Monday, September 08, 2008

There are two Australias alright

When the Reserve Bank Governor Glenn Stevens appears before the parliament's economics committee in Melbourne this morning he is likely to be asked about the divide between the “two Australias” – the states that benefit directly from the resources boom and those that do not.

He is less likely to be asked about a more embarrassing divide – one that neither Labor nor the Coalition is keen to air publicly.

It's the divide between the Australia that earns its money from wages and Australia that gets its money from profits.

Last week’s National Accounts show that the gap is wider than ever before.

Only 52.4% of Australia’s income flowed through to workers in wages and superannuation in the June quarter – the lowest proportion since 1965. By contrast the share of income pouring into profits hit 28.4% - an all-time high.

Back three decades ago more than 60% of national income was paid out in wages and only 17% in profits...

The graphs presented in the National Accounts show that the relative collapse in wages and the explosion in profits has been particularly rapid since the start of this decade.

This doesn't mean that the buying power of wages has fallen – at least not until the recent slide in the dollar and the jump in petrol prices.

Employment specialist Bob Gregory from the Australian National University says all but one group of Australians has enjoyed increased buying power. The group that has missed out is the unemployed. Unemployment benefits increase only at the rate of inflation. Most other benefits and wages have increased faster.

But Professor Gregory says another group of Australians has enjoyed extraordinary increases in their incomes. They're the Australians who were already at the very top of the scale.

“I am not taking about top 20% or the top 10% - it's the top 1% to 2%. They've raced ahead. It's no longer that important to focus on who's getting left behind, and its no longer sensible to look at average incomes. Those are the very top are distorting the average. They've income has soared.”

They are the Australians enjoying the biggest access to company profits.

La Trobe University economist Don Harding believes that other Australians are starting to notice.

“I think the November election result was partly about this. People know that they are not getting access to the prosperity they are told is around them. There’s the same restive feeling in Western Australia right now. That state is in the middle of an enormous mining boom, but ordinary West Australians are finding it hard to buy houses.”

Professor Harding’s proposed solution is radical – a super tax on profits to put a greater share of Australia’s income back into the hands of working people.

“Why should the big benefits of Australia’s resources windfall go to people who are shareholders – many of them foreigners?”

“One thing would be to tax those profits more highly through a Resource Rent Tax and give the money back to working Australians through the tax system, so that they do alright out of the resources boom – otherwise they might not.”

“The people behind the government’s Tax Review have this funny idea about tax competition – that we need to keep our corporate tax rates low because otherwise businesses will move offshore, but at the current profit rates our mining businesses won’t.”

Professor Harding’s argument is a mirror image of the one about the “real wage overhang” that dominated Australian economic discussion during the 1970s and 1980s. Then the share of Australian income devoted to wages was said to have climbed too high. It needed to be brought back in order for business owners to feel that they were getting properly rewarded.

“The Accord between the Hawke government and the unions was a big part of getting the wage-share down,” says Professor Gregory.

“Real wages were held back to allow the profit share to grow. Then the Howard government took things further by industrial relations changes that weakened the role of unions.”

There has been a similar trend overseas.

“It’s happening internationally. One view is that, worldwide, the labour market has moved against unskilled men. Another is that the businesses doing well happen to be the capital intensive ones.”

“In Australia the Treasury says that were it not for mining our wages share would not be declining much. Mining is capital-intensive. If tomorrow you doubled the money you poured into mining and its profit rate was fixed you would expect profits to soar. That’s what’s happening - we have high profits in mining and money pouring into it.”

A record share of national income going to profits and a historic low going into wages is not something about which a Labor government is likely to boast. Although it didn’t mention it on Budget night, its budget forecasts show the wage share falling even lower.

Some of it a statistical aberration. Some workers who once called themselves wage earners now call themselves contractors. Many previously unincorporated businesses whose income was not recorded as profits have now incorporated as a result of the new tax system.

And there are plusses to low wages relative to profits. They make workers relatively cheap to take on and put a floor under unemployment.

Also, compulsory superannuation has made every Australian worker a profit-earner as well.

“If every worker was capitalist you wouldn’t be that worried about the wage share and the profit share,” says Professor Gregory.

“And with superannuation these days every worker with a long-term commitment is a capitalist.”

“But some are much bigger capitalists than others. They’re the ones doing extraordinarily well. Big changes are taking place and no-one really understands them.”