by Richard Denniss

[Originally published in the Australian Financial Review, 18 March 2019]

Like a dog that doesn't know what to do when it catches the car it's been chasing, the business community doesn't seem to know what to do now they've pushed wages growth to record lows and the profit share of GDP to all-time highs. While some might read the room, bank their gains and mouth some platitudes about sharing said gains, the Business Council of Australia (BCA) and the Coalition are not for turning.

According to Minister for Finance Mathias Cormann, low wage growth is just what the economy needs. And even though his argument didn't even persuade his own cabinet colleague, Linda Reynolds, the Morrison government is sticking to its script that catch-up wage rises would "wreck the economy" – or at least the bits a renewable energy target won't wreck.

In the last two years, the Coalition has lost the fights about company tax cuts, the banking royal commission and the need to subsidise new coal mines and coal-fired power stations. Yet three months out from an election they are backing themselves to convince the public that low wages are actually good for them. One thing you can't accuse this government of is being poll driven!

When the Coalition first came to office, then Minister for Employment Eric Abetz warned of an impending "wage explosion" and urged employers to resist their workers' calls for wage rises. And resist they did. The median full-time wage has grown by only $7300 per year since 2014 while the annual incomes of the top 10 per cent of income earners have grown by almost $12,000.

The Coalition's determination to ignore the economic threat of low wage growth, like their determination to ignore the economic threat of climate change, is so out of step with available evidence that the Reserve Bank of Australia has – for the first time in modern history – become a widely cited source of support by the progressive side of politics. When the institution whose interest rate policy gave us the "recession we had to have" becomes the voice of reason on wages growth and climate change, then you know something big has shifted in Australian politics.

Structural and cultural change

In fact, 124 Australian labour market researchers have signed an open letter, published in today's The Australian Financial Review, about the benefits of promoting faster wage growth.

Low wage growth is not just a short-term drag on the economy, it is a long-term drag on productivity growth. For all of the talk about the need to increase productivity before employers can increase wages, the fact is that the causation runs the other way. Productivity increased 39 per cent over the past 20 years, but real wages increased only 14 per cent. That's why the profit share of GDP has risen so high: employers have extracted increased productivity from their workers but hung on to those gains for dear life.

Wage growth did not "fall" in Australia, it was pushed down by decades of structural and cultural change. The purpose of changes to industrial relations laws was to weaken workers' bargaining power, just as the move away from industry bargaining to individual contracts was. Slowing public sector wage growth was designed to slow overall wage growth and systematically underpaying workers their legal entitlements was designed to lower wages. Guess what? It worked.

But despite record low wage growth, GDP growth is anaemic, unemployment and underemployment still dominate the thinking of millions and, most pressingly for the government, the electorate is decidedly fed up. The trick of blaming cost of living pressures on renewable energy worked for a year or two, but after nearly six years in office, voters have twigged to the fact that the main reason they feel like they aren't any better off is because they aren't. Blaming immigrants or environmentalists for working class woes worked from opposition, but it just doesn't cut the mustard after two terms in government.

The right's determination to jump from one losing battle to the next is as inexplicable as it is unsuccessful, but it may come with a silver lining. Having flogged the dead horses of trickle-down economics harder than ever before, in front of an electorate that's more concerned with animal welfare than ever before, perhaps after the next election the BCA and the Coalition will finally be able to dump their old baggage and engage meaningfully with a rapidly evolving community and economy. Or maybe they'll simply push for a bigger GST and a commitment to nuclear energy. We'll find out soon enough.

Richard Denniss is chief economist for The Australia Institute @RDNS_TAI