With the most recent national accounts revealing Australians on average are just $2.50 per week better off than seven years ago, we need to identify what can be done to lift wages on a sustainable basis without risking jobs. It is not good enough for successive Federal budgets simply to assume wages will rise, with no strategy to achieve it.
Economic analysis tells us that wages cannot rise permanently without productivity growth. Yet recent history tells us that productivity growth is no guarantee of wage rises; it is necessary but not sufficient for sustained wages growth. If productivity growth occurs in a slack labour market, workers will lack the bargaining power to demand wage rises and employers will lack the inclination to give them.
The most recent jobs figures – confirming the lowest unemployment rate in eight years – suggest a tight labour market and stronger worker bargaining power. But lurking behind the headline rate is a more sinister picture. Full-time job creation has begun going backwards and almost 1.1 million workers are looking for extra hours of work. The current underemployment rate easily exceeds that of the last recession 28 years ago.
This more forensic search of the data reveals quite a lot of slack in the labour market. Part of the explanation is the sharp rise in temporary work visas over the last few years. A task force commissioned by the Federal government and chaired by Professor Allan Fels has revealed a 54 per cent increase in the number of temporary work visas over the last 10 years.
Add to the 900,000 temporary work visa holders the number of illegal workers in Australia and the total reaches almost one million.
The Fels report found underpayment of wages to these temporary workers is rife, citing estimates of as many as half of them being paid less than the legal requirements.
Now a clearer picture of the true state of the labour market emerges: the demand for labour is weaker than the headline numbers suggest and the supply of labour is stronger. Is it any wonder real wages have stagnated?
Using basic economics, the way to increase real wages is to constrain the supply of labour while increasing the demand for it.
If Australia wants more workers it should increase the rate of permanent immigration rather than increasing the number of guest workers. Yet the Federal government is cutting back on permanent migration while increasing the number of temporary work visas.
On the demand side, the most effective way of lifting wages sustainably is a new wave of private foreign investment embodying the latest technologies. Workers using these technologies will be more productive, placing them in a position to demand wage rises and, if the supply of such workers is constrained, obliging employers to accommodate workers’ demands.
Trade unions effectively recognised the value of foreign investment when they supported high-value, foreign-owned manufacturing such as in the automotive industry.
Employer organisations and the Coalition government supported a cut in the company tax rate ostensibly to attract new foreign investment. But there was never any guarantee more foreign investment would flow from the proposed company tax rate cut.
That’s why shadow treasurer, Chris Bowen, developed Labor’s Investment Guarantee, a 20 per cent upfront acceleration of depreciation of capital investment. It is well targeted: no extra investment no tax concession.
The Minerals Council has released an analysis comparing the impacts of cutting the company tax rate by five percentage points and the 20 per cent Investment Guarantee. While the Minerals Council still favours the company tax rate cut, the analysis shows that for new capital equipment the Investment Guarantee lowers the effective tax rate by a greater amount than a cut in the headline company tax rate.
And the Investment Guarantee is permanent, so its effect would not be limited to simply bringing forward investment that would have eventually happened anyway.
So there you have it: the most effective way of generating wages rises is to limit the number of temporary work visas in Australia, enforce the existing wage laws and introduce an Investment Guarantee to attract foreign investment embodying the latest productivity-raising technologies.
Yet, just as it has done with surpluses, the Federal government continues simply to assume wages growth will pick up. It’s much easier to assume a stronger economic outlook, stick the assumption in the budget and claim victory, than it is to implement policies actually designed to lift wages.