As we all slouch back towards work in the new year, a hardy perennial has been dominating the business pages and the Bosses’ Bible, the Australian Financial Review.
Spurred on, this time, by the release of 1980 Cabinet papers (resources boom #1) and remarks by Howard government Reserve Bank appointee, Donald McGauchie, we’ve had a fresh round of dire warnings of a “wages breakout”.
This, on top of the usual shrill demands for “reform” in workplace relations – it’s a given, apparently, that the Fair Work Australia Act empowers unions.
Oh really? In a very useful post at We’re All Dead, Matt Cowgill does some myth busting on the current state of play in labour market hysteria.
Among other stats, Cowgill shows that the wages share of national income continues to head downwards, and is at its lowest point since 1964.
A reasonable observer might surely think:
(a) There’s a fairly pure case of ideology in the strict sense of the word in all this hoo-hah – “common sense” which is completely contradicted by facts;
(b) Fair Work Australia actually does incorporate a lot of the thrust of WorkChoices.
Very interesting post by Cowgill, thanks.
I too am inclined to see the labour share of income/profit as a key measure. But it depends on what you think Australia is for. To some people, it’s an economy with people in it, and for them all that really matters is that the economy gets bigger. I prefer to look at Australia as a bunch of people who live in the same place and their happiness as the primary measure. GNH FTW!
Andrew Leigh shows why GNH isn’t all it hopes to be.
http://people.anu.edu.au/andrew.leigh/pdf/GrowthMatters.pdf
Many stock broker seminars show the growth in portion of profits to wages. Does the growth in profit trickle down to shareholders [implied] or stick to the CEOs and directors.
There should be a balance between business and labour that isn’t like WorkChoices – almost no one wants unions to have back the powers they had before the Winter of Discontent.
Jarrah: the question is less whether it’s perfect, and more whether it’s useful, especially whether it’s more useful than GDP. The essay you point to doesn’t suggest that it’s not a useful measure, or even say it’s not a good idea, just that it has one problem – habituation (people get used to things that used to make them happier, like flush toilets). There’s also evidence that happiness is partly comparative (happiness is being richer than the neighbours) and largely inherent (you’re born that way). But as the “Making Australia Happy” doco showed, it’s possible to make people happier without spending a lot of money. I suggest that reducing the number of people selling unhappiness would also help (the advertising industry relies to a large extent on making us unhappy).
Andrew Leigh should also learn to use the web instead of using PDF.
On unionism:
“There is qualified but widespread support for unions among Australian workers, even among those who do not belong to them. Nearly half (46 per cent) of those respondents who said they were not a union member (and did not want to be) agree that, without trade unions, working conditions for employees would be much worse, and nearly a third agree that trade unions are very important for the job security of employees.”
Overall, 79 per cent of the people surveyed agree with the statement “There should be a law to protect all workers in Australia against unfair dismissal”, 69 percent agree that “Award wages are the best way of paying workers and setting conditions”, and 52 per cent DISAGREE with the statement “Unions should have less say in how wages and conditions are set” (with only 24 per cent agreeing).”
From here, Nov ’07:
http://blogs.smh.com.au/sit/archives/2007/11/who_we_areneew.html
“especially whether it’s more useful than GDP”
Leigh argues it is not. Did you miss that bit? Anyway, I don’t want to derail the thread.
OB: John Howard could have made the unions near redundant by setting up the systems required to give employees and contractors a fair go without needing the help of a union. However, what he did was use the weakened power of the unions to undermine working conditions.
If we cant set up an effective set of checks and balances we need to go back to stronger unions with the ultimate right to strike.
Kim, where do you get the reference to 1964? Cowgirl’s piece talks about Keating- and Howard-era figures for wages and profite, and he only goes as far back as the seventies when looking at productivity.
Surely 1964 was the golden age of the econocentric IR club created after the boilermakers decision.
My first impression was, “wow, wages are as egalitarian as they were when Horne wrote ‘The Lucky Country’.”
Overall I think the reason for The Australian pushing this meme about ‘wage breakouts’ has to do with the big end of town being quite insecure in the current global economic environment, and they’re just falling back on WorkChoices as a cure all (like that will save them should the US housing market collapse again and start another round of dominoes falling). That and they’ve figured out Abbott is going to lose the next election.
I hope that’s nothing but some good satire. Otherwise that comment is just another reason to make me despair about the Internet not making people any smarter.
Nickws, Cowgill does claim that “The wages share of national income is at its lowest since 1964″, see under his first graph. I find it hard to believe too but maybe it’s because wages share and profits share don’t add up to 100%, so there are some other factors involved.
As for Abbott winning the next election, Ross Gittins disagrees, he says the Govt is a pack of amateurs, see http://rossgittins.blogspot.com/2010/12/outlook-for-australian-politics-and.html.
I think it is more likely that the people at The Australian have been so traumatised by the failure of the Efficient Market Hypothesis that they have gone bonkers.
Nickws: Ask the average Briton who lived through the Winter of Discontent whether unions should have that kind of power.
I don’t think it was necessary for Labour to wait eighteen years to regain power, though. I remember wondering if Labour could really, truly be as dumb as they seemed. Alas, yes — but it shouldn’t have taken four consecutive whippings for them to figure it out.
Kim,
Thanks for the link.
JoeG and Nickws,
See ABS National Accounts, table 20, seasonally adjusted. The current wages share is 52.5 per cent, the lowest since September 1964. http://www.ausstats.abs.gov.au/ausstats/meisubs.nsf/0/83AD5E7234F35469CA2577EB000F189A/$File/5206020_selected_analytical_series.xls
Good link Matt: The profit:wages ratio has risen by 50% since I started work in 1960 during the Menzies era. The min wage:average has dropped since then too. no wonder the people at the bottom of the pile feel done.
Jarrah, Andrew Leigh’s probably a nice bloke, and he must be fairly clever because he was a professor until he took up politics, but you should recall he “proved” that a whole bunch of women clenched their thighs together (or something) to avoid giving birth until after the baby bonus kicked in. I’m afraid I haven’t been able to take him seriously since then (having witnessed childbirth a couple of times).
JoeG at 11, yes, sorry, I reread Cowgirl’s post and I see that “wages share of national income is at its lowest since 1964″ is indeed a line stuck in between two of his graphs. Though there isn’t any context in the bulk of his text to explain the circumstances of this RE his main argument.
OB at 12: “Ask the average Briton who lived through the Winter of Discontent whether unions should have that kind of power.”
I have nothing against the average ‘Briton’, but unless she gets off her arse, like my mum did, and comes to live and work in this country I will discount her opinions on the composition of the Australian work force.
The Australian union movement never actually pulled off a nationwide general strike comparable to even the NUM’s single industry strike of the Heath era, the one that plunged the UK into darkness (an historical fact that must peeve old school Oz militants—what use was that wonderful pre-Hawke-betrayal labour movement if it couldn’t have been used to shut down the country for the sake of advancing the proletariat?)
The Winter of Discontent was all about the gridlock that occurred when a whole bunch of industry employment contracts came due for renegotiation at the same time—and there was no centralised arbritration system to clear them through, nor was there a class of technocrats like John Button and Ian McPhee whose entire job description was to use such a system to avoid unecessary strife over wages and conditions.
Nickws,
I use the wages share and profit share figures to support my assertion that: “it doesn’t appear that the industrial relations system has somehow facilitated an earth-shattering shift in the balance of power between labour and capital”. I had thought that it connected with my argument reasonably well, perhaps I was wrong.
Matt, I read your article twice, and I agreed with the central point about there not being any runaway-wages-growth-about-to-roon-the-economy unless The Oz gets what it wants.
Yet I didn’t read it as recap of Australian economic history back to before Peak Hawke.
Maybe I don’t know just how much knowledge I lack in this area, but when I read this several-hundred-words article that references wage/profits ratios in the modern era I just didn’t take away any impression of the lived Australian economy as it was before the end of the postwar boom. That’s why I think bringing up the wages-as-a-portion-of-national-income from 1964 is a non sequitur, at least until some context is provided for the lay reader like myself.
I mean, you’re arguing for a return to Keating’s IR regime, right? 1964 is a red herring in that case, unless you’re adopting PK’s habit of triumphalist attacks on the Menzies era from the Right.
Oh, god, sorry for mispelling your surname, man.:=)
A bit of context is useful here.
When your graph the wages share going back to the 1950s, it is true that the share is low relative to its post-war average. However, that period included two wages breakouts – one during the Whitlam era – and another at the end of Fraser’s time in government. Both episodes coincided with deep recessions that saw Australia’s unemployment rate jump considerably. Those wages breakouts were very bad for employment because they were not tied to productivity growth. When Hawke came to power in the early 1980s there was quite a large wage overhang in Australia – the wages share needed to fall to restore competiveness and boost employment growth. Indeed, achieving that outcome was one of the main aims of the Accord.
Between 1987 and 2000, the wages share was broadly constant as most of the necessary adjustment in wages had taken place. However, since then, we’ve had a commodity price boom that has been extremely good for the profits (in the mining sector in particular). Over that period, wage growth has been quite solid but not as strong as profits growth, and so the wage share has trended down while the profit share has trended up. That period has also been spectacularly good for employment growth, in large part because there has not been an excess spillover into wages as there had been during earlier commodity booms.
Could wages growth have been a little stronger in recent years? Probably. But the economy has also been operating close to full capacity at a time when productivity growth has been quite subdued. If wage growth had been much higher (without compensating productivity gains) then most likely you would have seen a combination of higher inflation as firms passed on their higher labour costs into final prices (which in turn would have brought about tighter monetary policy), and lower employment growth as firms sought to offset some of the impact of higher wages on their profit margins.
Overall, the economy has dealt pretty well with the recent boom, which has had benefits for both capital and labour, even if the latter’s share of income has declined a little over the period.
I use the wages and profit share shifts as one of a number of factors to argue that what we need is a wages break out, that the class collaboration of the union leadership since 1982 has been a failure and that the current malaise of the Left (broadly defined) is in part a consequence of the acceptance of this neoliberalism.
Sure JP, and what impact do you think a wages breakout would have on employment? Or do you just expect firms in traded goods and services industries (who won’t be in a position to pass on higher wages into prices) to absorb the higher wages in their profit margins? And how do you think the RBA might react to the increase in inflation that would result as firms in non-traded goods sectors raised their prices? What do you think would happen to the competiveness of exporters and import competing industries in your wages break-out world?
LO doesn’t Billy Blog argue that government and corporations want high levels of unemployment so wage levels remain low.
While Julia Gillard is teacher bashing through MySchools etc there is a big pool of trained teachers competing for fewer teaching vacancies than available teachers. The surplus teachers are the pool of casual teachers who get most of their work in term 3
Is the following article found by Joe relevant to this discussion?
Corporate America, paving a downward economic slide
LO, it’s a reasonable analysis @20 only if you assume productivity is utterly exogenous to wage (and condition) setting arrangements. But of course if you assume that, then the explicit justification for “reform” of the Workchoices variety is undermined.
In fact, high and low wage equilibria, with or without high unemployment, are very possible because the level of wages relative to profits makes a great deal of difference to both the nature of capital investment (eg no supermarket in Australia hires bag packers, but plenty in the US do) and to the incentives for labour-saving technological advance (eg self-serve checkouts). Read articles like Acemoglu’s “Good jobs, Bad jobs” for impeccably neoclassical reasoning leading to this conclusion, rather than just accepting conventional wisdom based on exogenous growth theory.
The theoretic and empiric arguments for general labour market deregulation are actually much weaker than economists who have not read the modern labour economics literature think.
Note: the reason I included the wages/profits share graphs in my post was merely to make the point that the FW Act has not facilitated or induced a significant shift in the distribution of national income among factor inputs. The reference to 1964 was intended to confirm that the wages share is very low, and the profits share very high, relative to where they have been in recent decades, therefore supporting my central argument. I did not envisage that this (relatively minor) element of my argument would generate so much discussion.
LO,
Thank you for your comments. I appreciate that you are attempting to be constructive and put things in context, but I do find your contributions slightly patronising.
DD, I don’t disagree that productivity is to some extent endogenous to wage setting mechanisms and indeed the level of wages itself. And I also agree that there are a variety of institutional wage setting systems that are consistent with good labour market outcomes. However, that does not then imply that episodes where wages grow rapidly in an environment where business performance is poor and underlying productivity growth is weak, will not have bad consequences for employment. The principle for example that wages should adjust downward to exogenous negative productivity shocks is hardly controversial.
And it is pretty hard to argue that the the 1970s wages break-out in Australia wasn’t harmful. It did make the inflation situation worse and it did contribute to rising unemployment during that period. Sure, in the longer run those higher wages changed capital accumulation incentives, but there were some pretty hefty transitional costs.
Moreover, even in corporatist wage-setting systems, which the empirical evidence suggests are probably associated with the best labour market outcomes, one of the reasons for that out-performance is that parties to wage agreements are more likely to internalise the macroeconomic implications (and external macro conditions) of wage negotiations. Again, it isn’t as though those systems out-perform because wages are set ignoring those external factors. Indeed, when functioning well they often display considerable real wage flexibility.
I’ll give you the counter-example, which is Greece, Portugal and Spain. All three countries experienced a decline in competitiveness over the past decade in part because their labour markets were malfunctioning, with strong domestic demand pushing up wages even in traded goods sectors experiencing quite weak productivity growth (there was a big increase in relative unit labour costs in the traded goods sector). In your world, those higher wages should have eventually pushed up productivity growth in those countries’ traded goods sectors, leaving competitiveness unaffected.
And finally, while things like tight employment protection legislation haven’t been found to raise overall unemployment rates, there is more evidence that it raises unemployment amongst younger, less skilled workers, and reduces productivity growth.
Speaking of myth-busting, heard John ralston Saul on radio tody noting that after 30 years of brainwashing economic graduates with messages about deregulation, privatization and avoiding government debt, the system they created has led to…
….the most MONSTROUS level of government debt in all recorded economic history.
Ideology FAIL.
Next?