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Thursday, February 23, 2017

Why low wage growth hurts

Low wage growth is what the Coalition wanted. Within weeks of being sworn in as employment minister in 2013, Eric Abetz warned "weak-kneed employers" against caving in to unreasonable union demands.

He set the pace himself, axing Commonwealth guidelines for cleaners employed on government contracts, giving them what amounted to pay cuts of around 20 per cent when their contracts expired.

He offered defence force staff just 1.5 per cent, less than inflation and the lowest increase in living memory. His prime minister, Tony Abbott, decreed that no public servant would get more. Abetz offered staff in his own department just 0.5 per cent along with cuts to conditions. Later, under the Turnbull government, the purse strings were loosened as it became apparent that the "wages explosion" Abetz feared had turned into a different sort of problem.

In the December budget update, the Treasury wrote down the tax receipts expected in the budget by $3.7 billion, and by $30.7 billion over the four years, despite higher commodity prices, largely because of what had happened to wages. Instead of growing by the forecast 2.5 per cent, they were growing by 1.9 per cent. It cut its forecast to 2.25 per cent and may have to cut it again.

Lower wage growth means less tax revenue than expected, higher government payments, including Family Tax Benefits, and less consumer spending and perhaps even less economic growth.

On what would have once been thought of as the bright side, it can also lead to lower inflation in a self-perpetuating spiral, as pointed out by Reserve Bank Governor Philip Lowe on Wednesday.

But he's not happy about the prospect because inflation is already below his target, and without the certainty of some price rises, businesses are unlikely to want to expand.

About the only genuine positive is that employers are unlikely to want to move jobs offshore or replace workers with machines. They are cheap enough as they are.

Low wage growth can mean

  • Lower tax revenue
  • Higher government payments
  • Lower consumer spending
  • Lower economic growth
  • Lower inflation
  • Lower investment
  • Less offshoring and automation
In The Age and Sydney Morning Herald