions. For these people, there is no question: their wages are lower than they would’ve been if super hadn’t increased.
Where’s the evidence employers pay for super?
If wage rises came from the pockets of employers then we should see a spike in wages plus super when compulsory super was introduced, and again when it was increased. But there wasn’t one when compulsory super was introduced – a point Bill Shorten has made in the past.
When compulsory super was introduced via awards in 1986, workers’ total remuneration (excluding super) made up 63.3% of national income. By 2002, when the phase-in was complete, it made up 60.1%.
Out of the 26 countries for which the Organisation for Economic Co-operation and Development has data, Australia recorded the tenth largest slide in the labour share of national income during the period compulsory super contributions were ramped up.
Of course, changes in super aren’t the only thing that affects workers’ share of national income.
But the size of the fall in the labour share in Australia over the period when the super guarantee was increasing isn’t consistent with the idea that employers picked up the tab for super.
Would it be different this time?
Paul Keating argues that while in the past lifting compulsory super to 9.5% was paid for from wages, a future increase to 12% today would not be:
Workers are not getting real wage increases anywhere, and can’t get them. The Reserve Bank governor makes the point every week. So the award of an extra 2.5% of super to employees via the super guarantee will give them a share of productivity they will not get in the market – without any loss to their cash wages.
But such claims are difficult to square with concerns that workers’ weak bargaining power is one of the reasons current wage growth is so weak.. If employers don’t feel pressed to give wage rises, why would they feel pressed to absorb an increase in the compulsory Super Guarantee?
And while real wages (wages adjusted for inflation) haven’t grown particularly quickly, the dollar value of wages continues to grow: by 2.2% a year over the past five years. It would be easy for employers to simply reduce those increases to offset any increase in compulsory super – as they have in the past.
And no, more contributions won’t help workers
The Grattan Institute’s recent report, Money in Retirement, showed increasing the compulsory super would primarily benefit the top 20% of Australians. It would hurt the bottom half during working life a lot more than it helps them once retired.
Their higher super contributions would not improve their retirement outcomes: their extra super income would be largely offset by lower part-pensions. What’s more, the age pension is indexed to wages. If wages grew by less (as they would as compulsory super contributions were increased) pensions would grow by less too.
Lifting compulsory super would also cost the budget A$2 billion a year in extra tax breaks, largely for high-income earners, because it is lightly taxed.
That would mean higher taxes elsewhere, or fewer services.
For low-income Australians, increasing compulsory super contributions would be a thoroughly bad deal. It means giving up wage increases in return for no boost in their retirement incomes.
A government that wanted to boost the living standards of working Australians both now and in retirement would consider carefully all of the Productivity Commission’s suggestions including this one: an independent inquiry into the whole idea and effectiveness of Australia’s regime of compulsory contributions, to be completed ahead of any increase in the Superannuation Guarantee rate .
It’s been an extraordinary four years since wages grew by anything like the 3-5% per year they used to.
Ever since 2015, wage growth has been closer to 2% per year, moving only in a narrow band between 2.3% to 1.9% and back again. It’s the slowest sustained rate of wage growth since the 1930s great depression.
Governments themselves have deliberately held down wage growth for their own workers and encouraged companies that sell to them to do the same.
The five not-so-easy steps
There is no one solution. But in our book, we advance a five-point plan that we think might work:
End active wage suppression by governments, both for their own workers and in sectors that rely on public funding or procurement. Governments must set a lead, not just in what they pay their own employees, but in the funding they provide for others, especially in growing sectors such as aged and disability care.
Revitalise collective bargaining, including by creating paths to industry-level agreements, at least in those sectors where enterprise bargaining is not currently working.
Strengthen minimum wage regulations, by enabling the Fair Work Commission to set a “living wage”, and encouraging it to lift award wages over time while dealing with the gender pay gap.
Address the “fissuring” of work, by expanding the definition of employment and holding businesses responsible for underpayments by the subsidiaries over which they exert influence or control.
Improve compliance with minimum wage laws, including by increasing funding to the Fair Work Ombudsman, making it harder for repeat offenders to stay in business, and creating faster and cheaper redress for underpayment claims.
Not everyone will agree with these proposals.
But as the research compiled in our book illustrates, something has to be done. Australia’s once-vaunted reputation as a fair and inclusive society depends on it.
There have been a few suggestions lately on what policies the government should take up in order to fight slow wage growth.
Former Prime Minister Paul Keating suggested the superannuation guarantee – the amount employers must contribute to workers’ super – be increased to 12% to compensate workers for a lack of wages growth.
While the Australian Council of Trade Unions is calling on the government to lift the minimum wage and “recalibrate” the industrial system to ensure fair incomes for workers.
In this Viewpoints, James Morley argues government intervention could cause unforeseen problems, while Beth Webster notes the need for the government to re-balance the economy.
James Morley: Slow wage growth reflects two key aspects of the “secular stagnation” phenomenon sweeping the industrialised world: low productivity growth and low inflation expectations. Addressing slow wage growth should go to these causes, not to the symptom.
If the government was to intervene directly in the setting of wages to increase their growth, it would be reminiscent of the wage/price controls put in place in many countries in the 1970s. These were an attempt to stem high inflation by mandating exactly how wages and prices could be set. They were a mistake then and would be a mistake now, even if only for wages and not prices.
One problem is that such policies distort what is already the most complex of all economic markets – the labour market. “Insiders” (those with steady jobs) might win something on a one-off basis with higher wages. But “outsiders” (those without jobs or changing jobs) will surely lose, as firms ration labour given too many controls.
The labour market is notable for its complicated contracts designed to encourage high performance and effort. Because of these contracts, and issues such as confusion about adjusting wages for inflation (a surprisingly high proportion of wage changes are exactly zero, even though it makes no economic sense), wages already do not adjust enough as it is.
These distortions occur even though the labour market has high turnover rates, with flows between jobs vastly outnumbering flows between employment status. Introducing more controls would put sand in the wheels of the labour market by distorting relative wages across industries and decreasing employment.
Beth Webster: A well-functioning economy is all about balance. In Australia, we have a situation of profits being a high share of GDP, low wage growth, low investment spending and low interest rates. The problem is not inflation, but a lack of willingness by people with incomes to buy goods and services.
It’s not a problem of lack of funds for investment. Nor is it a problem of high labour costs.
Economistsknow that a reliable way to increase spending in the economy is to raise the incomes of the least wealthy. In our case, this could involve enforcing the payment of the minimum wage (for example, in the hospitably industry); raising benefits and pensions, such as unemployment and family benefits; and tax cuts at the low end.
There is ample evidence that a market economy will not invest enough to fully employ all people who want a job, if left to its own devices. The result is low productivity growth and a boom-bust economy. So government action is warranted, and that depends on the position of the economy.
Given the current economic settings, a rise in wages at the low end of the market could lead to higher investment and therefore employment (with the bonus of higher productivity growth). And it may well move towards income equality.
It’s worth noting that the shares of GDP to labour and capital have been quite stable in Australia at around 55% and 45%, respectively, over the past 40 years. This stability is exactly as predicted by the Solow-Swan model of economic growth. This model also suggests that lower productivity growth, rather than changes in income shares, has been more important for the recent slow wage growth.
Beth Webster: There is has been a trend of falling wages as a share of GDP in Australia. According to the ABS, in 2016-17, wages as a share of GDP was only 52.8%, which continues the long term decline from 57.1% in 1984-85. A difference of 5 percentage points is huge.
With 730,400 unemployed people and about an equal number who would like to work more hours, there is a strong case for saying we have a weak economy.
The market is not delivering the balance of demand and supply forces that we need to achieve full employment and raise GDP. Government intervention is needed.
Cutting taxes lets companies keep more of their profits, allowing them to invest in new equipment and premises for example. The company then needs to hire more workers to work with these new assets. The newly created jobs require businesses to compete for workers and this increased demand pushes up wages across the entire economy.
Suppose a retail company gets a tax cut and opens a new store. It advertises for workers, many of whom are already employed by a rival store that didn’t get the tax cut. The first company will need to offer the workers higher wages to entice them away. The rival store will need to consider matching the wages in order to keep the workers.
In other words, even workers in companies that don’t receive the tax cut should see a wage rise.
Going through the AlphaBeta report
In 2015, the federal government cut the tax rate from 30% to 28.5% for businesses with less than A$2 million in revenue. Eligible businesses saved around A$2,940 on average because of the tax cut.
AlphaBeta used transaction data from 70,000 businesses to compare businesses just below the A$2 million threshold to companies that were just above it.
The analysis looked at the differences between the two groups of firms in terms of whether they hired new workers, invested in their businesses, increased worker wages, or kept some of the cash as a reserve.
AlphaBeta chalked any differences between companies that received the tax cut and those that didn’t to the company tax cuts.
As reported in The Australian, AlphaBeta found that companies that received the tax cut increased their employee headcount by 2.6%. The companies that didn’t receive the cut increased employment by just 2.1%.
The problem is that we cannot draw any conclusions about the effect of company tax cuts on jobs or wages by studying a bunch of firms that received them and another bunch that did not, even if the firms are only slightly different.
This is because, as noted above, the effect of company tax cuts on jobs and wages take place in the entire labour market. An increase in demand for labour flows through to all business, and therefore, so do higher wages.
So we should not expect to see wages rising only in those businesses that receive the tax cuts. The finding that an increase in wages is small and insignificant is exactly what we would expect to see from this study.
Another problem is that we do not know whether the characteristics of the companies in AlphaBeta’s sample. Were some industries with particularly pronounced employment or wage increases over represented in one group but not the other, for instance?
Studying the effect of company tax cuts on employment and wages also requires a longer time period – sometimes years – and careful control of other factors affecting jobs and wages in some firms relative to others.
The analysis in this review is generally fair and reaches a sound conclusion regarding the AlphaBeta report. However, the logic behind company tax cut raising wages is somewhat simplified.
A cut in company tax lowers the costs of production and can flow to labour, capital (including equipment and buildings) and consumers. Economics tells us that who actually benefits from a tax cut depends on what is more responsive to the tax – labour, capital or output.
The lower production costs from a company tax cut can lead to greater output and lower prices as consumers buy more goods and services. This depends, of course, on how responsive consumers are to changes in price.
In the short-run labour is more mobile than capital, which is usually regarded as fixed. Therefore, in the short-run most of the benefit is borne by owners of capital (the companies) in the form of higher after-tax profits.
However, over the longer term, companies invest their after-tax profits in the business. So most of the benefit of the tax cut goes to workers though higher wages as the increased “capital stock” (such as equipment) makes labour more productive.
It follows that there is no reason to expect a significant increase in wages over a period of one or two years (as the AlphaBeta report covers). Indeed, such a result would be somewhat surprising. – Phil Lewis
This chart shows that in all sectors the average wage of workers in small businesses is below that of the sector averages. Average wages in medium business were closer to the sector average, with a notable differential appearing in retail and agriculture.
The agricultural sector is an egregious example, where if you work for a small business you are likely to earn less than one-third of what you would for a large firm – A$10,000 as opposed to over A$36,000 a year on average.
In our analysis we looked at Australia’s bilateral free trade agreements with major trade partners in the Asia-Pacific region (the USA, China, Japan, South Korea, Singapore and New Zealand) across key economic sectors (agriculture, manufacturing, mining, retail trade and transportation) in the past decade.
The data show small businesses largely under-utilise free trade agreements. Large enterprises are responsible for 100% of mining exports, 93% in manufacturing, 88% in agriculture, 81% in transportation and 72% in retail.
The intuitive explanation for low exports by small and medium businesses is that they aren’t as productive as larger firms. Among other things, smaller businesses are more labour-intensive.
But this explanation does not gel with how strongly entrenched smaller firms are in the Australian economy.
Between 2012 and 2016 most small enterprises (and several medium-sized enterprises) had greater operating profit margins than their larger competitors in the sectors we assessed.
By looking at the contribution businesses make in their industry, known as “industry value added”, we can also see that small and medium businesses are the lifeblood of certain sectors, particularly agriculture and retail.
As we have shown, smaller Australian businesses are more productive than large firms. But they maintain disproportionately low levels of exports and wages. We found that under-utilisation of free trade agreements, rather than lack of access to them, is the fundamental cause of the lower exports.
Public policies should analyse free trade agreements in terms of their contribution to the actual productivity of enterprises by sector, rather than the potential to expand the total market value of exports.
In other words, the best use of international trade is not touting banalities like “this free trade agreement is worth such and such”. Rather, it is by calculating in what sectors, and in what markets, Australian enterprises actually gain or lose from international trade.
With transparent information, based on substantial economic evidence, governments could at last find political legitimacy to implement systemic trade adjustment measures. This would reallocate resources within and between sectors, from large to small and medium export-oriented businesses.
In short, the IMF acknowledges that the recent US tax cuts will have a positive impact on economic growth in 2018-19. However, this is conditional on the US government not cutting expenditure, is likely to be short-lived, and will come at the cost of increased government deficits.
In this light, corporate tax cuts seem to be a long-term pain for a short-term gain, which is probably not what we need in Australia.
Let’s start with the point that is probably least controversial – that a reduction in the corporate tax rate will lead to an increase in wages.
Think of the output produced by a corporation as a pie. This pie is shared among shareholders (in the form of dividends), banks and other lenders (in the form of interest paid on loans), workers (in the form of wages) and the government (in the form of taxes).
If we reduce the government’s share then there is more for everybody else, including workers. And some data do suggest that wages increase when corporate tax rates decline.
This means German workers have a stronger say when it comes to sharing the pie. For any given decrease in the slice of the government, German workers are more likely to get a bigger slice for themselves. This is not necessarily the case in Australia.
It is therefore difficult to draw implications for Australia from studies that look at the experience of Germany or other countries with significantly different institutional arrangements.
Furthermore, the fact that wages should increase in response to a corporate tax cut does not automatically imply that other economic variables will also respond positively. For instance, the more wages increase in response to a corporate tax cut, the smaller the increase in employment is likely to be.
Because of these other factors, the impacts of tax cuts on employment and growth can be small, short-lived, or conditional on other government policy actions, such as managing debt.
In a similar vein, recent theoretical work that incorporates more realistic assumptions about the economy (such as the distribution of entrepreneurial skills in the population) suggests that a tax cut only has a significant impact on economic growth when the tax rate is initially high.
This means that even within a given country, the effect of a corporate tax cut can change depending on initial economic and policy conditions.
Putting tax cuts in a broader context
Beyond growth and employment, the effects of corporate tax cuts should also be considered in terms of deficit and inequality.
From the point of view of the public budget, a cut in the tax rate has to be somehow financed. How?
A first possibility is that the tax cut pays for itself. This is essentially the idea that as the tax rate goes down, the increase in the tax base (e.g. pre-tax corporate profit) is sufficiently large to ensure that the total tax revenue increases.
However, an increase in the tax base would require a significant and sustained increase in business investment, which, as we have already seen, does not necessarily happen.
The government could increase other taxes, but this means the government would effectively be taking from one group of taxpayers (possibly workers themselves) to give to corporations.
Another option is to reduce some government expenditures. But this could also involve taking from one group to give to another. If the decision is made to cut social welfare and public goods like education and health, then more vulnerable segments of the population will bear the cost of lowering the corporate tax rate. This means more inequality in the economy.
Of course the government could decide to just let the deficit be. This would result in higher debt. But can Prime Minister Turnbull (or President Trump for that matter) accept that?
The central economic challenge for Australia is to promote long-term, inclusive growth. Are we confident that this is what corporate tax cuts will deliver? Based on the economic research that I have read, the answer is no.
Australia should cut its immigration intake, according to Tony Abbott in a recent speech at the Sydney Institute. Abbott explicitly cites economic theory in his arguments: “It’s a basic law of economics that increasing the supply of labour depresses wages; and that increasing demand for housing boosts price.”
But this economic analysis is too basic. Yes, supply matters. But so does demand.
And while migrants do live in houses, the federal government’s fondness for stoking demand and the inactivity of state governments in increasing supply are the real issues affecting affordability.
The economy isn’t a fixed pie
Let’s take Abbott’s claims about immigration one by one, starting with wages.
It’s true that if you increase labour supply that, holding other factors that affect wages constant, wages will decline. However, those other factors are rarely constant.
Notably, if the demand for labour is increasing by more than supply (including new migrants), then wages will rise.
This is a big part of the story when it comes to the relationship between wages and migration in Australia. Large migrant numbers have been an almost constant feature of Australia’s economy since the end of the second world war, if not earlier.
But these migrants typically arrived in the midst of economic growth and rising demand for labour. This is particularly true in recent decades, when we have had one of the longest periods of unbroken growth in the history of the developed world.
In our study of the Australian labour market, we found no relationship between immigration rates and poor outcomes for incumbent Australian workers in terms of wages or jobs.
Australia uses a point system for migration that targets skilled migrants in areas of high labour demand. Business is suffering in these areas. Migrants into these sectors don’t take jobs from anybody else because they are meeting previously unmet demand.
These migrants receive a higher wage than they would in their place of origin, and they allow their new employers to reduce costs. This ultimately leads to lower prices for consumers. Just about everybody benefits.
There’s an idea called the “lump of labour fallacy”, which holds that there is a certain amount of work to be done in an economy, and if you bring in more labour it will increase competition for those jobs.
But migrants also bring capital, investing in houses, appliances, businesses, education and many other things. This increases economic activity and the number of jobs available.
Furthermore, innovation has been shown to be strongly linked to immigration. In the United States, for instance, immigrants apply for patents at twice the rate of non-immigrants. And a large number of studies show that immigrants are over-represented in patents, patent impact and innovative activity in a wide range of countries.
We don’t entirely know why this is. It could be that innovative countries attract migrants, or it could be than migrants help innovation. It’s likely that the effect goes both ways and is a strong argument against curtailing immigration.
Abbott’s comments are more reasonable in the case of housing affordability because here all other things really are held constant. Specifically, studies show that housing demand is overheated in part by federal government policies (negative gearing and capital gains tax exemptions, for instance) and state governments not doing enough to increase supply.
Governments have responded to high housing prices by further stoking demand, suggesting that people dip into their superannuation, for instance.
In the wake of Abbott’s speech there has been speculation that our current immigration numbers could exacerbate the pressures of automation, artificial intelligence and other labour-saving innovations.
But our understanding of these forces is nascent at best. In previous instances of major technological disruption, like the industrial revolution, the long-run effects on employment were negligible. When ATMs debuted, for example, many bank tellers lost their jobs. But the cost of branches also declined, new branches opened and total employment did not decline.
In his speech, Abbott said that the government needs policies that are principled, practical and popular. What would be popular is if governments across the country could fix our myriad policy problems. Abbott identified some of the big ones – wages, infrastructure and housing affordability.
What would be practical is to identify the causes of these problems and address these directly. Immigration is certainly not a major cause. It would be principled to undertake evidence-based analysis regarding what the causes are and how to address them.
A lot of that has already been done, notably by the Grattan Institute. What remains is for governments to do the politically difficult work of facing the facts.