Friday, February 2, 2018
Raising the minimum wage above inflation will punish the poor and the elderly, and ruin our competitiveness
Young people should ask their elders how they felt about the performance of the Australian economy in the 1970s before signing up to Labor's populist policies to raise wages. The Whitlam government chased wage increases in the early 1970s. The consequences for employment and living standards were negative. The average annual inflation rate for the decade was 9.8 per cent (up from 2.5 per cent in the 1960s). Unemployment was 5 per cent (up from 2 per cent over the previous quarter century).
Nominal wage increases pushed by organised labour without regard for productivity improvements in the 1970s led to a double impetus for rising unit labour costs. This is because percentage change in unit labour costs is approximately equal to percentage change in nominal wages less the percentage change in labour productivity. These are some of the worst macroeconomic conditions a country can experience – falling output coupled with rising unemployment and inflation. Or as economists commonly refer to it as, "stagflation".
Labor Party historians would contend that the Hawke administration devised institutional arrangements within which agreement was secured between business, labour unions, and the federal government on policies to curb wage demands and lower expectations regarding future price increases – the so-called Prices and Incomes Accord. They did in part play a role in moderating inflation in the Australian economy. However, inflation in Australia was not ultimately tamed until a recession in the early 1990s coupled with a new inflation targeting regime and central bank independence. Nor should we forget, it was under Hawke’s decade of leadership of the ACTU that union wage demands spiralled the economy into a vicious cost-push inflation cycle.
This economic history of Australia and its lessons should not be forgotten. Unfortunately, Mr Shorten’s vision is for a return to the pre-1980s industrial award system of union militancy, wage indexation and cost push inflation that crippled the Australian economy and, at the time, ushered in the slowest period of growth in real incomes per capita in contemporary Australia. It is no coincidence that the annual average wage inflation peak in 1971 and 1974 coincide with peaks in the number of working days lost per 100 workers due to strikes.
Raising the minimum wage without regard for productivity improvements and above the rate of inflation is an inept policy that will punish the poor and the elderly, and ruin Australia’s international competitiveness. First, it would increase unemployment in the Australian economy. Unions always care more about their members than the unemployed or the rest of the workforce. And despite Mr Shorten claiming this policy is aimed at “raising the pay of all Australians, particularly the 2.3 million in the award system” – it is quite clear that those responsible for the push for a wage increase absent productivity improvements, Mr Shorten and his marionettes from the ACTU, will likely not be impacted by the rise in unemployment. The employment prospects for those without a job would also be substantially diminished as a result of this short sighted policy on the run.
Mr Shorten must also not care about the cost-of-living pressures facing the elderly and retired. Those who have worked hard and saved all their lives, who would surely have their nest egg whittled away by the ensuring inflation such a reckless policy would entail. Savers are the biggest losers when it comes to inflation. As an anonymous economist once remarked: “Inflation is the time when those who have saved for a rainy day get soaked.” It is quite ironic that the generation most impacted by poor economic policy management in the 1970s are today’s retirees as an 18-year-old in 1970 is 66 today.
Nor has Mr Shorten and his economic advisers considered the impacts of his policy on international competitiveness of the Australian economy. It is already bad enough that Australia is lagging behind the rest of the world on company tax reform and an overly regulated economy – now Mr Shorten wants to see unit labour costs rise. How will labour-intensive industries such as manufacturing and tourism compete on a global stage with uncompetitive wages and militant unions seeking to block productivity enhancing reforms? And businesses servicing the domestic market that also trade exposed, because of import competition, will also not be able to pas on these costs in higher prices without losing market share.
The fundamental problem with Labor’s economic policy platform, is that they lack policies that will have an immediate impact on the productivity of the economy and economic growth. Worst still, they are promoting inept policies that will harm Australia’s living standards at a time when productivity growth, the single most important driver of real income growth, is not that flash. As was reported last week, multifactor productivity, grew by 0.6 per cent in 2016-17 below the long-term average of 0.9 per cent. Multifactor productivity reflects the overall efficiency with which labour and capital inputs are used together in the production process and is the measure economist most care about.
This latest policy frolic is just another example. Handing out high wages without meaningful productivity improvements is not how you grow an economy – it is how you shrink it. Taxing households and businesses excessively and thereby reducing the incentives to save and invest in our economy are what is holding our economy back.
Corporate tax reform and broader income tax reform, seeking free trade deals, reducing red tape and regulatory burden all make the economy more internationally competitive or rather improve the productivity of the economy. These are the policies that will help Australians get ahead.
A final history lesson to finish. In 1984, economic historians wrote a book with the ominous title Australia and Argentina: On Parallel Paths. Based on the current evidence should Mr Shorten and his team of economic profligates be elected a modern version of this book might well be “Australia and Greece: On Parallel Paths”.