Gittins on Productivity

In my semi-regular series of posts in appreciation of Ross Gittins' role in reporting Australian economics, here is my latest.

This article by Gittins, If bulldusting about productivity was productive, we’d all be rich provides insight into the recent Fair Work Commission ruling to raise award rates by 3.5%. Award workers are typically some of the lowest paid workers in our economy, and industry groups are ‘concerned’ that this is a whole 1.1% above inflation. Oh no! Clutch your pearls!

Whereas keeping the lid on wages may seem profit-increasing for the individual firm, when all of them do it at the same time, it’s profit-reducing. Why? Because the economy is circular. Because wages are by far the greatest source of household income. So the more successful employers are in holding down their wage costs, the less their customers have to spend on whatever businesses are selling. If economic growth is weak – as it is – the first place to look for a reason is the strength of wages growth.

Money we earn is money we spend. More so for lower income earners, because a greater proportion of their income is spent, rather than saved, by virtue of the scale of fixed costs relative to their income levels. So let the people have some more money so that they can spend it.

the commission points out a little-recognised inaccuracy in the conventional way of measuring real wages. It says that, if you take into account that prices rise continuously but wages rise only once a year, award wage workers’ overall loss of earnings since July 2021 has been 14.4 per cent.

14.4%! So all those people who feel like the economy is more difficult now, that everything costs more, and there is little if nothing left over by the time the next payday rolls around… you are absolutely right.

What the lobbyist witch doctors have been doing is concealing the truth that the best explanation for our weak productivity performance is that employers have been seeking to increase their profits by holding down wage costs, rather than by investing in labour-saving technology.

This was a designed strategy by the previous Federal Liberal government and it’s in industry’s individualised (but not collective) self-interest to maintain this approach as long as they can. And they are trying to do exactly that.