The strong Australian dollar is the biggest drag on our competitiveness, not our lowest paid workers

On Monday this week Maurice Newman, the head of Tony Abbott’s business advisory council, gave a speech examining Australia’s fall in competitiveness over the past five years.

It made a nice change from his writing on the myth of climate change, but it was no more informative. Rather than blame the high exchange rate, shockingly for a business leader, he found fault with our industrial relations system.

Before looking at his precise complaints it’s worth noting that the big problem with rising wages and competitiveness is if wages rise faster than productivity growth. This would, in effect, mean workers would be getting paid more to produce less. Were this to happen, labour’s share of the national income would grow and the share going to capital would fall.

And yet, as even The Economist has recently noted, throughout the world labour is losing out to capital. And Australia is no exception – indeed, in the past decade, among the OECD, Australian labour’s share of national income has fallen by the fifth largest percentage:

So right off the bat Newman’s attack on Australian wages doesn’t pass the smell test.

But the real target of his speech was those on minimum wage. He compared Australia’s minimum wage with other nations such as Canada, the US and New Zealand, and expressed dismay that it was so much higher, noting “we cannot hide from the fact that Australian wage rates are very high by international standards”.

He is certainly right – among OECD nations, our minimum wage is the third highest in US dollar purchasing power parity terms.

So QED? Well not quite.

Firstly, this is no new thing. Among the OECD nations, in 1993 Australia had the third highest minimum wage; in 2003 it was the fourth highest. Rather unsurprisingly, the ten nations with the ten highest minimum wages in 1993 are the same ten now.

Moreover if we’re worried about our international competitiveness, the minimum wage is an odd place to look. The industries with the highest proportion of workers on the minimum wage are accommodation and food services. At best you could say it has some impact on our international tourism industry, but it’d be a fairly big stretch to say the level of our minimum wage is the determining factor of being able to entice foreign tourists.

Similarly of the next six industries with the highest number of workers on minimum wage, only the retail sector (with 25.6%) is at all trade exposed. The manufacturing sector has only 11.3% on the minimum wage and the mining sector has a mere 0.6% of workers taking home the minimum wage of $622.20 a week.

And yet because our minimum wage has actually fallen compared to the average of OECD nations over the past decade (from US$4.08 higher in 2003 to US$3.83 in 2012), these sectors are being rendered no less competitive now by the minimum wage than they were in 2003 (or 1993 for that matter).

Newman also suggested that the industrial regulations system needed to be fixed because it is “dogged by rigidities”. This is the kind of talk that had business leaders and conservative newspaper columnists warn of wages blowouts owing to the Fair Work Act – even before the ALP took power in 2007.

Rather inconveniently for them, yesterday the latest wage price index figures released by the ABS showed the lowest annual increase in worker’s wages since the ABS began publishing the wages index in 1998:

Were the industrial relation system “dogged by rigidities,” wages would not fall in line in this way following the drop in the demand for labour we have seen in the past 12 months.

So what is the biggest hit to our competitiveness? The exchange rate.

Quite simply our nominal currency has risen against other currencies. Partly this has been the result of the mining boom, but mostly it’s because of the very weak US dollar. In January 2009 one Australian dollar bought you US$0.65. Within two years you would get $US1.00 and since then the lowest it has fallen is $US0.89.

Most of this movement is out of our hands – and has almost bugger all to do with our industrial relations system.

On this Newman noted only, “A lower exchange rate may help, but in any realistic scenario, it alone cannot make us competitive.”

Which is fine, except no one is saying that.

In addition to the exchange rate, everyone knows we also need productivity growth if we wish our competitiveness and national income to improve. And yet, as I noted last week, when it comes to productivity, Australian workers for the past five years have been doing damn well (Newman oddly did not mention this).

The ACTU’s very good bulletin on productivity, released on Monday, compares our nominal exchange rate with the real rate that takes inflation into account. If prices and wages were rising faster than in other nations then that would hurt our competitiveness. It would see our real exchange rate rising faster than the nominal rate.

But if you look over the past six years your see the two measures are almost glued together.

Thus logically the reason for falling competitiveness is not wages rises, but our nominal exchange rate.

Over the long term, a competitive Australia, where our national income continues to grow, require productivity growth – as it always has. It will require wages to grow in line with that productivity growth.

Blaming the lowest paid workers and suggesting they need to take a pay cut because our exchange rate has gone up is only a solution if you are more interested in politics than economics.