Economists need to reimagine wages policy. Policies developed from textbooks for the 1980s are not appropriate for the 2020s. Economics is not a physical science but a social science.
There would have been no Keynesian economics if the Great Depression were not occurring at the time.
Macroeconomic policy in the 1980s and early 1990s dealt with runaway inflation emanating largely from the two oil price shocks of the 1970s.
A debilitating wage-price spiral caused stagflation – a combination of high inflation and high unemployment.
The Hawke and Keating governments, working with the union movement, restrained wage rises in exchange for increases in the social wage, such as through Medicare and superannuation.
A quarter century later, in the digital age of machine learning, restraining real wages is not the right economic policy.
What’s changed? The stagflation of the early 1980s appears to have given way to the secular stagnation of the 2020s.
An American economist, Alvin Hansen, warned of secular stagnation in the late 1930s, drawing on Keynes’ theory of an underemployment equilibrium caused by insufficient consumer and investor spending.
Former US Treasury Secretary Larry Summers has revived and modernised the 1930s theory of secular stagnation, suggesting it is relevant to present circumstances in the developed world.
Certainly, we have had enough evidence in the decade since the Global Financial Crisis to suggest our economies are not simply slow to recover. In other words, Australia’s and other economies’ circumstances of weak wages growth and ongoing underemployment are not cyclical but structural.
For around three years, Australia’s Reserve Bank has been predicting that wage rises are just around the corner; arguing that when the unemployment rate falls to 4½ per cent, wages will begin to rise. But the 4½ per cent rate has happened in NSW and almost in Victoria – Australia’s two most populous states – yet there is still no sign of a pick-up in wages growth.
Now both the Reserve Bank and the federal government’s mid-year economic and fiscal outlook expect unemployment to remain well above 4½ per cent, which means no prospect of an acceleration in wages growth.
Employers are not giving their workers wage rises because they don’t need to; with a combined unemployment and underemployment rate exceeding 13 per cent, there’s plenty of surplus labour in Australia and also in the increasingly globalised labour market.
Strong growth in temporary work visas over the last few years is adding to the surplus supply, with the federal government’s own migrant workers taskforce estimating that temporary migrant workers, excluding New Zealanders, now constitute about 6 per cent of the workforce “and are having a significant effect on the operation of the labour market.”
Confronted with high levels of household debt and low expectations of future wage rises, Australian workers are reluctant to spend. Since consumer spending constitutes around 57 per cent of GDP, it is not surprising that economic growth is feeble.
Australians obviously saved most of their mid-year tax cuts rather than spending them. When they went into debt, buying homes and household items, they would have had expectations of faster wage rises than those that have eventuated.
Now householders feel obliged to trim their sails, paying down debt rather than spending the tax cuts. This correction in favour of debt reduction is likely to continue for some time.
Even more fundamentally, in the digital age and the emerging era of artificial intelligence, job opportunities will increasingly shift to personal services such as aged care, childcare and food delivery.
Compared with the few workers who will supervise and operate the machines embodying artificial intelligence, the many workers in personal services will not be working with a lot of sophisticated capital equipment.
That is, their GDP per hour worked – their labour productivity – will be low. This doesn’t mean they won’t be working hard; they just won’t be paid very well.
Labour productivity will continue to be high in mining and in what remains of Australian manufacturing, but together they account for less than 10 per cent of total employment.
Governments and private providers of health, aged care, childcare and disability support services will seek to keep costs down. There will be increasing pressure from these providers for extra permanent and temporary migrant workers.
With all these dynamics in play, wages are likely to remain lower for longer, weakening consumer spending and enfeebling the economy.
In the 1980s, Australia’s wage rates compared with those of other countries were vitally important for domestic and foreign investors.
That’s why wage moderation was so fundamental for employment and economic growth. But in the digital age, comparative wage rates are less important in influencing investment decisions.
The real reason businesses aren't investing
New thinking on wages policy is needed for a new era. The wages policy of the Hawke-Keating era was right for the times.
But if we now nostalgically reapply the policies of the 1980s because they worked back then, we would be attempting to slay an inflation dragon that we killed off long ago.
Let’s develop a wages policy that is relevant to the vastly different circumstances of the 2020s.