The least understanding of neoclassical economics shows this thinking is the wrong way round. It’s when the cost of labour gets too high that businesses have greater incentive to invest in labour-saving equipment.
At present, we’re told, business investment spending as a proportion of national income is the lowest it’s been in at least 40 years. If so, it’s a sign that labour costs are too low, not too high.
Australian Industry Group chief executive Innes Willox says wage rises will further suppress private sector investment and employment generation.Credit: Oscar Colman
The other reason firms are motivated to invest in expanding their production capacity is if business is booming. But this is where business risks shooting itself in the foot. Whereas keeping the lid on wages may seem profit-increasing for the individual firm, when all of them do it at the same time, it’s profit-reducing.
Why? Because the economy is circular. Because wages are by far the greatest source of household income. So the more successful employers are in holding down their wage costs, the less their customers have to spend on whatever businesses are selling. If economic growth is weak – as it is – the first place to look for a reason is the strength of wages growth.
The Fair Work Commission has cut the real wages of people on award wages by about 4.5 per cent – something the lobby groups somehow forgot to mention.
Fortunately, however, while sensible economists leave the running to the false prophets of the business lobby, my second favourite website, The Conversation, has given a voice to Professor John Buchanan, of the University of Sydney, an expert on the topic who isn’t afraid to speak truth to business bulldust.
“In Australia, it has long been accepted that – all things being equal – wages should move with both prices and productivity,” he says. “Adjusting them for inflation ensures their real value is maintained. Adjusting them for productivity [improvement] means employees share in rising prosperity associated with society becoming more productive over time.”
In recent times, however, all things ain’t been equal. Depending on how it’s measured, the rate of inflation peaked at 7.8 per cent (using the CPI, which excludes mortgage interest rates) or 9.6 per cent (using the living cost index for employed households, which does include them).
So the Fair Work Commission has cut the real wages of people on award wages by about 4.5 per cent – something the lobby groups somehow forgot to mention. That’s what honest dealers these guys are. If there’s a way to fiddle the figures, they’ll find it.
The supposed real increase of 1.1 per cent in award wages is actually just a reduction in their real fall to about 3.4 per cent. So much for the impossible impost that will send many small businesses to the wall.
ACTU secretary Sally McManus has welcomed the commission’s recognition that the real value of award wages should be restored.Credit: Eamon Gallagher
The commission has always been into swings and roundabouts. Cut real wages now to get inflation down, then, when things are back to normal, start getting real wages back to where they should be. So we can expect more so-called real increases – each of them no doubt dealing death and destruction to the economy.
Speaking of fiddling the figures, the commission points out a little-recognised inaccuracy in the conventional way of measuring real wages. It says that, if you take into account that prices rise continuously but wages rise only once a year, award wage workers’ overall loss of earnings since July 2021 has been 14.4 per cent.
What the lobbyist witch doctors have been doing is concealing the truth that the best explanation for our weak productivity performance is that employers have been seeking to increase their profits by holding down wage costs, rather than by investing in labour-saving technology.
