One of the salient features of the neo-liberal era has been the on-going redistribution of national income to profits away from wages. This feature is present in many nations. As I noted in yesterday’s blog – Employer group demands free labour from Government – employer groups in Australia are upping the ante and demanding that the Government provide them with free labour. It goes like this – the government runs a fiscal austerity campaign, which creates rising unemployment. They then harass the unemployed for daring to apply for the below poverty line income support. If that is not enough, then the private sector demands the Government hand these unemployed workers over to them for free to “make coffee” and other tasks. Its a lovely world that we are living in. Meanwhile there is growing pressure on Australia’s wage setting tribunals to scrap penalty and overtime rates, allegedly because they damage employment and firms are just busting to put more workers on as long as wages drop. The Australian Bureau of Statistics published the latest – Wage Price Index, Australia – for the December-quarter today and we learn that the annual growth in wages is now at the lowest level since the data series began in the June-quarter 1997. The annual hourly wage inflation is now down to 2.5 per cent overall and 2.4 per cent in the private sector. With productivity growth running slightly slower and the annual inflation rate dropping sharply in recent quarters as the overall economy slows down (and oil prices fall), the shift to profits slowed marginally in the December-quarter. But Real Unit Labour Costs (RULC) continued to fall. Further, the long-term trends are still alarming with employment growth flat or negative and unemployment rising.



I have had a long association with these tribunals as an expert witness and I cannot recall the employers’ representatives ever agreeing that the time is right for wage rises. If their submissions are to be taken on their word then there would never be any wage increases.

And with nominal wages growth slowing rapidly over the last several quarters and the redistribution of national income towards profits continuing, they are still not satisfied.

That is the nature of capital – always wanting more and harassing the government to take their side and help them get it.

The problem with this neo-liberal era is that governments around the world have agreed to working on that side of the struggle against workers. Something has to give.

The wage series is the quarterly ABS Wage Price Index published by the ABS. The Non-farm labour productivity per hour series is derived from the quarterly National Accounts.

A compact dataset can be downloaded from the RBA Table H2 Labour Costs and Productivity. I extrapolated the average growth over the last five years to get the December-quarter productivity result, given the national accounts data is not released until early March.

Nominal wage and price inflation

The first graph shows the overall annual growth in the Wage Price Index since the September-quarter 1998 (this series was first published in the September-quarter 1997).

I also superimposed the annual inflation rate (Consumer price index) – the red line. The bars above the red line indicate real wages growth and below the opposite.

The big funny-looking jump in 2001 was the introduction of the Goods and Services Tax which created a once-off adjustment in the level of the CPI.

So after falling for three quarters, then steadying, the real wage grew modestly in the December-quarter 2015 – at an annual rate of 0.8 per cent.

But as we will see later, this is still well under the productivity growth rate, which means that the redistribution of national income towards profits is still on-going.

Real wages growth subdued in December-quarter

The following graph shows the annual growth in real wages from the first-quarter 2001 to the December_quarter 2014 (I cut out the GST effect).

After a few quarters of hard real wage cutting, the private sector returned to positive real wages growth but at very subdued rates.

The rise in real wages in 2012 into 2013 was the result of the strong growth encourage by the fiscal stimulus. The declining profile after that is associated with the end of the mining investment boom exacerbated by the obsessive fiscal austerity that was introduced (too early)

Workers not sharing in productivity growth

The next graph shows the annual hourly real wage change for the private sector (blue bars) and the annual hourly productivity growth (green line) since the March-quarter 2001.

Productivity growth has been relatively strong in recent quarters, which is one reason why employment growth is so flat. For each extra dollar of real output, less workers are needed when productivity growth rises.

Historically (for periods which data is available), rising productivity growth wass shared out to workers in the form of improvements in real living standards. Higher rates of spending then spawn new activity, which soaks up the workers lost to the productivity growth.

The neo-liberal period marked a shift in that relationship as we discuss below.

Clearly, since the September-quarter 2011, the payoff to workers from the positive productivity growth has been absent with real wages growth lagging productivity growth.

In recent quarters, the gap has been large.

Real wages and productivity growth – a massive redistribution to profits

To understand the significance of the gap between real wages growth and labour productivity growth the following points should be noted:

Employment is measured in persons (averaged over the period).

Labour productivity is the units of output per person employment per period (in this case per hour).

The wage and price level are in nominal units; the real wage is the wage level divided by the price level and tells us the real purchasing power of that nominal wage level.

The total economy-wide wage bill is employment times the wage level and is the total labour costs in production for each period.

Real GDP is thus employment times labour productivity and represents a flow of actual output per period; Nominal GDP is Real GDP at market value – that is, multiplied by the price level. So real GDP can grow while nominal GDP can fall if the price level is deflating and productivity growth and/or employment growth is positive.

The wage share in national income (GDP) is the share of total wages in nominal GDP and is thus a guide to the distribution of national income between wages and profits.

Unit labour costs are in nominal terms and are calculated as total labour costs divided by nominal GDP. So they tell you what each unit of output is costing in labour outlays.

Real unit labour costs are calculated by dividing Unit labour costs by the price level to give a real measure of what each unit of output is costing. RULC is also the ratio of the real wage to labour productivity and through algebra I would be able to show you that it is equivalent to the Wage share measure.

From the last point, if real wages growth is above productivity growth then RULC are rising, which is the same thing as saying that national income is being redistributed to wages (workers).

However, if real wages growth is below productivity growth then RULC are falling, which is the same thing as saying that national income is being redistributed away from wages (workers) to profits (capital).

It can get a little more complicated if the share that government claims changes but that is normally stable, which means the dynamics of national income distribution are between wages and profits.

From the last gap, we can see that RULC have been falling and national income has been redistributed towards profits since September-quarter 2011.

The following graph shows the indexed growth in hourly real wages and labour productivity per hour since the September-quarter 1997 (the start of the Wage Price Index series).

If I started the index in the early 1980s, when the gap between the two really started to open up, the productivity index would stand at around 170 and the real wage index at around 115.

Starting the index in the September-quarter 1997 produces a smaller gap, which just goes to show that one can manipulate data to achieve a range of ends (often quite contrasting) by altering the sample size.

What is clear is that since the September-quarter 1997, real wages have grown by only 11.2 per cent (so just over 0.6 per cent on average per year), whereas hourly labour productivity has grown by 29.2 per cent (or 1.7 per cent on average per year).

This is a massive redistribution of national income to profits and away from wage-earners and the gap is widening each quarter.

The gap widened further in the December_quarter 2014.

Where does the real income that the workers lose by being unable to gain real wages growth in line with productivity growth go? Answer: Mostly to profits. One might then claim that investment will be stimulated.

At the onset of the GFC, the Investment ratio (percentage of private investment in productive capital to GDP) was 23.9 per cent.

It peaked at 24 per cent in the June-quarter 2013. But in recent quarters as the gap between real wages growth and productivity growth widens, the Investment ratio has fallen and in the September-quarter 2014 it stood at 22.3 per cent.

The downward shift in the non-mining investment ratio is more stark than that.

Some of the redistributed national income has gone into paying the massive and obscene executive salaries that we occassionally get wind of.

Some will be retained by firms and invested in financial markets fuelling the speculative bubbles around the world.

For workers, the problem is that they rely on real wages growth to fund consumption growth and without it they borrow or the economy goes into recession. The former is what happened around the world in the lead up to the crisis (and caused the crisis).

The latter is more or less what is happening now.

One of the essential changes that needs to happen to ensure that another bout of financial instability doesn’t hit soon is that real wages have to grow in proportion with productivity growth – exactly the reverse of what is happening now.

Real wages growth and employment

The claim that real wage cuts are necessary to stimulate employment are never borne out by the evidence. Wages have two aspects.

First, they add to unit costs, although by how much is moot, given that there is strong evidence that higher wages motivate higher productivity, which offsets the impact of the wage rises on unit costs.

Second, they add to income and consumption expenditure is directly related to the income that workers receive.

So it is not obvious that higher real wages undermine total spending in the economy. Employment growth is a direct function of spending and cutting real wages will only increase employment if you can argue (and show) that it increases spending and reduces the desire to save.

There is no evidence to suggest that would be the case.

The following graph shows the quarterly growth in real wages (horizontal axis) and the quarterly change in total employment. The period is the September-quarter 1998 to the December_quarter 2014. The solid line is a simple linear regression.

Conclusion: No discernible direct relationship! There is strong evidence that both employment growth and real wages growth respond positively to total spending growth and increasing economic activity.

At present, total spending in the economy is subdued and moderating.

Conclusion

Not a wages breakout or explosion in sight! In fact, nominal wages growth is now at the lowest level since the data series began (September-quarter 1997).

And a very damaging fiscal strategy being deployed.

The employer groups are mounting massive pressure to further cut the growth in wages – presumably to negative numbers. As I noted yesterday, they even want the government to give them free labour and to cut the fiscal deficit further, which would create even more unemployment – and presumably a bigger pool of this free labour.

There is a very real need for a new political party to form in Australia to reject this rubbish. The Labor Party will not do it. The Greens are neo-liberals on bikes (given their macroeconomic policy platform) and there are not other contenders at present to fill the gap.

Maybe Australian readers would like to air their views on this and make suggestions about how that sort of progressive party could form.

The Syriza success (up to the election) shows that progressive left grass roots movements can be spectacularly successful.

Tomorrow I will write about the ‘reforms’ proposed by Syriza yesterday. I was going to do it today but then the wage data came out.

There is a lot of “give Syriza a chance” sort of narrative out there now – “they are just buying time” and the rest of it. But apart from achieving a “Don’t mention the War (Troika)” sort of change, the situation looks like it will remain bleak.

The reforms proposed have no conditions on them that the Eurogroup will create a massive stimulus from the European Investment Bank into Greece, which would allow them to run fiscal balances yet gain the strong growth in employment and wages that they need.

Unless that massive stimulus comes, sticking to fiscal austerity, which is all we have seen in the reform wording, will not achieve anything much good.

And when you compare it with the mandate they sought and received – they are light years away.

The problem is that the mandate was inconsistent. I do not believe they can achieve what they claimed they would while staying in the Eurozone. But more on that tomorrow.

That is enough for today!

(c) Copyright 2015 Bill Mitchell. All Rights Reserved.