There’s a bit of chat around the shop today that one of the mooted new stimulus measures the Rudd government might undertake – bringing forward tax cuts and LITO changes for low income earners – could be a way of counterbalancing an anticipated small increase in the minimum wage from the Fair Pay Commission. The suggestion seems to have arisen from the eminently well-connected Heather Ridout of the Australian Industry Group.
The Australian characterised such a move as a “wage/tax tradeoff” – ala the Accord, and Simon Jackman alludes to “corporatism”. However, there are some significant differences from the Accord – the most important contrasts with the 80s in Australia are that the reach of wages policy is much smaller (because movements in the minimum wage are relevant really only for “award-only” workers who are a smallish minority, and there’s little chance of flow on increases) and it’s less well thought out because it’s more ad hoc and there really isn’t a “social partner” actually representing the low paid to negotiate with, or the quasi-institutional structures for concerted policy formulation which existed in the past.
I’d also question how effective tax cuts for the low paid will be given that the low paid aren’t paying an enormous amount of tax already, with the restructuring of the thresholds and LITO that’s already been done. Whatever the merits of this proposal (and that’s all it is at this stage, though I wouldn’t be at all surprised if it were adopted), I think we’re seeing another instance of policy making on the run from the Rudd government. Economic summits, Hawke and Keating style, might be talkfests, as Lindsay Tanner recently claimed, but some actual public debate about important tax and wages policy measures wouldn’t go astray, as opposed to their advocacy through a nod and a wink from business groups and in the pages of the press.
Mark,
1) This is quite reminiscent of the “Five Economists’ Plan” from the late-90s, particularly the LITO aspect of it. I’m not sure this really is “policy making on the run”, as the idea is not new.
2) Is “policy making on the run” really a bad thing? The situation is evolving rapidly, and conventional macroeconomic levers are proving ineffective. Is it not better that the Government tries to adapt and respond as quickly as possible? A well-worn critique of Keynesian fiscal policy is the ‘lag’. Is it not better to make policy “on the run” than to deliberate over policy that will ultimately prove ineffective due to its tardiness?
3) I think you underestimate the flow on effects of award wage increases on non-award dependent employees. Industries with a low level of enterprise bargaining (hospitality, retail, perhaps construction in non-boom times, community services) still use awards as a reference, and employers might habitually pay a small margin above the award.
Apart from these issues I liked your post, as usual.
Thanks, MattC.
Just to clarify and respond:
(1) Indeed – particularly the argument for holding down wages, and I’m sure there are other economists who’d make that case too. But the “five economists” plan never got anywhere because Howard thought it was politically unacceptable. So I’m concerned to see these sort of ideas popping up without any real examination of the underlying premises.
(2) I don’t cavil with a deft response, but I’d like it to be properly debated, and to be based on a broader set of perspectives than those of favoured groups like AIG and bureaucrats and newspaper columnists. Bringing forward tax cuts would presumably require legislation, and the FPC decision won’t be handed down for some months, so it’s not as though this sort of thing can be done in a trice.
(3) Sure, good point – but the usual sorts of crap about “wages breakouts” really are redundant.
Incidentally, I suspect part of the context of all this is the Workchoices nostalgia we’re hearing at the moment from business – all the “we must have downward flexibility in a crisis” blah etc.
Mark
I agree with Matt. This is not exactly a new idea and there is an enormous amount of research on wage/tax tradeoffs that have been done within the APS.
The premise is pretty simple, and it is not based on concerns about a wage breakout. It is simply that during downturns it is less profitable to employ existing or new employees at prevailing wage rates. If wages are kept artificially high, especially for the young and low-skilled for which labour demand is more elastic, employment rates will fall by more than is necessary. On the flip side, falling (stagnant) wages for the low-paid can have obviously bad equity implications and in a recession can also impact on aggregate demand.
So, the idea is to find a policy that allows you to have the employment benefits of more wage flexibility during the downturn, without the cost of worse distributional outcomes. Negative income taxes and earned income tax credits are a way of doing that.
The problem is that to implement the above policy properly within the broader context of tax reform (the point of the Henry review) takes time – so the government is considering other measures that can be implemented more easily.
I take your point about having a proper debate about such things, but that will come in time when the Henry Review reports.
It may be that a lot of low-income employees pay little tax as it is – but the changes in wages we are talking about are fairly small – the fpc is likely to recommend a positive but small increase in award/minimum wages – so the shortfall will also be small and wouldn’t require a large offsetting tax change. If nominal wage reductions occurred, the only way to preserve disposable incomes for those affected would be an increase in government transfers.
So, overall it would be better if any wage/tax tradeoffs were considered within a broader overhaul of the tax system, but within the time constraints, what the government is considering should at least give employers some incentive not to reduce headcount too much. I would hope that any changes announced would be accompanied by a micro-analysis of the net impact on the incomes of different household types.
LO, I’m aware of that, but I was referring to some of the rhetoric typically employed by employers, newspaper columnists and Liberal pollies when these things are discussed.
For people interested in this stuff, I should draw attention to a conversation I’m having with Simon Jackman on this topic over at his blog in the comments thread of the post I’ve linked to:
http://jackman.stanford.edu/blog/?p=1103
MattC – a few more points on your point 3 – I’m not sure about construction, but there are quite a few basically award dependent employees in light manufacturing. But we shouldn’t underestimate the number of employees in generally low paid sectors who are covered by collective agreements with large employers – think of the market concentration in grocery retail, and for that matter the sort of colocation effect of upmarket fashion retailers with department stores (if David Jones and a store in the same centre are competing for the same customers, the staff demographic will be similar and there’ll be a sort of pull towards the collective agreement). The form of pattern bargaining in the Forward With Fairness bill effectively seeks to rope smaller employers in low wage sectors into collective agreements, and will further diminish the reach of the minimum wage/award-dependent decision making process.
Just a quick observation: Matt C’s point about flow-ons from changes in awards is interesting. I’d love to know what the data actually says about that, perhaps particularly in a soft labor market like the one we’re headed into.
And the call for some evidence-based policy reccs made in this thread is always welcome.
Guys, as a follow up on the discussion on Jackman’s blog – there are a number of factors that will limit any significant increases in union coverage.
First, the structure of the Australian economy is vastly different thant it was say before 1980. Sectors with traditionally high union coverage (manufacturing) are a smaller proportion of the total.
Second, the economy is exposed to a lot more competition (in the trade and non-traded sectors) – that makes it harder for unions to deliver wage premiums for staff.
Third, enterprise bargaining means that non-union members in many sectors receive many of the benefits of coverage without having to join a union.
I simply cannot see union coverage increasing much in Australia, except at the margin. Without the Accord, employment growth would have been weaker during the 1980s and unemployment correspondingly higher – the ACTU did the right thing, even if it accelerated their longer term demise.
You are right that the decline in unionism makes European style corporatism difficult – but if you summed all the people covered by EBs, awards and the minimum wage – you would still get a fair wack of the population.
Two points there, LO.
It’s effectively impossible to run any sort of wages policy for workers covered by collective agreements – increases in awards don’t affect them because of the shift from paid rates to minimum rates awards, and there’s no way that the IRC can enforce any guidelines on quantum for the parties. So it has to be by exhortation!
The point I’m making about corporatism is that it classically provided for policy to be subject to negotiation (or “concertation”) between representative parties – again the decline in union coverage and the decentralisation of wage fixation and bargaining makes that impossible. So I think it’s something of a misnomer – although there are aspects of the current pattern which resemble it.
What Jason Soon @ catallaxy suggests that Mark is arguing:
“Low income workers shouldn’t get tax cuts if there’s no government mechanism to prevent them from asking for wage increases after that.”
I guess I was reading a different blog post.
Mark,
Most people on the Federal minimum wage are up for a little over $40 a week in tax (single income couples without kids pay less). After the already scheduled LITO increase (July), this falls to around $38 a week – not much change really.
It seems to me that a fairly large cut is still available for frisky policy planners to play with.
“bringing forward tax cuts and LITO changes for low income earners – could be a way of counterbalancing an anticipated small increase in the minimum wage from the Fair Pay Commission”
Tax cuts other than in the form of LITO benefit very high income earners,in fact they often get more benefit than low income earners, so no wonder Ridout et al.
I have to ask though, why should tax cuts be used to counterbalance wage increases? The taxes are already income workers have earned but that have been deducted to contribute towards the provision of community services. This suggestion just seems to socialise the costs of wage increases by reducing the amount available to provide community services.
I feel that in the long term the worker may be missing out (because they don’t get pay increases that were justified on the basis of cost of living increases and that has a permanent flow on effect on future income) AND the community misses out because reduced tax rates also mean reduced services. The only winners appear to be businesses who get the benefit of workers at lower cost.
I can see the short term benefits to the economy and business but I have a problem seeing the long term benefits to anyone other than businesses.
Mark – if the government had the will, it could bring together the ACTU and the leaders of the 5 or 6 largest unions, together with employer groups, to thrash something out. The decentralisation obviously complicates things, and coverage would not be complete, but some of the elements of the corporatist approach could be replicated.
Polly – it depends on how tax reform is structured – it is possible to do this so that the primary benefit is to low-income workers. And on the topic of why such workers should accept real wage cuts temporarily – I guess it depends on how the burden of the downturn should be distributed. Would you rather that the incidence of the downturn be primarily on employment? Or on wages? I’d rather the latter as long as it is possible to offset the impact on real incomes through target tax credits.
“it is possible to do this so that the primary benefit is to low-income workers”
and IMO the best way to do that is through LITOs that don’t benefit high income earners.
“And on the topic of why such workers should accept real wage cuts temporarily”
That is my concern though, are they really temporary – the worker takes a real wage cut now but when the economy recovers do they get a catch up amount? We all know that even in good times employers claim they can’t afford pay increases so are they likely to ever get a catch up increase?
As I wrote I can see the short term benefits but have some concerns about the longer term.
klaus k @ 10 – yep. I’ve got no idea where Jason Soon got that from. I’m not sure it even makes sense, and I’m certainly not arguing it.
spog @ 11 – don’t forget a lot of people on low wages aren’t working full time.
But corporatism exists where unions have the power to increase the overall level of wages. Do Australian unions have this power anymore? I doubt it. Torben Iversen argues that post-corporatsit social democracy relies on central bank independence with the threat of higher interest rates restraining wage bargainers. Will a gneral fear of unemployment lower rank and file workers wage targets? Note how the Libs are rallying behind tax cuts, just as the republicans in the US, tax cuts unite the right social issues divide them.