THE CHANGING ECONOMICS OF WAGES AND THE LABOUR MARKET

Talk to VCTA Teachers Day, Melbourne, Friday, September 1, 2017

I want to talk to you about the changing economics of wages and the labour market. Some of what I say may be news to you, some of it will, I hope, bring back to you stuff you haven’t thought about for a long time. What I say is intended more for your own edification – or re-edification – than for you to take straight into the classroom and lay on your students. One of the purposes of Professional Development is, after all, to ensure that you know a lot more about the subjects you teach than your students do.

The neoclassical model

One of the things I’ve noticed in my career as an economic journalist is the gap in thinking between economists who specialise in the study of a particular market or industry – the labour market, for instance, or the health industry, or even the education industry – and other economists who specialise in a different aspect – monetary economics, fiscal policy – or have no particular specialty. The specialists specialise in knowing about all the peculiarities of their market – all the special cases of market failure - that make it different from other markets and much harder to analyse. By contrast, the non-specialists “specialise” in using the same generalised, simple neoclassical model to analyse all markets on the assumption that all markets, being markets where prices change to equilibrate supply and demand, are pretty much the same.

I’ve noticed this one-model-fits-all approach particularly among policy advisers – Treasury, the Productivity Commission, PM&C, the Reserve Bank – but it has become more common since the rise to intellectual dominance in the early 1980s of what we used to call “economic rationalism” and now have joined the rest of the world in calling “neoliberalism”. This move to a more fundamentalist approach to economic analysis was very much about playing down the incidence of market failure and using the same simple, price-driven model to explain everything. Its great attractions are its simplicity, its clear predictions and its clear prescriptions on how problems should be solved. One sign of reversion to a more fundamentalist approach has been the willingness of economists to advocate – or, at the very least, accept in silence – the push for a return to individual contracting between workers and their bosses. Of course, this “neoliberal consensus” is now breaking up before our eyes under the onslaught from Brexit, Trump and the Redheaded One, and I’ll present you with some evidence of changing attitudes in academia and among Australian policy advisers.

The high school economics syllabus contains a far bit about the changing institutional arrangements for wage fixing in Australia, but doesn’t dwell on the micro theory of how wages are set by a firm or an industry. The syllabus’s Keynesian approach to macro management implies acceptance, at least at the macro level, of the Keynesian emphasis on wages being sticky downwards, with the implication that adjustment to shocks in the labour market comes less via changes in prices (wage rates) than via changes in quantities (employment and unemployment).

Even so, at the micro level, the syllabus carries an implicit acceptance of the neoclassical story that wage rates are set at the point where the marginal revenue product of labour curve crosses the labour supply curve and, of course, the market clears. A key explanatory variable is the elasticity of demand for labour, which is the effect on employment of a change in wages. This simple analysis is, of course, part of the model of perfect competition.

The unsuitability of the simple model

 But you don’t have to think hard before you realise that, when it comes to the labour market, the unsuitability of the simple neoclassical model runs a lot deeper than just the many respects in which all real-world markets fall well short of the assumptions of perfect competition. The most glaring respect in which the labour market differs from all other markets, whether markets for goods or markets for the factors of production, is that the rest involve the purchase or sale of inanimate objects, whereas each unit of labour purchased or sold comes with a human being inextricably attached. This obvious truth has many implications for the way labour markets work.

Perhaps the first person to formally note this truth was Alfred Marshall, the (British) father of neoclassical economics – the “marginalist revolution” – in one of the later editions of his magnum opus, The Principles of Economics, first published in 1890, which was the dominant textbook used in university economics courses throughout the English-speaking world until it was displaced by Keynes’s General Theory in the 1940s.

Surprisingly, given its history of neoclassical orthodoxy, this unique feature of labour – its inseparability from the humans delivering it – was readily acknowledged by the Productivity Commission in its report on the Workplace Relations Framework in late 2015. The report’s first “key point” is that “a workplace relations framework must recognise two enduring features of labour markets” the first of which is that “labour is not just an ordinary input. There are ethical and community norms about the way in which a country treats its employees” (page 2). This is true enough, but I’d have thought it was a strange way to put it. If you except that economies are run for the benefit of the people living in them, then the real point is not that it’s “unethical” to treat workers badly, but that the vast majority of people living in any economy are employees or their dependents. People are ends in themselves, not means to an end in the way that inanimate objects are merely means to human ends.

Further in (page 83), the PC says that “Labour market outcomes do not just affect economic performance — they also have a substantial impact on equality of opportunity, the stability of family relationships and social cohesion more generally. The ethical and social dimensions of the labour market form the basis for many aspects of the WR system that differentiate it from the regulation of other markets.

“For example, the ‘price’ of labour differs from the price of most other inputs in an economy. A broad principle underpinning Australia’s competition policy framework is that lower prices from competition are almost always desirable. In labour markets it is less clear that a lower price is necessarily desirable, given that many people’s incomes and wellbeing depend to a considerable extent on the price of labour and it can be costly to use alternative mechanisms to redistribute income. Indeed, the existence of a minimum wage — a ‘floor price’ set by regulation, which would usually be seen as contrary to the public interest for other goods and services — illustrates this distinction.”

In a nearby section of the report headed Human complexities (page 86), the PC acknowledges further implications of the labour market’s animate rather than inanimate nature:

“In the real world, employers and employees are people with all their various flaws and virtues, and these can collide in workplaces in ways that have ramifications for how labour markets function:

• People make mistakes (for example, employers and employees may form an employment contract without any real due diligence).

• Employers and employees have values that are important to the way they do their work. An employee may want to work many additional hours at no cost because of professional pride. Employers may want to pay bonuses, provide better staff facilities or assist an employee facing family problems (say domestic violence) because they are dealing with human beings who they wish to help and please. Employers and employees dealing with each other are not merely doing so as part of a calculated business strategy, and in some cases this opens the door for one party to exploit the other’s goodwill and non-monetary motivations. (One less altruistic formulation of this is that employers may sometimes set higher prices for labour to motivate trust and to increase the cost of shirking — one example of so called ‘efficiency wages’.)

• There are few ‘representative’ employers and employees. People have heterogeneous tastes for workplace conditions and heterogeneous abilities, even when paid the same wage rate.

• Some businesses are poorly managed, and most are not at the technological and managerial frontier. An inadequately managed firm may provide poor training, treat people poorly, leave them bored or over busy with poor task scheduling, pay them too little for what they do, or provide no praise for good work — and yet people do not leave the first time they are ill-treated. On the other hand, there are model employers, with a spectrum of employers between the two extremes. The poorest performing employers may fail ultimately, but failure usually takes time, and damage in the interim may not be limited to just the employer. There is a persistent poorly performing tail in the distribution of firm performance in all countries and all industries.

Some of the above complexities suggest a need for regulation, others not. For example, regulation of unfair dismissal is justified, not only because the act itself is problematic but also because the potential to do it allows leverage by an employer to exploit vulnerable employees. Bullying would fall under the same category (whether by an employee or employer). Voluntary consent to work longer hours than the average is not an obvious problem, unless it is actually not ‘voluntary’, but obtained through coercion.”

Market failure in labour markets

The fact that the labour market is so personalised – workers are people, but so too are bosses – means that many of the usual respects in which all real-world markets differ from perfect competition, all the common or garden categories of market failure, are a lot more significant in the case of the labour market. For instance, why are wages sticky downwards as Keynes told us? Because of the human factor. Because employers know that cutting workers’ nominal wages makes them very unhappy and likely to be less enthusiastic about doing their jobs well. Much better during a recession to just leave nominal wages unincreased and wait for continuing inflation to reduce them in real terms. (This, by the way, is why sensible macro managers like to see some price inflation: it makes it easier to cut real wages when sometimes you need to.)

Speaking of the more standard reasons the labour market falls short of perfect competition, the PC’s report offers a good list of them (page 85):

“• information asymmetries. Jobseekers may find it difficult to know the extent of competition for a job, the standard levels of remuneration and conditions for a comparable employment opportunity, and the non-wage conditions of a new workplace — such as workplace morale or the behaviour of managers. For employers, it may be similarly difficult to evaluate a potential employee’s skills or personal attributes, and other opportunities or offers the employee is considering. These gaps in information increase the uncertainty of rejecting an offer during negotiations. Even where parties can overcome these information gaps, this is likely to come at a significant cost.

• search costs. Job searching is costly, as is recruitment. It is also an uncertain process — parties usually make and receive offers in a sequential fashion, and so must consider the likelihood of receiving a better offer or applicant in the future. For workers whose skills or knowledge are not easily transferable between jobs, the financial costs and time taken to switch between employers or job sectors may be particularly high.

• impediments to individuals freely entering and exiting the labour market. Many people do not have sources of non-labour income or savings to support themselves if they do not work. Even where safety nets such as unemployment benefits are available (though they can be difficult to access), the personal and social costs of unemployment mean that many people may not see exiting unsatisfactory employment as a viable alternative.

• barriers that limit the mobility of labour between segments of the labour market. People can find it difficult to relocate to areas where jobs are more available, due to influences such as family circumstances, housing and ties to local communities and infrastructure. While developments such as long-distance commuting, temporary immigration, and advances in transport and communication technology have improved labour mobility in Australia, there are still significant personal reasons that hold employees to locations.

• employers that wield substantial purchasing power in the labour market (monopsonies). While monopsonies are historically associated with ‘one company towns’ where employees have little recourse to seek jobs nearby, they still persist in some sectors, for example government-provided services, or where the skills required by firms are sufficiently differentiated (sometimes referred to as monopsonistic competition). Behaviour to similar effect can also occur where employers in certain industries ‘cooperate’ to prevent wage bidding wars for talented employees.

These characteristics mean that in the absence of labour market regulations, wages are not necessarily set purely by reference to a competitive market rate, but rather through bilateral bargaining between employer and employee. The relative bargaining power of each party will determine their capacity to influence the final wage outcome.”

Unequal bargaining power

Given the PC’s acknowledgement of the significance of all these departures from the neoclassical model, it’s not surprising that the second of the two “enduring features of labour markets” it highlights in the “key points” of the report is that “without regulation and an ability to act collectively, many employees are likely to have much less bargaining power than employers, with adverse outcomes for their wages and conditions. Equally, poorly-designed regulation can risk bestowing too much power on organised labour in their dealings with individual employers. The challenge for a WR framework is to develop a coherent system that provides balanced bargaining power between the parties, that encourages employment, and that enhances economic efficiency. It is easy to both over and under regulate.”

In its appendix H on bargaining power, the report says “most [people] agree that the central goal of workplace relations policy is to reduce the superior bargaining power of employers over employees that would occur in the absence of regulation . . . 

• Bargaining power originates from the relative costs to contracting parties from failing to reach an agreement, with the result that one party can achieve leverage to re-distribute returns from the other.  For example, the cost of not employing a given employee may be low for the employer, while high for the employee.

• The neoclassical model of a perfectly competitive labour market predicts that imbalances in bargaining power cannot persist, with both employers and employees being ‘price takers’. However, there are a variety of factors that can differentiate the labour market (or at least many parts of it) from the perfectly competitive model, including: information asymmetries and search costs; a lack of voluntary entry and exit from the labour market; impediments to labour mobility; and employers with substantial purchasing power in the labour market (monopsonists).

• These factors mean that wages are generally set by employers and employees through bargaining, rather than purely by a competitive market rate. The resulting wage thus reflects relative differences in the bargaining power of parties.

• In the absence of regulation, imbalances in bargaining power would often be tilted towards employers, but in some circumstances may favour employees or unions.

• To counteract perceived inequalities in bargaining power, governments respond with policies such as enforcing minimum standards within the labour market (for example, minimum wages), and allowing employees to unionise and collectively bargain.

• A key regulatory concern is to ensure that in mitigating the risks of excessive employer bargaining power, regulations do not overcompensate by granting excessive power to employees.”

Minimum wage

 Which brings us to the minimum wage. The PC’s position is that “minimum wages are justified, and the view that existing levels are highly prejudicial to employment is not well founded. However, significant minimum wage increases pose a risk for employment, especially for more disadvantaged job seekers and in weakening labour markets”.

The report goes on to note (page 177) that:

“• Australia’s national minimum wage is high by international standards. It has risen in real terms over the last decade, although its growth rate has been constrained to reduce its ‘bite’ (the minimum wage as a share of median wages).

• There is an economic rationale for a regulated minimum wage that lifts the incomes of low-paid workers above the levels they would otherwise receive, to counter the effects of imbalances in bargaining power and other market distortions. There are also equity arguments . . . 

• At present, it is not possible to pinpoint the impacts of minimum wages on employment. Economic theory and some international empirical studies suggest that increases in minimum wages can reduce jobs and hours worked, but they also indicate that employment gains are possible in some circumstances. There have been few clear-cut wage ‘experiments’ in Australia and many studies are dated and/or have data and methodological limitations. The indirect evidence is also not clear-cut.

• While not definitive, the Productivity Commission’s assessment is that modest increases in Australia’s minimum wage are unlikely to measurably affect employment, but that large increases in minimum wages would reduce employment. How, and at what rate, such effects manifest will vary depending on economic conditions and other policy settings.”

If you’re not surprised by all that, you should be. At least until the publication of an empirical study by Card and Krueger in 1993, most economists were sure a “binding” minimum wage – one that held the wage rate above the level market forces would have set – would cause employment to be lower. This is what the neoclassical model predicted, and there was little reason to doubt it was true. Today, however, economists are strongly divided on the question, with many now doubting that modest increases in the minimum wage do much if anything to affect employment, while clearly benefiting those already on the wage. The Card and Krueger study compared changes in employment levels in the fast-food industry in adjoining states, New Jersey and Pennsylvania, when one state increased minimum wages and the other didn’t. It found that, if anything, employment rose a fraction after wages were increased. So this age-old question has now become an empirical rather than a than a theoretical question. Many more empirical studies have been done since Card and Krueger, and while many have confirmed its broader conclusion that minimum wage increases have little effect on employment, many have found that there remains a quite small negative effect.

Alternative models of the labour market

When labour economists realised how unsuited the neoclassical model was to analysing the workings of the labour market – and how off-beam its predictions could be, they began developing alternative models, ones with more realistic assumptions and thus more credible predictions. Trouble is, while most of these alternatives offer more believable explanations of some aspects of the labour market, none is sufficiently comprehensive as to allow it to be adopted as a replacement to the simple neoclassical model with its (often wrong) answer for everything. This is a big part of the reason the old model remains influential in many areas in addition to analysis of the labour market. I’ll run you quickly through a few of the lesser models before coming to the two I think are most useful, the efficiency wage and the oligopsony model.

Drawing on RG Castles little text, the dual labour market theory developed by the American economist Michael Piore argues that labour markets can be split into two distinct sectors, primary and secondary labour markets. The primary market consists of stable, relatively well-paid jobs, usually requiring both qualifications and skills. The company invests in training and seeks a long-term relationship with the employee. The secondary sector, by contrast, is characterised by poorly paid jobs with minimal training and high levels of staff turnover.

A related idea is the concept of “internal labour markets”. Most workers in the primary labour market are sheltered from the effects of changes in supply and demand in the labour market. Once they obtain a primary job, their future depends on the operation of an internal labour market within the firm. Firms have a long-term investment in their employees through on-the-job training and wish to encourage workers to remain with the firm. Management encourages productivity within a framework of long-term job security.

Efficiency wage. This term was first used by Marshall in the last edition of his text in 1924, by was developed in a different direction by Carl Shapiro and Joe Stiglitz in 1984. It argues that, at least in some markets, wages form in a way that doesn’t clear the market. It points to the incentive for managers to pay their employees more than the market-clearing wage so as to increase their productivity or efficiency, or to reduce costs arising from staff turnover. This greater efficiency justifies the higher wage. Even so, if wage rates are above the market-clearing level, unemployment is persistent. Shapiro and Stiglitz developed the case where, in markets where it’s difficult to measure the quantity and quality of a worker’s effort, there is an incentive for managers to pay a higher wage to discourage “shirking”, since workers have more to lose if they were sacked for shirking. A different rational motive for paying higher wages occurs where the high cost of training replacement workers means paying a higher wage to discourage staff turnover is justified. Or, if workers abilities differ, paying higher wages should help the firm recruit and retain more-able workers. George Akerlof’s version argues that higher wages encourage high morale, which raises productivity.

Oligopsony model. Monopsony means one buyer of a product or, in this case, labour. Oligopsony means just a few buyers – by no means uncommon in a modern economy where a few big companies dominate many product markets. As explained by Alison Booth, the oligopsony model assumes that even if workers have identical skills and abilities, they have differing preferences on which employer they want to work for, influenced by such things as how far the firm is from where they live, the hours they want to work, or whether they like the boss and their fellow workers.

 It takes time and effort (that is, cost) for workers to find alternative employers they like at least as much as their present one and, similarly, it’s expensive for employers to find a worker they like as much as the one they could lose. This makes many workers reluctant to change jobs and many bosses reluctant to change workers. And because these preferences are private information – the other side can’t be sure how strong there are – there’s scope for “economic rents”: for workers to be paid less, or more, than the value of their work. Less is more likely. Booth says the attraction of the oligopsony model is its ability to show how a minimum wage can actually increase employment, as well as why employers provide general training to workers who could leave and take the training with them.

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A terrible injustice most of us could face

It's one of the most glaring gaps between theory and practice in our community, a huge disconnect between our democracy and our economy. A terrible injustice most of us could face. Everyone knows about it, but it's rarely discussed. What is it?

The prohibitively high cost of justice. We're all supposed to be equal before the law, but you ain't anything like equal if they can afford a lawyer and you can't.

The president of the Law Council of Australia, Fiona McLeod, is running a campaign to highlight the plight of people who, in theory, should be receiving aid to help them with their legal problems but, in practice, often aren't.

People who include Indigenous Australians, those with disabilities, older people, children, the homeless and those experiencing economic disadvantage, prisoners and detainees, asylum seekers and other recent arrivals to Australia, people who have been trafficked and exploited, LGBTI people, those experiencing family violence and those in regional and remote areas.

The sad truth is that, in these times of tight budgets, when federal and state governments of both colours lack the courage to tackle the powerful interest groups benefiting from the biggest swathes of government spending, legal aid is treated as a soft touch.

You can chop it back without outcry.

But the problem is bigger than that. Lawyers speak of the "missing middle" – people who aren't rich enough to afford lawyers, but aren't poor enough to be eligible for legal aid.

That's some middle. In the Productivity Commission's 2014 report on access to justice, it estimated that only the bottom 8 per cent of households were likely to meet income and asset tests for legal aid, leaving "the majority of low and middle income-earners" likely to struggle or miss out.

To give you an idea, a less complex family law case costs the parties between $20,000 and $40,000, with complex cases costing more than $200,000.

And your chances of requiring legal help are higher than you may realise. A survey conducted in 2008 found that close to half of respondents experienced one or more civil (not criminal) legal problems, including family law matters, during a year.

The report says that "the ability of individuals to enforce their rights can have profound impacts on a person's wellbeing and quality of life.

"For example, it can mean that someone who has sustained injuries due to the negligence of others can seek recompense for impairment and/or their reduced income-generating capacity."

So what can we do to reduce this gap between what we're entitled to and what actually happens?

Short of nationalising the legal profession, there is no single, simple solution to the high level of lawyers' incomes and thus legal costs.

Apart from urging governments to spend more on legal aid, the Productivity Commission's answer is to chip away at the problem in as many places as possible.

More should be done to disseminate legal information (including self-help kits). States should establish a central, well-publicised point of contact for legal assistance and referral. The service would provide free telephone and web-based legal information, as well as actual advice on minor matters.

People need to be more aware of the ways to resolve disputes without using lawyers and courts. There are more than 70 government and industry ombudsmen and complaint bodies, covering telecom providers, banks and government agencies, which sort many matters with little cost or delay.

There are almost 60 federal and state tribunals, dealing mainly with challenges to bureaucratic decisions. The idea was that people would represent themselves and lawyers be avoided, but a legalistic approach is creeping in.

Then there's "alternative dispute resolution" where people such as retired judges can fix problems before matters get as far as court. More could be done to encourage this.

The courts have been doing more to manage their case load and push cases through, but they could do a lot more to reduce unnecessary cost and delay. They could make more use of technology to improve their performance.

The commission says there is "substantial scope to improve the efficiency and effectiveness of Australia's civil justice system" by curbing abuse of the adversarial system through a lack of co-operation and disclosure between the parties and the use of procedural tactics, and by discouraging disproportionate legal and other costs.

Rules about the awarding of costs could be toughened to discourage tactical delays and over-servicing.

As for the lawyers themselves, some of their longstanding rules of behaviour, supposedly intended to ensure clients get the best service, may be more about allowing them to charge more.

The commission says lawyer and client should be able to agree that the lawyer will do some, but not all, of the legal work involved.

It should be possible for more legal tasks to be performed by non-legal professionals.

It's permitted for lawyers to work on the basis that no fee is charged if a legal action is unsuccessful, but an extra percentage is added to the normal bill if it is successful.

But it's not permitted for lawyers to charge an agreed percentage of the damages their client receives. The commission believes that, with adequate protections, it should be.

If the courts and lawyers can't do more to limit the cost of legal proceedings, one day governments will get tough with them.

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Government losing its resistance to rent-seeking businesses

I'm starting to suspect the federal government – of whatever colour – has lost its ability to control its own spending.

Even if this is, as yet, only partly true, governments are likely to have unending trouble returning the recurrent budget to balance and keeping it there, let alone getting it into surplus so as to pay down debt.

Those of us who worry about such things have given too little thought to the causes of the Abbott-Turnbull government's abject failure to achieve its oft-stated goal of repairing the budget solely by cutting government spending.

It's common to blame this on political failure and obstacles. There's truth in most of those excuses, but they miss the point. Spending restraint will never be easy politically, governments rarely have the number in the Senate and their opponents will always be opportunistic.

That's why governments need to be a lot clearer about what they're seeking to achieve on the spending side, and a lot more strategic in how they try to bring it about.

On ultimate objectives, the goal of literally smaller government – smaller than it is today – is a pipedream. Government spending is almost certain to rise over time – don't you read Treasury's intergenerational reports? – meaning taxes will have to rise over time.

But there are obvious limits to voters' appetite for higher taxes, which is why governments need to be able to control the rate at which their spending is growing, and do it not by cost-shifting to other governments or service recipients – as was the approach in the failed 2014 budget – but by ensuring ever-improving value for money through greater efficiency and effectiveness.

Unless governments lose their obsession with welfare spending (most of which goes to the aged) and come to terms with the other two really big items of government spending, health and education – especially when you consolidate federal and state budgets – they won't get far with controlling the rate of growth in their spending.

What too few people realise is how much of government spending goes not directly into the pockets of voting punters, but indirectly via businesses big and small: medical specialists, chemists, drug companies, private health funds, private schools, universities fixated by their ranking on global league tables, businesses chasing every subsidy they can get, not to mention international arms suppliers.

The budget, in other words, is positively crawling with vested interests lobbying to protect and increase their cut of taxpayers' money.

A government that can't control all this potential business rent-seeking – isn't perpetually demanding better value for taxpayers; perpetually testing for effectiveness – is unlikely to have much success in limiting the growth in its spending.

Which brings me to my fear that government has already lost that ability.

A wrong turn taken early in the term of the Howard government – when the Finance department moved most responsibility for spending control to individual departments and got rid of most of its own experts on particular spending areas – plus many years of "efficiency dividends" (these days a euphemism for annual redundancy rounds) have hollowed out the public service.

The spending departments have lost much of their ability to advise on policy, while the "co-ordinating departments" – Treasury, Finance and Prime Minister's – have lost much of their understanding of the specifics of major spending programs.

This matters not just because the departments have become increasingly dependent on outside consultants to tell them how to do their job – and to be the for-profit repositories of what was formerly government expertise – which could easily be more expensive than paying your own people.

The big four chartered accounting firms were paid $1 billion in consulting fees over the past three years, thus introducing a whole new stratum of potential rent-seeking.

More importantly, the longstanding practice of having specialised departments – one each for the farmers, miners, manufacturers, greenies etc – makes them hugely susceptible to being "captured" by the industry they're supposed to be regulating in the public interest.

The departments soon realise their job is to keep the miners or whoever happy and not making trouble for the government.

The Health department, for instance, would see its primary task as dividing the taxpayers' lolly between the doctors, the chemists, the drug companies and the health funds in a way that keeps political friction to a minimum.

How much incentive do you reckon this gives the spending departments to limit their spending, root out rent-seeking and lift effectiveness?

That's why, by denuding the co-ordinating departments of people who know where the bodies are buried in department X, government has lost a key competency: the ability to control the growth in its own spending.

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In truth there's no apprenticeship 'crisis'

If we're to believe what we're told, Australia's apprenticeship system is in crisis, with plunging numbers following cuts in government support.

In last year's federal election campaign, Bill Shorten claimed the number of people "in training for an apprenticeship" – note that tricky wording – was "now at its lowest level since 2001".

Spending cuts by the Abbott-Turnbull government had "seen apprentice numbers fall by more than 120,000 since the 2013 election".

In May this year, Karen Andrews, Assistant Minister for Vocational Education and Skills in the Turnbull government, said the objective of a new government fund was to "restore the number [of apprenticeships] to 2012 levels, when Labor's withdrawal of employer incentives contributed to a massive decline".

Earlier this year, a joint statement by the three biggest business lobby groups claimed that apprenticeships had declined by 45 per cent since June 2012 and urged the Turnbull government to "take urgent action to avert an imminent crisis in our apprenticeship system".

Not to be outdone, the ACTU claimed in last year's election campaign that the Coalition had "ripped funding out of apprenticeship programs", resulting in a "catastrophic drop in the number of apprentices learning their trade".

When you remember the almighty hash that federal and state governments of both colours have made of their efforts to smarten up TAFE colleges by making vocational education and training "contestable" by for-profit training providers, it's not hard to believe that, between them, the former Labor and present Coalition federal governments have stuffed up apprenticeships.

Fortunately, however, you don't have to believe it. It isn't true. For their own reasons, the people I've quoted – Labor and Liberal, employers and unions – are seeking to mislead us about the state of the apprenticeship system.

This is clear from a report published this week by the highly regarded higher education expert Professor Peter Noonan, and Sarah Pilcher, of the Mitchell Institute at Victoria University.

Let me ask: What do you understand the word "apprenticeship" to mean? Do you take it to mean the system that's existed for decades where young people work in trades such as carpentry, plumbing, electrical, commercial cooking and hairdressing, and undertake about four years of training before becoming qualified tradespeople?

Now try this: Have you heard of the "traineeships" that the Hawke government invented in 1985 to reduce youth unemployment by providing job and training opportunities for young people in service sector occupations not covered by traditional apprenticeships?

They typically last for only a year or less, and are common in retail and hospitality, admin, childcare and aged care.

Get this: when all those people I quoted spoke of the "apprenticeship system", what they were actually referring to was those short-term traineeships.

There's been a huge fall in the number of traineeships since 2012, because the Gillard government decided to crack down on massive rorting by employers and training providers of changes in the traineeship system made by the Howard government.

There has been a modest fall in the number of traditional apprenticeships since 2012, but this is despite the absence of any change in the full funding of traditional apprenticeships.

No one would understand the distinction between apprenticeships and traineeships better that Shorten, the minister responsible, the employer groups and the ACTU.

None of them would fail to realise that the public worries a lot more about trade apprenticeships than about short-term service sector traineeships.

So when they chose to depict a crackdown on employer rorting of traineeships as a crisis in the apprenticeship system, they knew full well they were misleading us.

But how did they think they could get away with such deceit? That no Peter Noonan would blow the whistle on them?

Here's the bit you'll have trouble believing. It sounds like it's straight out of Utopia.

They thought they'd get away with it because, some years ago, some genius in the federal government decided to add the traineeship figures to the apprenticeship figures and call them all apprenticeships.

You know, add oranges to apples and call them all apples. Good one.

So far has that bureaucratic obfuscation gone, that actual figures for apprenticeships and traineeships have disappeared.

You can, however, divide the so-called apprenticeships between trade apprenticeships (the real ones) and non-trade "apprenticeships" (actually traineeships).

The number of traineeships has long been a lot greater than the number of apprenticeships, which tend to vary with the strength of the economy. Even so, commencements have increased in some categories: carpenters, plumbers and electricians.

But the number of traineeship commencements ballooned after 1998, when the Howard government took a scheme aimed at encouraging employers to hire more young people, and made subsidies available for training of existing employees, of any age.

The report says registered training organisations, apprenticeship centres and brokers "aggressively marketed" these existing-worker traineeships.

"A business model emerged whereby employers would share the incentives with registered training organisations, who then delivered training, too often of questionable duration and quality," the report finds.

By 2012, the peak year before the Gillard government's restrictions took effect, 44 per cent of all traineeship commencements were for existing workers. About 18 per cent of all "trainees" were aged 45 or older.

The Howard government also decided in 1998 to make employer incentives available for part-time traineeships and apprenticeships.

"This decision . . . also created a market in Commonwealth employer subsidies, through which firms could shift their part-time and casual youth workforces (including full-time school and university students) into part-time traineeships," the report says.

"This had a dual benefit for employers – they were able to pay trainees the national training wage (below the relevant award) while also claiming employer subsidies, with training provided fully on the job.

"Major retail firms and franchises, in particular in the fast food industries, took full advantage of these incentives."

Now why do I find that easy to believe?

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What you'd have to live on if you were poor

Speaking of the cost of living, how much do you need to live on? Surveys show most people's answer is: just a bit more than I'm getting at present. Trouble is, they keep saying that no matter how much their income rises.

One way to convince yourself you're not doing all that well is to compare what you earn with people of your acquaintance who're earning a lot more than you.

A better assessment would be to compare your finances with those of people a lot closer to the bottom – if only you knew any.

Not to worry. On Wednesday, Professor Peter Saunders and Megan Bedford, of the Social Policy Research Centre at the University of NSW, will publish new "budget standards" for low-paid and unemployed Australians.

The study was funded by the Australian Research Council, with a quarter of the cost covered by donations from Catholic Social Services Australia, the United Voice union and the Australian Council of Social Service.

In a painstaking exercise, the researchers have put together, and costed, the baskets of goods and services different-sized families at these income levels would need to allow each individual – adult or child – to lead a fully healthy life.

So it's not a poverty line and it does take account of prevailing community standards, but it's the minimum amount required to satisfy basic needs.

"There is no allowance for even the most modest or occasional 'luxuries' and wastage was kept to an absolute minimum. The budgets are thus extremely tight," the researchers say.

For instance, low-income families are assumed to have a car, but it's a second-hand, five-year-old Toyota Corolla, kept for five years. Unemployed people have no car.

Because it's a healthy standard, its only allowance for alcohol is a couple of glasses a week, with no allowance for smoking.

Let's see how you fancy living on these budget standards (I've rounded the figures to the nearest $10 for ease of comprehension). Each of the low-paid categories assumes one person working full-time on the national minimum wage.

A single adult would need to spend $600 a week. A couple with no children would need $830. Add a child of six and that rises to $970. Add a second child, of 10, and it's up to $1170. A sole parent working part-time, with a child, would need to spend $830 a week.

Let's take a couple with two children. Their biggest expense would be rent, $460 a week for a three-bedroom unit in an outer suburb. Then $200 for food, $140 for transport, $140 for household goods and services, $80 for recreation (swimming lessons; bit of sport for the kids), $60 for education, $40 for personal care, $30 for clothing and footwear and $20 a week for out-of-pocket healthcare.

The budget standards for unemployed families are, perforce, a lot tighter.

Whereas the low-paid were assumed to shop at Woolworths and Kmart, unemployed people in the focus groups used to check the realism of the standards said they couldn't afford such stores and went to Aldi and discount stores. They chase specials and collect discount vouchers, make things last longer and waste nothing.

Even with this frugality, an unemployed single adult needs $430 a week. A couple without children needs $660, but that rises by $110 to $770 with one kid, then by a further $170 to $940 with a second kid. An unemployed sole parent with one child needs $680 a week.

It's true that economies of scale mean a couple needs only 1.5 times as much money as a single. But additional kids cost more, partly because older kids cost more, but also because you need to rent a bigger unit.

The good news is that a single adult on the minimum wage earns about $60 a week more than they need to maintain the minimum healthy standard of living, costing $600 a week. A sole parent working part-time, with one child, gets wages and welfare benefits of $45 a week more than their minimum living costs of $830 a week.

After that, however, the news is bad. A low-paid couple with no children earns $40 a week less than the $830 they need. After allowing for family benefits, a low-paid couple (one in full-time work and one doing some part-time work) with one child is almost $10 a week shy of their $970 healthy standard, while a couple with two children is short by $90 of the $1170 a week they need.

One of the great stains on our fair-go nation's conscience is the long-running attempt by governments of both colours to starve the unemployed until they find a (usually non-existent) job.

The study finds that the dole, plus any other welfare benefits for which the jobless are eligible, falls almost $100 a week short of the much tighter minimum healthy living standard for the single jobless.

A childless couple on the dole falls short by almost $110 a week and a couple with two kids is shy about $130 a week.

In our boundless generosity, however, we go easy on an unemployed couple with one kid (short by a mere $60 a week) and a jobless sole parent with one kid, short by a piddling $50 a week.

If only you and I weren't having such a struggle to maintain our own living standards, we could perhaps ask the pollies to be a tad more munificent.

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Metrics-obsessed managers must be careful what they wish for

In decades to come, when the history of business endeavour in the early part of the 21st century is written, I predict it won't be kind to the great management fad of "metrics".

When you look at the terrible mess the Commonwealth and the other big banks have got themselves into, it's hard not to suspect that misuse of KPIs – key performance indicators – and incentive pay do much to explain their predicament.

It's not that I'm against measuring what can be measured about the activities of businesses. As a lifelong bean-counter, I'm a great believer in measurement as an aid to decision-making and accountability.

And it's certainly true that the digital revolution has made it much easier and cheaper to measure multiple dimensions of a business's activities.

No, the problem is the naivety with which so many top executives have leapt into the metrics fashion, seeing it as a magic answer to their management task, a simple and easy way to incentivise their troops and ensure they're all working to further the company's greater good.

Their trouble is that their inexperience in the measurement business stops them understanding its awesome power. Measurement's immense power for good – or ill.

Its ability to keep the business surging forward, or running off the rails. Indeed, its ability to convince you you're going great guns until the very moment disaster looms.

Use metrics as a substitute for thought rather than as an aid to hard thinking and there's a high chance it'll bring you undone.

The slogans of the metrics brigade say "you can't manage what you don't measure" and "what gets measured gets done".

Trouble is, that latter slogan is more a warning than a promise. The psychologist Martin Seligman observes that "if you don't measure the right thing, you don't do the right thing".

The notion that you can't manage what you don't measure is a trap. A smarter conclusion is that "not everything that counts can be counted". Lose sight of that and you're headed for mediocrity at best.

Which brings us to the importance of motivation. Money-obsessed managers who see attaching money to performance indicators as the perfect way to ensure people are motivated to achieve the firm's goals have failed to think hard about motivation.

Like managers, staff have many motivations, only one of which is to make more money. But there's plenty of research evidence that money tends to overpower other motives – even such a worthy (and, to bosses, cheap) motive as taking pride in doing your job well.

Attach monetary rewards to some dimensions of a person's responsibilities but not others and just watch as the non-incentivated dimensions are pushed to back of mind.

Give a pep talk about how important those other aspects are, and you won't be believed. Money speaks louder than words.

Then watch as the extra-reward-for-effort mentality takes hold. I'll try harder for extra money but, if you're not offering extra, why would I bother? Do you take me for a mug?

Two academics at Macquarie University, Associate Professor Elizabeth Sheedy and Dr Lyla Zhang, conducted a lab simulation using 306 financial professionals recruited with help from an industry body.

Participants were asked to do some simple analysis and then make up to 60 decisions about buying securities, granting loans and underwriting insurance, all within company policies designed to control the amount of risk it took on.

These policies could mean that potentially profitable deals weren't pursued, or that time was "wasted" that could have been devoted to generating profits.

Participants were randomly assigned to five different groups, which varied according to how employees were paid – fixed, or variable according to profits generated – and whether managers emphasised making profits or controlling risks.

"We found that when people had variable payments that [were] linked to profits, their compliance with risk management was significantly reduced," the researchers found.

"When managers and co-workers were also profit-focused, compliance reduced even further. Interestingly, the variable payments did not produce significant increases in productivity" relative to participants on fixed pay.

"On the other hand, when participants were paid a fixed amount regardless of profit, compliance with risk management policies was higher, although still not perfect."

The researchers conclude that "since incentives structures that are profit-based have an adverse impact on risk compliance and do little for productivity, such remuneration programs should be reconsidered".

"Our research shows that it is difficult to have high rates of risk compliance in the presence of profit-based payments. Staff are likely to believe that profit-based payments signal the true priorities of the organisation and they modify their behaviour accordingly."

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Seeking the truth about the extent of unemployment

So, the Australian Bureau of Statistics told us this week, the rate of unemployment fell a tick to 5.6 per cent in July. Trouble is, most people know the official unemployment rate understates the extent of the problem.

What many people don't know, however, is that when you take the rate of unemployment and add the rate of under-employment, which in May took us up to 14.5 per cent, you overstate the extent of the problem.

It's well known by now that the official definition of unemployment is a very narrow one because you only have to do one hour's work in a week to be classed as employed.

A lot of people also know – or think they know - that this amazing definition was introduced by the government some years ago to stop the figures looking so bad.

Labor voters know it was a Coalition government that fudged the figures; Liberal voters know the villain was a Labor government.

Sorry, this is an urban myth. It is just not true. The bureau would never allow any bunch of politicians to fiddle with the definitions it uses.

As it has explained many times, the bureau uses internationally agreed standards to define unemployment, which are set by the International Labour Organisation, part of the United Nations.

They had to draw the dividing line between unemployed and employed somewhere, and they chose one hour – a choice that was easier to make in the days when almost all the jobs were full-time.

Even today, there'd be very few people actually working just an hour or two a week. Most would work at least one shift of seven or eight hours.

Even so, there's no denying that such a narrow definition understates the extent of joblessness. This is why the bureau also publishes a measure of underemployment.

The underemployed consist of all those people who are working part-time – defined as less than 35 hours a week – but would prefer to be working more hours.

When you take the rate of underemployment and add it to the rate of unemployment (with both unemployment and underemployment expressed as proportions of the labour force) you get what the bureau calls the "labour underutilisation rate", which we can think of as a broader measure of unemployment.

If you look over the years, the rate of unemployment tends to go higher and lower in line with the downs and ups in the business cycle.

You can also see the business cycle reflected in the rate of underemployment, but it has a much clearer underlying upward trend. It was 2.6 per cent in 1978, but 8.3 per cent in November 2015 and 8.8 per cent this May.

Until early 2003, the unemployment rate was higher than the underemployment rate, but since then the underemployment rate has been higher, with a growing gap.

Between February 2015 and this May, the unemployment rate fell by 0.5 percentage points, whereas the underemployment rate rose by 0.3 points.

The underemployment rate is a lot higher for females, 11 per cent, than for males, 6.9 per cent.

It's also greatest among people in lower-skilled occupations and lowest among people in higher-skilled occupations. (Uni students please note.)

Now get this: although workers of all ages suffer underemployment, it's much more a problem for the young. More than a third of the underemployed are aged 15 to 24, and their rate is 18.5 per cent.

But why has the trend rate of underemployment been rising steadily since the late 1970s?

Since underemployment is an affliction of part-time workers, the steady rise in part-time employment over that time – so that it now accounts for about a third of all jobs – does much to explain why there's more part-timers who happen to be saying they'd prefer to be working more hours.

Professor Jeff Borland, of the University of Melbourne, adds that "younger workers appear to have experienced the largest increase in underemployment because they have had the largest growth in part-time employment".

He reminds us that more young people have part-time work because more of them are in full-time education and needing a part-time job.

But here's my punchline: although the official unemployment rate understates the size of the problem, just adding the underemployment rate goes to the other extreme of exaggerating it.

Why? Because it adds apples to oranges. We worry most about underemployment because we assume it involves people who need full-time jobs but have had to settle for part-time.

It does. But it also includes people who are happy to stay part-time but, even so, would prefer to work an extra shift or maybe just a few more hours.

It doesn't make sense to add people with such a small problem to people with the much bigger problem of needing a full-time job but not being able to find one, as though they were similar.

Remember, too, that almost a third of the people included in the official unemployment rate are looking only for part-time work.

This is why, if you search very deep on the bureau's website (clue: catalogue no. 6291.0.55.003, table 23b) you find that, as well as just counting heads, it also does a more accurate measure of underemployment that counts the hours people are looking for – meaning part-timers needing a full-time job count for a lot more than those just wanting a few more hours.

This "volume" measure shows that, in May, the underemployment rate was 3.2 per cent of all the potential hours the whole labour force could work, and the unemployment rate was 4.3 per cent, giving an hours-based measure of labour underutilisation of 7.5 per cent.

Which is closer to the truth of the matter.

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How we delude ourselves about the cost of living

Let me tell you a home truth no politician would dare to: We don't have a problem with the cost of living. In fact, consumer prices rose at the unusually slow pace of just 1.9 per cent over the year to June.

I don't expect that telling you you're kidding yourself will make me popular – which, of course, is why the pollies aren't game to tell you, even though they know it's true.

But how on earth can I claim there's no problem with the cost of living when, in this column only last week, I wrote that the retail cost of electricity had more than doubled over the past decade, and was now rising by a further 15 or 20 per cent?

Because electricity bills do not the cost of living make.

Households have to buy a hundred other things apart from power, and it's changes in the combined cost of all those things that determine what's happening to the cost of living.

Trouble is, humans are not good at keeping track of what's happening to all the prices of the 101 things we buy.

We tend to focus hard on some price changes, while ignoring loads of others. Which ones do we focus on? The ones that are rising rapidly, of course.

Which ones do we ignore? The ones that don't change much. We even fail to notice or remember for long the prices that are falling.

Nothing's better suited to misleading us than bills for water, gas or electricity. They tend to come only once a quarter, which makes them a large dollar figure.

When they're a lot higher this quarter than they were last – and when we struggle to find the money to pay them – we're left convinced the cost of living is out of control.

Actually, it says we could be better at budgeting – could hold more spare cash aside for unexpected bills. But it's easier for us to shift the blame to someone else – the gov'ment, for instance.

All this subjectivity is why we get a reasonably realistic picture of changes in the cost of living only by accepting what we're told by the people whose job it is to keep a careful record of price changes, the Australian Bureau Statistics, with its consumer price index.

The index measures changes in the prices of a fixed basket of goods and services bought by households in the eight capital cities. The bureau conducts a detailed survey every six years to ensure the items in the basket reflect changes in our purchasing habits.

The basket includes 87 different classes of expenditure, covering – as we'll see – far more than just the things we buy in supermarkets. The bureau checks about 100,000 individual prices every quarter, across the eight capitals, mainly by having its workers go into shops to see for themselves, or by contacting service providers.

It tries to get the actual prices people are paying, and to adjust for changes in quality and quantity (such as when a producer reduces the size of a tin or package without reducing the price commensurately).

The index confirms that, over the decade to June, the price of electricity rose by 116 per cent, while the combined price of all the goods and services in the basket rose by just 26 per cent.

How is that possible? Because most prices rose by far less than electricity did, some prices actually fell, and – get this – electricity accounts for less than 2 per cent of the cost of all the many things we buy. (For age pensioners, it's 3.4 per cent.)

Let's look closely at that 1.9 per cent rise in consumer prices over the year to June. It includes a 7.8 per cent rise in electricity prices.

But food prices (accounting for 17 per cent of the total cost of the basket) rose 1.9 per cent, alcohol and tobacco prices by 5.9 per cent, clothing and footwear prices fell by 1.9 per cent, housing costs rose 2.4 per cent, while prices for furnishings and household equipment and services were unchanged.

Out-of-pocket health costs rose 3.8 per cent, transport costs rose 2.1 per cent, communication costs (mainly phones) fell 3.8 per cent, recreation costs (mainly audio, visual and computer costs) fell 0.1 per cent, education costs (mainly private school and uni fees) rose 3.3 per cent, and the cost of insurance and financial services rose 2.1 per cent.

This means prices fell for categories worth 17 per cent of the total cost of the basket and were unchanged for a category worth 9 per cent of the basket.

The truth so many people can't see is not that the cost of living – consumer prices – has been rising rapidly, but that wages are only just keeping up with prices.

Over the four years to March, consumer prices rose by 8.3 per cent, whereas the index for wage rates rose by an unusually weak 9.2 per cent.

What's really making us dissatisfied is not that the cost of living is rising rapidly, but that our wages haven't been rising by the 1 per cent or so per year faster than prices that we're used to, thus preventing us from increasing our standard of living.

That is, our ability to buy a bit more stuff than we bought last year.

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Why wage growth will strengthen before long

It's become deeply unfashionable to presume any of the present weakness in wage growth is merely cyclical (and thus temporary) rather than structural (and thus lasting). Sorry, my years of economy-watching tell me it's never that simple.

It's the mark of an amateur – a journalist who prefers sexy stories to boring stories that are more likely to be true; a youngster who believes all they're told on social media – to believe the established patterns of the past have no bearing on the present.

Note, I'm not denying the likelihood that a significant part of the problem may arise from deep, structural causes requiring correction by judicious government intervention.

What I'm saying is it's far too soon to conclude no part of the weakness is temporary. We'll know the truth of the matter only with hindsight.

We know the importance of "confidence" in driving the business cycle, but it doesn't just apply to businesses and consumers. It also applies to workers negotiating pay rises.

There's a chance that, with all the union movement's exaggerated talk of an ever-rising tide of "precarious employment", organised labour has spooked itself into accepting lower pay rises than it needs to.

As Reserve Bank governor Dr Philip Lowe keeps hinting, one day workers will decide to contest bosses' claims that they couldn't possibly afford more than a 2 per cent pay rise.

For another thing, it's surprising the wage-rise pessimists have failed to take heart from the Fair Work Commission's decision in June to raise not just the national minimum wage, but the whole structure of award minimums, by 3.3 per cent.

This compares with a rise last year of just 2.4 per cent.

It's true that only about a quarter of employees are directly affected by this decision, but many more are affected indirectly because the "individual arrangements" by which their wages are set consist merely of a set margin above their award rate.

And why would the supposedly more industrially powerful workers on enterprise agreements settle for another 2 per cent rise when, all around them, weaker workers were getting 3.3 per cent?

But there's a more technical argument that a period of weak wage growth was just what was needed as part of our transition from the decade-long resources boom. With that transition close to completed, it shouldn't be long before wage growth strengthens.

As Professor Ross Garnaut warned in 2013 in his book, Dog Days, the big fall in the nominal exchange rate that (eventually) followed the collapse in mining commodity prices wasn't all that was needed to restore the international price competitiveness of our export and import-competing industries.

We also needed the nominal depreciation to become a "real" depreciation, with the costs faced by Australian firms rising much more slowly than the average of costs faced by firms in our major trading partners' economies.

Garnaut doubted we could achieve the high degree of wage restraint need to make the depreciation stick but, as former top econocrat Dr Mike Keating pointed out in a recent blog post, that's just what's happened.

Keating says you'd expect that, over the medium to longer term, real wages, the productivity of labour and "real net national disposable income" per person (a version of gross domestic product that's adjusted for swings in our terms of trade) would each grow by about the same amount.

Between 2002 and 2012, the period of the resources boom, real wages grew faster than productivity, though by less than the strong growth in the real national income measure.

But Keating notes that, following the 2012 peak in the resources boom, these relationships were reversed, with real national income actually falling between 2012 and 2016. Real wages then needed to rise by less than productivity, which is just what's happened.

"My judgement is that equilibrium between productivity, [real] wages and real net national disposable income per person has now been restored," Keating concludes – implying there's now scope for real wages to grow in line with improvements in productivity.

This fits with the Reserve Bank's conclusion in its May statement on monetary policy that, as measured by comparing our "nominal unit labour costs" (nominal wage growth versus the change in labour productivity) with those of our trading partners, our real exchange rate has fallen to about its post-float average. This wouldn't have changed much since May.

So there's been a sound economic justification – the need to restore our industries' international price competitiveness – for our weak wage growth over the past three or four years.

But that need has now been satisfied, allowing us to hope for a return to real wage growth.

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The way wages are set is changing

Since we've all got so excited about the weak growth in wages, let me ask you a personal question: How much do you know about how wages are set?

For instance, how many workers are affected by the 3.3 per cent increase in the federal minimum wage, announced by the Fair Work Commission in June?

Some people say the weak wages growth is explained by the efforts to discourage collective bargaining under John Howard's Work Choices and neo-liberalism more generally. Any signs of this?

Wages can be set in different ways. So what are they, and how many workers are affected by each?

These questions are answered by a box on the minimum wage decision in the Reserve Bank's latest statement on monetary policy, issued last week. Many of its figures came from the Australian Bureau of Statistics publication, employee earnings and hours, catalogue number 6306.0, for May 2016.

The bureau finds three main ways of setting the wages of employees: "award only", collective agreements and individual arrangements.

Industrial "awards" are legally enforceable determinations made mainly by the federal Fair Work Commission, which set the minimum pay and conditions for employees in a particular industry or occupation.

They form a safety net for the great majority of employees. Any employer paying less than the minimum wage specified in the relevant award is breaking the law and could be prosecuted.

Every year the commission reviews, and usually increases, the "national minimum wage", which is the lowest amount any adult employee may be paid. In this year's review, the national minimum was increased by 3.3 per cent to $18.29 an hour.

What's less well understood is that, at the same time it adjusts the national minimum wage – the minimum minimum, so to speak – the commission also adjusts all the various minimums for workers in different classifications set out in each of the many industrial awards.

Since 2011, the commission has increased the full set of award minimum wages by the same percentage as its increase in the national minimum wage.

According to the bureau's latest figures, for May last year, about 23 per cent of our 10.1 million employees were totally reliant on the relevant minimum wage set out in their award.

Next on the list of wage-setting methods is the 36 per cent of employees whose wages are set by "collective agreements".

Most of these agreements are "enterprise bargaining agreements" negotiated with employers by a union representing the workers at the enterprise.

Enterprise agreements – which should be registered with the commission – build on the provisions of the employees' award, usually involving wage rates and conditions (such as paid leave) that are more generous than provided for in the award.

That leaves 41 per cent of employees – the largest share – having their wages set by "individual arrangements". But this is a rag-bag group.

It may include some people still on formal "individual contracts" left over from the Work Choices era, and it certainly includes managers and employees in highly paid professions whose wages and conditions have always been set by direct negotiation with the boss.

But there's another, big and interesting group: all those ordinary workers whose "individual arrangement" is that they get the award wage plus $X a week, or plus Y per cent.

This means a lot more workers' pay is protected by the award system than a quick look at the figures would suggest. Similarly, the commission's annual increase in award wage rates has a bigger effect on overall wage growth than you'd think.

So how have the proportions of employees in the three wage-setting categories been changing?

Over the 14 years to the start of 2016, the share of employees covered by collective agreements has fallen by 1.8 percentage points to 36 per cent, while the share of individual agreements has fallen by 0.4 points to 41 per cent, meaning the share of award-only employees has increased by 2.2 points to 23 per cent.

But before you take this as proof that a campaign against collective bargaining has forced more workers back to mere reliance on their award, remember there are other possible explanations.

Changes in the composition of the workforce, for instance. Since most part-time employees are award-only, the slowly increasing proportion of part-time jobs could explain much of the increase in the award-only share.

And remember this: some industries are growing faster than others, but different industries have different degrees of reliance on particular wage-setting methods.

For instance, collective bargaining is most common in public administration (covering 78 per cent of employees), education and training (63 per cent), utilities (60 per cent), and health care (55 per cent). That is, industries dominated by the public sector.

Individual arrangements are most common in professional and technical services (80 per cent), wholesale trade (70 per cent), rental and real estate services (63 per cent), construction (58 per cent) and – get this – manufacturing (55 per cent).

That leaves the award-only method most common in hospitality (43 per cent), admin services (42 per cent) and retailing (34 per cent).

It's true that hourly rates of pay are highest for employees with collective bargaining ($39.60), with individual arrangements next on $38.50, and award-only last on $29.60.

But the gap has been narrowing, with the average hourly rate under collective bargaining growing by 89 per cent in nominal terms over the 16 years to May 2016, while award-only grew by 97 per cent and individual arrangements by 109 per cent.

Again, however, this is likely to be explained more by the changing structure of industries and occupations – for instance, a higher proportion of high-paid managers and professionals in the individual arrangements category – than by campaigning against collective bargaining.

Statistics – especially these broad averages – can be misleading. But ignoring the stats and listening only to anecdotes will leave you with a much more distorted picture of reality.

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Why electricity prices are high and going higher

It's never my policy to feel sorry for any politician, so let's just say I wouldn't like to be in Malcolm Turnbull's shoes when he meets the electricity retailers he's summoned to Canberra on Wednesday.

His hope is to persuade them to do more to help their customers find the best prices on offer, so that any savings customers make reduce, to some extent, the further big price rises that are on the way.

Trouble is, it's long been the practice of many big businesses – telcos, internet service providers, electricity retailers – to make it as hard as possible for their household customers to find the "plan" that meets their needs most economically, and also to take advantage of any trusting customer on a more expensive plan than they need.

So, whatever noises they make after their meeting with the Prime Minister, I can't see the likes of Energy Australia, Origin Energy and AGL – which between them have about 70 per cent of the retail market – volunteering to help their customers pay less.

Turnbull seemed to begin the year hoping to shift the blame for high electricity prices to Labor – which, federal and state, certainly has contributed to the problem – but it finally seems to have dawned on him that, if further big price rises are coming through right now, voters are likely to lay most of the blame on whoever happens to be prime minister at the time.

And, after all, it was Tony Abbott who sought election in 2013 on the claim that the big rise in power prices was caused almost solely by Ju-liar Gillard's price on carbon, and that abolishing the tax would fix things.

In truth, the story of why retail electricity prices have risen so far – doubling over the past decade, even after allowing for inflation – is long. But let me summarise.


About the first 30 per cent of the retail price is accounted for by the wholesale price – the cost of generating the power.

This component didn't contribute greatly to the price doubling of the past decade, but is now the chief source of the recent price rises of 15 to 20 per cent in some states, with more to come.

About the next 40 per cent of the retail price comes from network distribution costs – the cost of taking electricity from the power stations and transmitting it, first, through the high-voltage power lines and then through the poles and wires that distribute it to our homes.

It's this component that explains the great bulk of the doubling in the real retail price.

Because the distribution network is a natural monopoly, the prices the privatised or still government-owned distribution companies are allowed to charge are controlled by the Australian Energy Regulator, using a cost-plus formula.

Trouble is, with connivance by the NSW and Queensland governments, which retained government-owned distributors, the companies soon found ways to game the formula.

They claimed they needed to spend big on strengthening their networks to ensure that the spike in demand for power on just a few hot afternoons each year could be met without blackouts.

There were much cheaper ways to reduce the risk of blackouts – such as by rewarding some users for cutting back on those few days of peak demand – but these wouldn't have been as lucrative for the companies.

After years of big price rises to pay for this "gold-plating" of the network, the regulator finally woke up and tried to wind back some of the increase.

The NSW Coalition government, anxious to maximise the sale price of the poles-and-wires companies it was about to partially sell off, took the regulator to court and got the price roll back stopped in its state.

This brings us to the final 30 per cent or so of the retail price accounted for by the electricity retailers' margin.

Price control over these margins was lifted some years ago in the belief that competition between retailers would keep their margins in check, but it hasn't really worked.

This is partly because the companies try to avoid competing on price, and partly because not enough people use the government website, energymadeeasy.gov.auhttps://www.energymadeeasy.gov.au, to check every few years that their existing supplier isn't taking advantage of them.

But now the formerly stable wholesale generation part of the market has begun producing big price increases, with more to come.

This is partly because very old power stations are being closed and not sufficiently replaced by new generators, thanks to uncertainty about how the transition from fossil fuels to renewable energy is to be managed.

Having abolished Labor's carbon tax, the Coalition has so far failed to replace it with any other mechanism because of opposition from its climate-change deniers.

But also partly because miscalculations by one of the three gas companies permitted by the previous Labor government to build big gas export facilities in Queensland has pushed gas prices way above even the higher export-parity price.

Apart from crippling some industries, this has greatly reduced the ability to use gas-fired power stations to cover the "intermittency" of wind and solar power, pending the arrival of adequate storage technology.

Turnbull has threatened to use the feds' export powers to reserve sufficient gas for domestic use, but we're yet to see this have its effect. Much potential price pain lies ahead.

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Higher employment our payoff for avoiding recession

When Boris Johnson, Britain's Foreign Minister, visited Oz lately, he implied that our record 26-year run of uninterrupted economic growth was owed largely to the good fortune of our decade-long resources boom.

Johnson, no economist, can be forgiven for holding such a badly mistaken view – especially since many Australian non-economists are just as misguided.

They betray a basic misconception about the nature of macro-economic management and what it's meant to do.

It's clear that Johnson, like a lot of others, hasn't understood just why it is that 26 years of uninterrupted growth is something to shout about.

It's not that 26 years' worth of growth adds up to a mighty lot of growth. After all, most other countries could claim that, over the same 26-year period, they'd achieved 23 or 24 years' worth of growth.

No, what's worth jumping up and down about is that little word "uninterrupted". Everyone else's growth has been interrupted at least once or twice during the past 26 years by a severe recession or two, but ours hasn't.

That's the other, and better way to put it: we've gone for a record 26 years without a severe recession.

But now note that little word "severe". As former Reserve Bank governor Glenn Stevens often pointed out, we did have a mild recession in 2008-09, at the time of the global financial crisis, and earlier in 2000-01.

So, yet another way to put the Aussie boast is that we've gone for a period of 26 years in which the occasional increases in unemployment never saw the rate rise by more than 1.6 percentage points before it turned down again.

What you (and Boris) need to understand about macro-economic management is that its goal isn't to make the economy grow faster, it's to smooth the growth in demand as the economy moves through the ups and downs of the business cycle.

This is why macro management is also called "demand management" and "stabilisation policy". These days, the management is done primarily by the Reserve Bank, using its "monetary policy" (manipulation of interest rates), though both the present and previous governor have often publicly wished they were getting more help from "fiscal policy" (the budget).

When using interest rates to smooth the path of demand over time, your raise rates to discourage borrowing and spending when the economy's booming – so as to chop off the top of the cycle – and you cut rates to encourage borrowing and spending when the economy's busting – thereby filling in the trough of the cycle.

This is why the economic managers find it so annoying when the Borises of this world imagine that the decade long resources boom – the biggest we've had since the Gold Rush – must have made their job so much easier.

Just the opposite, stupid. Introducing a massive source of additional demand in the upswing of the resources boom made it that much harder to hold demand growth steady and avoid inflation taking off.

But then, when the boom turned to bust, with the fall in export commodity prices starting in mid-2011, and the fall in mining construction activity starting a year later, it became hard to stop demand slowing to a crawl.

We're still not fully back to normal.

This is why the macro managers' success in avoiding a severe recession for 26 years is a remarkable achievement, and one owed far more to their good management than to supposed good luck (whether from China or anywhere else).

But what exactly is the payoff from the achievement? Twenty-six years in which many fewer businesses went out backwards than otherwise would have.

Twenty-six years in which many fewer people became unemployed than otherwise, and those who did had to endure a far shorter spell of joblessness than otherwise.

The big payoff from avoiding severe recessions – or keeping them as far apart as possible – is to avoid a massive surge in long-term unemployment that can take more than a decade to go away – and even then does so in large part because people give up and claim disability benefits or become old enough to move onto the age pension.

Dr David Gruen, a deputy secretary in the Department of the Prime Minister and Cabinet, has demonstrated that, though the US economy had a higher proportion of its population in employment than we did, for decades before the global crisis, since then it's been the other way around.

"The key lesson I draw from this comparison is that the avoidance of deep recessions improves outcomes in the labour market enormously over extended periods of time," he concluded.

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All the things that aren't causing weak wage growth

There's just one problem to remember before we work ourselves into a complete tizz over the War on Wages, convincing ourselves globalisation and digital disruption mean we'll never get a steady job or a decent pay rise again.

It's this: so far we've heard a lot of suspiciously confident predictions about the way robots and digitisation are about to destroy millions of jobs, a lot of anecdotes about law-breaking employers, a lot of scary stories about "the gig economy" and "portfolio jobs", a lot of adults assuring impressionable school children they'll have 10, or is it 17, different jobs in their working lives, a lot of propagandising by the unions about the rise of "precarious employment" and a lot of speculation about how all this somehow explains why wages growth is the slowest it's been since the early 1990s.

Know what we haven't got a lot of? Hard evidence that any of all that has actually started happening to any significant extent.

This is not to say some version of all that won't happen at some time in the future. I can't say it won't since I don't know that the future holds, unlike all the self-proclaimed experts with their precise predictions.

(Next time you hear someone telling you exactly how many jobs robots will have destroyed by 2020, or how many jobs or occupations you'll have in the next 40 years, ask yourself this question: How – would – they – know?)

But if there's no evidence this frightening future has got going yet, there's no way it can explain why wage growth has been so weak for the past three or four years.

For once, let's take a close look at what we actually know has been happening.

It is true that, as we saw in this column two weeks ago, the structure of occupations in the workforce is changing. Research by Dr Alexandra Heath, of the Reserve Bank, shows the share of routine jobs has fallen by 14 percentage points, while the share of non-routine jobs has risen by 14 points.

Similarly, the share of manual jobs has fallen by 5 percentage points, while the share of cognitive jobs has risen to the same extent.

But this is a long-term trend. These figures are for the change over the 30 years to 2016, and there's no sign of the trend accelerating over recent years.

A lot of detailed – and reassuring – research on the official statistics has been done by one of our leading labour-market economists, Professor Jeff Borland, of the University of Melbourne, and reported on his website, Labour Market Snapshots.

For one thing, Borland's been searching for evidence that our jobs are being taken by robots – and failing to find it. He breaks the issue into two parts.

First, has computerisation reduced the total amount of work needing to be done by humans, as many people assume?

No. The total amount of work available per head of population has bounced around with the ups and downs of the business cycle but, overall, has shown no downward trend. The latest figures show, if anything, a bit more hours of work per person than there were in the mid-1960s.

Second, consistent with Heath's research, Borland finds evidence that the progressive introduction of computers, which began in the early 1990s, is probably changing the types of jobs being done by workers.

But he, too, finds that the pace of change in the composition of employment "is no quicker today than in the period before computers".

"So while computers may be having some impact on the Australian workplace, most claims about their impact are vastly overstated," Borland concludes.

Next, Borland shines his statistical spotlight on all the claims about work becoming more insecure or "precarious".

You don't have a proper, full-time permanent job. You get a bit of work here and a bit there. If you do have a job, it never lasts long.

The Australian Bureau of Statistics has long published figures for job "tenure" – how long people have been with their current employer.

If all the talk of growing instability was a genuine trend – as opposed to the experience of a relatively small number of individuals – you ought to be able to see it in the job tenure figures.

But you can't. The reverse, in fact. Borland finds that, from the early 1980s to the present, the proportion of workers who've been in their job for 10 years or more has been steadily increasing. This is greatest for women, for whom it's gone from 12 per cent to 25 per cent.

At the same time, the proportion of all workers in their job for less than a year has been decreasing.

Next, how insecure do workers feel? When the bureau asks employees whether they expect to be with their present employer for the next 12 months, the proportion of men who don't has been steady at about 9 per cent between May 2001 and May this year.

Over the same period, the proportion for women has fallen steadily from 11 per cent to 9.5 per cent.

From all the talk, you'd expect the proportion of employees working for labour hire companies and temporary agencies to be rising strongly.

It ain't. Actually, between 2001 and 2015 it's fallen from a tiny 3.1 per cent to a tinier 2.2 per cent.

And though it's true the proportion of jobs that are part-time is continuing to rise, over the 10 years to 2016 it rose at the slowest rate for any decade since the mid-1960s.

Of course, none of this is to deny that wages growth in Australia has been surprisingly weak for several years, as it has been in other developed economies.

But in our guessing game about what might be causing that weakness, let's not get too fanciful.

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REBUILDING TRUST IN ORGANISATIONS

Talk to Relationships seminar, Sydney, Thursday, August 3, 2017

There’s little reason to doubt the assessment of the Edelman report and other sources that trust in organisations is diminishing in Australia, as it is many other developed economies. My job is to offer specific examples of that decline in trust and the problems it’s causing. Unfortunately, that’s all too easy.

What do we mean by trust in organisations? Edelman defines it very simply: trust to do what is right. What organisations are we thinking of? Most of those you could name. Edelman finds that, across many countries, trust is least in government – which I taken to refer mainly to elected politicians and less so to government departments and agencies. Trust in the news media is only a fraction greater. It’s quite a bit higher for business, though falling and still far from what it ought to be. Edelman’s country-wide assessment is that business is “on the brink” of distrust, but I fear that, here in Australia, it’s already over the brink. Not surprisingly, non-government organisations are the least distrusted in Edelman’s survey, but even these outfits aren’t as trusted as they were, and as they should be.

Why might so many of the different categories of organisation now be less trusted to “do what is right”? Because they’ve yielded to the ever-present temptation to put the interests of the organisation ahead of the interests of the citizens and customers and clients it professes to serve. Too often, the reputations of institutions have suffered mightily when finally it’s been revealed that those institutions put the preservation of their public reputations ahead of their duty by attempting to cover up, rather than acknowledge and correct, egregious instances of bad conduct.

But to get down to cases, let’s start with government. The public reputation of politicians has suffered from many categories of bad behaviour – the decades of election promises lightly made and just as lightly broken; the resort to spin doctoring and careful crafting of statements which, though true in some narrow, technical sense, are calculated to mislead; the way, during election campaigns, politicians on both side professor to be able to solve our problems and shower us with goodies, only to reveal a much harsher reality after the votes have been countered. These days politicians seem much more anxious than they used to be to tell us what’s wrong with their opponents’ policies than to explain the benefits of their own policies. But most voters are unimpressed by the claims and counterclaims, usually falling to the easy conclusion that both sides are lying. Politicians complain – no doubt correctly – that the public has “stopped listening” to the prime minister or the government. The public is turning away from the established parties (even including the Greens) with John Daley, of the Grattan Institute, calculating that 26 per cent of first preference votes in the Senate in last year’s election went to minor parties, up from 11 per cent in 2004.

Trust in government departments was diminished by the “robo debt debacle” in which vulnerable social welfare recipients were caused great distress by being sent demands for repayment generated by a deficient computer program, without adequate review of their accuracy. This seems to have occurred at the insistence of ministers, but Centrelink officials did their institution great reputational damage by their obfuscation and attempt to claim there was no great problem. Similarly, the Tax Office has significant problems with its both telephone system and its online system for many months, the severity of which it has been most reluctant to admit.

Much of the loss of trust in our institutions has occurred as a result of the enthusiasm and detail with which the news media have informed us of their various failings. But, with the notable exception of the ABC, this has done nothing to stop a decline of trust in the media itself. As a journo, I think I know exactly why this has occurred. It’s because, in our enthusiasm to bring our readers the most frightening news possible, we’ve been willing to convey to our readers sensational claims we don’t actually believe, but make no attempt to discredit for fear of spoiling a good story. Eventually, however, readers learn that the news we bring them isn’t necessarily to be believed. Our readers’ trust is lost.

No part of business has suffered greater loss of trust than our banks. Today the loss of reputation has been so great that there’s wide support for a royal commission into their conduct. But the damage began soon after the banks’ deregulation in the mid-1980s, when they began trying to win market share by offering new deposit and borrowing customers better deals than they were offering their existing customers, while failing to alert their customers to the better deals now on offer. When eventually customers realised their bank had been taking advantage of them, they were angry. Loss of trust is often the consequence of the failure to reciprocate loyalty.

In the years since the global financial crisis, however, the list of highly publicised instances of the banks’ negligent investment advice has multiplied. The most recent case is of a bank insurance arm finding excuses to reject legitimate claims under life insurance policies. The banks have often been reluctant to acknowledge these failures, or have portrayed them as a few rotten apples rather than systemic failure – often arising, I suspect, from misdirected performance indicators and monetary incentive schemes.

Turning to business in general, I imagine many of us have been shocked by media revelations of the extent of illegal underpayment of workers – sometimes by public companies claiming to have no control over the behaviour of franchisees. Another instance of lost trust is most people’s refusal to believe assurances from politicians and business lobby groups that workers would be the ultimate beneficiaries of a cut in the rate of company tax. And why are big businesses so desperate for a tax cut when so many of them already seem so successful at minimising how much tax they pay? Chief executives who demand restraint from their employees while subjecting their own remuneration to a quite different standard should not be surprised if they’re not trusted.

Finally, when we turn to the loss of trust in non-government organisations, it’s hard to ignore the damage various churches and other religious organisations – including the one I grew up in - have suffered from the shocking revelations of the Royal Commission into Institutional Responses to Child Sexual Abuse. As for the union movement – which has had its share of scandals in recent years – the loss of trust in employers has led to no surge in union membership.

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