Summit consensus: everyone wins some, loses some

In the consensus spirit of dear departed Bob Hawke, Anthony Albanese is hoping it will be all sweetness and light at this week’s jobs and skills summit. And, to give them their due, the industrial parties have been doing their best, looking to realise John Howard’s maxim: “the things that unite us are greater than the things that divide us”.

The ACTU has issued a joint statement with the peak small business organisation expressing their agreement to “come together to explore ways to simplify and reduce complexity within the industrial relations system”.

The ACTU has also issued a joint statement with the Business Council – representing the nation’s biggest companies – and the two biggest employer groups. They all agree that federal and state governments should try harder and spend a lot more money fixing the almighty mess they’ve made of what they call “vocational education and training” but is actually what’s left of TAFE.

And the ACTU and the Business Council have issued a joint statement with the peak community welfare organisation, the Australian Council of Social Service, agreeing that the guiding framework of the summit should be “achieving and sustaining full employment”.

The Hawke government’s consensus summit succeeded because it sought a comprehensive, grand bargain in which each side gained something it wanted, while giving up things the others wanted.

Of course, no one knew more about hammering out a deal between warring parties than Hawke. I hope Albanese can rise to the occasion because, underneath all the smiling goodwill, the parties’ objectives in attending the summit seem diametrically opposed.

The main thing the unions want is a return to industry-wide, or at least multi-employer, wage bargaining because, under enterprise-level bargaining, they’ve lacked the industrial muscle to achieve decent pay rises. In contrast, the Business Council is desperate for a surge in migration to fill the present record number of job vacancies. Why? So big business doesn’t have to pay higher wages to attract the workers they need.

The council agrees that enterprise bargaining is broken, but what it means is that its members are finding it too hard to use the bargaining system to get their workers to agree to changes in the work they do in return for a pay rise.

Almost to a person, the nation’s economists are strong supporters of high levels of immigration. But the Economic Society of Australia’s recent survey of 50 top economists suggests their support has become more qualified.

Asked which of the policies likely to be discussed at the summit they considered to be of most benefit to Australians, only about a third picked “migration”, whereas almost two-thirds picked “education and skills”.

Independent economist Saul Eslake said he was “absolutely not an advocate of reducing our immigration intake” but he “didn’t think we should revert to being as reliant on it as a substitute for doing a better job of equipping those who are already here with the skills which will be required to obtain secure employment and decent wages in the years ahead”.

“Australia’s education system – at all levels – is increasingly failing to equip Australians with the skills required for the jobs of both today and the future,” he said. “As a result of the shortcomings in our education and training systems, we have become increasingly reliant on immigration to deliver skilled workers.”

Well, that’s one way to look at it. I think businesses have tolerated governments’ dismantling of higher education because, as part of their mania for lowering labour costs, they’ve found it easier and cheaper to import the already-trained labour they need.

Professor Sue Richardson, of Flinders University, said she thought that “judicious migration is very beneficial to the economic and social life of Australia”.

But we’ve “relied much too heavily on migration as a solution to any labour supply problem”. This “enables employers and our skills-development system to avoid a close examination of why we do not generate the skills that we need, and what needs to be done to ensure that we do”.

It seems the government is working towards increasing our immigration targets to please business and ease labour shortages, but in return for greater business support for technical training. And for higher wage rates for skilled workers on temporary visas, to limit the scope for undercutting the wages of local workers.

But Eslake suspects immigration may not return to pre-pandemic levels, at least not as quickly as widely assumed. I do too.

As for the wage-fixing arrangements, I think that’s what the ACTU will take away from the summit. Something has to be done to reduce the power imbalance between employers and employees, if the economy is to thrive.

It turns out enterprise bargaining suits big business, but not small business. The unions and the small business peak body have already agreed to explore a move to multi-employer bargaining.

With industry bargaining, firms don’t have to worry about agreeing to higher wages than their competitors are paying. You’d think that, in time, the nation’s big businesses would also see this advantage.

Read more >>

Jobs summit: shut up those playing the productivity three-card trick

Anthony Albanese and his ministers are keen to ensure this week’s jobs and skills summit doesn’t degenerate into the talk fest the opposition is predicting it will be. Well, one way to avoid much hot air is to shut up people playing the usual three-card trick on productivity.

The truth is there’s a lot of muddled and dishonest talk about the relationship between wages and productivity. Much of this comes from the employer lobby groups, which will spout any pseudo-economic nonsense that suits their goal of keeping wage growth as low as possible.

But they get too much comfort from econocrats who think that if you know what economics 101 teaches about how demand and supply interact, you know all you need to know about how all markets work, including the labour market.

As former top econocrat Dr Michael Keating, an economist specialising in the labour market, has explained, “the authorities’ model, which assumes perfect competition, constant returns to scale and neutral technological progress, implies that real wages can be expected to grow at the same rate as [labour] productivity, neither more nor less, making it look as if the collapse in productivity growth explains the collapse in wages growth”.

So when workers complain about the lack of growth in real wages, the employers’ professional apologists reply that real wages haven’t grown because the productivity of labour hasn’t improved. If only the unions would co-operate in efforts to improve productivity, wages would grow, as sure as night follows day.

But the supposed magical mechanism by which productivity improvement flows inexorably to real wages is refuted by the summary statistics quoted in Treasury’s issues paper for the summit. We’re told that, though productivity improvement has slowed, we’ve still achieved growth averaging 1 per cent a year since 2004.

But we’re also told that “real wages have grown by only 0.1 per cent a year over the past decade, and have declined substantially over the past year”. Not much automatic flow-through there.

Which brings us to another thing that’s being fudged in the present debate. You sometimes hear spruikers for the employers implying you need productivity improvement to justify even a rise in nominal wages.

But productivity is a “real” – after-inflation – concept. For the benefit from national productivity improvement to be shared fairly between capital and labour – employers and employees – it has to increase wages over and above inflation.

Here, however, is where we strike another difficulty. There used to be tripartite consensus – business, workers and government – that wages should always keep up with prices. Cuts in real wages were needed only to correct a period where real wage growth had been excessive – that is, exceeding productivity improvement.

Right now, however, the opposite is the case. Real wages were long falling short of what productivity improvement we were achieving before the present surge in prices left wage rates far behind. Even with the labour market so tight, workers simply haven’t had the industrial muscle to achieve wage rises commensurate with the leap in prices.

And now, while businesses show little restraint in passing their higher imported input costs through to higher retail prices, while adding a bit for luck, the great and good – read business and the econocrats – have agreed that the quickest and easiest way to get inflation down is for the nation’s households to pay the price.

A big fall in real wages squares the circle. Business has passed on its costs – and then some – and the economic managers have redeemed their reputations and got the inflation rate falling back. What’s not to like?

Well, we’ve solved the problem by allowing a big cut in real household income. It’s likely businesses will feel adverse effects as households see no choice but to tighten their belts. And I imagine some workers, consumers and voters will be pretty upset, concluding that the economy certainly isn’t being run for their benefit.

In effect, Treasury’s issues paper says forget the present disaster and look to the future. We can get real wages growing again – an election promise - as soon as we get productivity up.

Well, no we can’t. The paper’s claiming that, contrary to the experience of the past decade, improved productivity automatically flows through to real wages. And even if that were true, it assumes workers are innumerate, and won’t know that future real gains in wages must first make up for previous real losses. It’s the productivity three-card trick.

Meanwhile, business and the econocrats’ self-serving expedience, in deciding that the punters should pay for a problem they did nothing to cause, has created the climate for radical reform of the wage-fixing system: a return to industry bargaining.

Read more >>

Look up, we're on the verge of employment greatness

“Visionary” and “inspirational” aren’t words normally used about economists, but they certainly apply to Professor Ross Garnaut, of the University of Melbourne, and to his Thursday dinner speech to the jobs and skills summit. His message to Anthony Albanese is that he’s taken the helm at the worst of times. But, if he can rise to the challenge, he can lead us to the best of times.

Garnaut’s message is in two parts. First, we must stop kidding ourselves about the state of the economy and the budget. Second, we can make the seemingly impossible changes needed to gain all the material and social advantages of economic success.

First, we are kidding ourselves about how well our economy has been performing. It’s true our economy bounced back more quickly from the COVID-19 pandemic recession than did most developed economies - because our stimulus from the budget was bigger and faster.

Since then, however, Garnaut says, “we have looked ordinary in a troubled developed world”.

“We can’t turn the economy back to before the pandemic,” he says. “Even if we could, pre-pandemic conditions aren’t good enough. That’s high unemployment and underemployment and stagnant living standards.”

Recently, our problems have been compounded by the invasion of Ukraine and its disruption of global energy markets. But, unlike the Europeans and most other rich countries, Australian energy companies benefit when gas and coal prices rise.

“We are kidding ourselves if we think no deep wounds will be left in our polity from high coal and gas – and therefore electricity - prices bringing record profits for companies, and substantially lower living standards to most Australians,” he warns.

And “we have to stop kidding ourselves about the budget”. We need unquestionably strong public finances to have low cost of capital, private and public, for our transformation from fossil-fuel loser to Superpower exporter of clean energy and minerals, and to shield us from a disturbed international economy and geo-polity.

We’ve emerged from the pandemic with eye-watering public debt and large budget deficits, when high commodity prices should be driving budget surpluses.

“We talk about [the need for] much higher defence expenditure, but not about higher taxes to pay for it.

“We say we are underproviding for care and underpaying nurses, and underproviding for education and failing to adequately reward our teachers.”

The latest Intergenerational Report tells us that the ratio of over-65s to people of working age will rise by half over the next four decades, bringing higher costs and fewer workers to carry them, he says.

But, “in the face of these immense budget challenges, total federal and state taxation revenue as a share of gross domestic product is 5.7 percentage points lower than the developed-country average”.

Get it? Yet another economics professor telling us taxes must go up – not down.

The budget update issued at the start of this year’s election campaign predicted real wages would decline by 3 per cent over the two years to next June. Treasurer Jim Chalmers’ update three months later increased the decline to 7 per cent.

So, says Garnaut, “the facts have changed, and we should be ready to change our minds”. When we stop kidding ourselves, we’ll recognise the need for policies we now think impossible. That’s Garnaut’s second, more inspiring point.

“Australians accepted change that had been impossible on two earlier occasions when we faced deep problems, and responded with policy reforms that set us up for long periods of prosperity, national confidence and achievement.”

The most recent was the reform era starting in 1983. The first was postwar reconstruction of the economy in the 1940s, which was followed by a quarter of a century of full employment and rising incomes.

Back then, the Curtin and Chifley governments were determined Australians would not return to the high unemployment and economic insecurity of the interwar years.

“The 1945 white paper on full employment was premised on the radical idea that governments should accept responsibility for stimulating spending on goods and services to the extent necessary to sustain full employment ...

“This would achieve the highest possible standards of living for ordinary Australians.”

The Menzies Liberal government’s political success – it stayed in power for 23 years – “was built on full employment, helped by Menzies insulating policy from the influence of political donations to an extent that is shocking today”.

Garnaut says he grew up in a Menzies world of full employment. (So did I, as it happens.)

The authors of the white paper wondered how low the rate of unemployment could fall before it caused high or accelerating inflation. They were surprised to find it fell to below 2 per cent, and stayed there for two decades without a problem.

It’s tempting to think that, with all the problems of controlling inflation and decarbonising the economy, this brush with our glorious past will soon disappear, and we’ll be back to the 5 to 6 per cent unemployment we’ve learnt to think is the best we can do.

But Garnaut’s inspiring vision is that, with the right, seemingly impossible policy changes, we can complete the return to a fully employed economy and stay there, reaping its many material and social benefits.

In the world he and I grew up in, “workers could leave jobs that didn’t suit them and quickly find others – often moving from lower- to higher-productivity firms. Employers put large efforts into training and retraining workers.

“Labour income was secure and could support a loan to buy a house. Businesses that could not afford rising wages closed and released their workers into more productive employment.”

Steadily rising real wages encouraged firms to economise in their use of labour, which lifted productivity.

Sounds worth striving for, to me.

Read more >>

If only Labor's wage changes were as bad as the bosses claim

Have you ever wondered why capitalism has survived for several centuries in the advanced economies? How a relative handful of rich families and company executives have been getting richer and more powerful for so long in countries where everyone gets a vote and could, if they chose, insist on something different?

It’s because the capitalists, counselled and coerced by politicians anxious to keep the peace, have made sure that the plebs, punters and ordinary working families have been given enough of the spoils to keep them reasonably content.

I remind you of this because, for 30 or 40 years in America, and now about a decade in Australia, the capitalist system – economists prefer calling it the market system – hasn’t been giving ordinary workers enough to keep them getting better off, while the few people at the top of the tree have been doing better, year after year.

If you wonder why so many Americans voted for a man like Donald Trump, and now delude themselves that he didn’t lose the last election, why the Yanks seem to be rapidly dismantling their democracy, a big part of their discontent is their loss of faith that the economic system is giving them a fair shake.

Fortunately, it’s nothing like that bad in Australia. Not yet, anyway. What’s true is that the average standard of living in Australia today is no better than it was a decade ago – something that hasn’t happened before in the more than 75 years since World War II.

Over the eight years before the pandemic, wages rose barely faster than inflation. We’ve had wage stagnation, now made a lot worse by the supply-chain disruptions of the pandemic, soaring electricity and gas prices caused by Russia’s war, and by the way floods keep wiping out our fruit and vegetable crops.

When Labor went to this year’s federal election promising to “get wages moving”, I think it struck a chord with many voters.

After we ended centralised wage-fixing by the Industrial Relations Commission in the early 1990s, we moved to collective bargaining at the level of the individual enterprise. Workers’ right to strike was hedged about with many requirements and limits.

At the beginning, more than 40 per cent of workers were covered by enterprise agreements. By now, however, some academic experts calculate that the proportion of workers covered by active agreements is down to about 15 per cent.

At the jobs and skills summit in September, all sides agreed that the enterprise bargaining system had broken down. Last week the government introduced its answer to wage stagnation, the Secure Jobs, Better Pay bill.

It would make a host of changes, many of which strengthen existing provisions of the Fair Work Act, and most of which the industrial parties agree would be improvements. It makes job security and gender pay equity explicit goals of the act, prohibits sexual harassment and requirements that workers keep their pay secret, and strengthens the right of workers with family responsibilities to request flexible working hours. More debatably, it abolishes the Australian Building and Construction Commission.

To repair enterprise bargaining, it clarifies the BOOT – better off overall test – requiring that agreements leave no worker worse off. This was the Business Council’s greatest complaint against enterprise agreements.

One reason such agreements now cover so few workers is that they’re expensive and complex for small and middle-size employers to organise. Hence, the proposal to widen the existing provision for “multi-employer bargaining”: workers in similar enterprises allowed to bargain collectively with a number of employers.

This would widen access to enterprise bargaining. It’s aimed particularly at strengthening the bargaining position of women in low-paid jobs in the aged care, childcare and disability care sector.

Ambit claims and exaggerated rhetoric are standard fare in industrial relations, but the cries of fear and outrage coming from the various employer groups are over the top.

It would “create more complexity, more strikes and higher unemployment,” said one. It was “so fatally flawed” it would “emasculate enterprise bargaining”, according to another outfit. It was “seismic” in its impact, claimed a third.

Methinks they doth … I’d be amazed if they actually believe that stuff. They’re probably still adjusting to the shock of having the unions back in the government tent. They know they won’t be able to stop the bill being passed, so they want at least to be seen opposing it with all their voice.

What changing the law won’t change is that the proportion of workers in a union has fallen from 50 per cent to 14 per cent. The small and middle-size businesses we’re talking about have even fewer union members than that.

No union members, no strike. No strike, no big pay rise. In any case, really powerful unions get big pay rises without needing to strike.

This is an attempt to make bargaining provisions that didn’t work last time, work this time. I doubt if these modest changes will do much to “get wages moving” again. More’s the pity. If I’m right, Australia’s capitalism will remain broken.

Read more >>

Helping the disadvantaged find jobs is now the Hunger Games

Some injustices get huge publicity, others get little attention from the media because they’re not expected to arouse much sympathy from a hard-hearted public. But I was raised in a strange religious sect whose mission was to care for the down and out.

At a time when the official unemployment rate is down to 3.4 per cent, job vacancies are at a record high and employers are crying out for more immigrant labour, there are still about a million people on unemployment benefits – JobSeeker, to use its latest euphemism – of whom three-quarters have been on benefits for more than a year.

How could this be? Well, one explanation is that the world is full of people who, unlike you and me, prefer not to work for their living. While we’re slaving away at the daily grind, they’re at the beach surfing, or sitting at home with their feet up watching daytime television, living the life of Riley on $46 a day.

Actually, it’s just going up to $48 a day. Think of it. Almost $50 a day for doing precisely nothing. While you and I are struggling with the soaring cost of living, these people don’t have a worry. There are jobs going begging, but they aren’t interested. If only we were as bone idle as them, we too could live life free of care.

That’s one explanation – one many people believe, or want to believe. The world is full of people who prefer taking it easy, so they must be forced back to work by keeping the dole low and penalising them if they don’t even bother to apply for jobs.

An alternative explanation was offered in a little-noticed speech to the jobs summit by Dr Peter Davidson, an adviser to the peak welfare body, the Australian Council of Social Service, and in a recent report by Anglicare.

The alternative explanation is that most of those who stay unemployed for long periods face serious impediments to getting a job. They have health or family problems that make it hard for them to search for a job, or limit the times when they’re available to work.

Or they’re not particularly attractive to employers. They have limited education, skills or experience, they’re too young or too old, or they don’t live where the jobs are.

And here’s the worst of it: they’ve been without a job for so long because they’ve been without a job for so long. It’s a catch-22. The longer it’s taking you to find a job, the less willing an employer is to offer you one.

The good news is that, now we’re so close to full employment – now employers can’t be so choosy – we’ve started making inroads into the backlog of long-term unemployed. But it will take a long time to shift, especially if the businesses that taxpayers pay to help them find jobs find it more profitable to waste their time and trip them up.

We all have our own mental picture of who’s unemployed. Match your picture against what Davidson told the summit: of all the people on unemployment benefits, 57 per cent are 45 or older, 40 per cent have a disability, 20 per cent have what he calls “culturally and linguistically diverse backgrounds”, 13 per cent are First Nations people and 12 per cent are sole parents, mainly women.

One reason there are a lot more long-term unemployed than there were in the old days is the decision that benefit recipients of working age – including widows, many sole parents and the less-than-fully disabled – should be on (the much lower and more tightly regulated) unemployment benefit.

At the time, those transferred to a lower benefit were to be given special help with training and job-finding. But after the Howard government abolished the Commonwealth Employment Service, and the provision of “employment services” was contracted out to charities and, increasingly, for-profit providers, their role became more about policing and punishing.

Davidson says the new Workforce Australia scheme – which is little better than the Jobactive scheme it’s replacing – is “more of an unemployment-payment compliance system than an employment service”.

It sends people out into the labour market and, when they don’t find jobs, tells them to search harder. People are told “it’s not our role to find you a job”.

It locks people into an endless cycle of make-busy activities like Work for the Dole and poor-quality training courses. It reaches less than 10 per cent of employers, and offers them little assistance.

This is confirmed by detailed research by Anglicare Australia. Director Kasy Chambers says they found that “private providers are being paid millions of dollars to punish and breach people”.

“Work for the Dole and Jobactive have repeatedly been shown to fail ... yet the people we spoke to also told us that they want to do activities that matter, and that lead them into work.”

Last word to Davidson: “This is supposed to be an employment services system, not the Hunger Games.”

Read more >>

Breaking news: unions play a central role, for good and ill

Welcome back to a tripartite world, where Labor has returned to power and its union mates are back inside the tent – and at last week’s jobs summit could be seen moving in their furniture. For those who don’t remember the 1983 glory days of Bob Hawke, Paul Keating, consensus, the Accord, and former ACTU secretary Bill Kelty as an honorary member of the cabinet, it will take some getting used to.

For those who’ve been watching only since the John Howard era, it may even seem unnatural. One of Howard’s first acts upon succeeding Hawke and Keating in 1996 was to delegitimise the unions.

He allowed the tripartite committees to lapse, and didn’t reappoint the ACTU secretary to the board of the Reserve Bank. I doubt if many even informal links between ministers and union leaders continued.

The Libs didn’t know the union bosses, and didn’t want to know ’em. They were the enemy – always had been, always would be. Big business bosses, on the other hand, would be privately consulted and were always welcome to phone up for a quiet word with the minister.

This, by the way, helps explain the Reserve Bank’s pro-business bias. Its board is loaded with business worthies - who are there to help keep the central bankers’ feet on the ground – and its extensive program of regular and formal “liaison” with key firms and industries, doesn’t include asking union leaders what they think’s happening.

If you wonder why Reserve governor Dr Philip Lowe’s remarks about wages can sometimes seem naive – even out of “boomer fantasy land” – it’s because he only ever hears the bosses’ side of the story. And I doubt if they ever shock his neoclassical socks by talking about how they exercise their market power.

It’s easy to justify the Liberals’ delegitimation of the unions by noting that, these days, only about 14 per cent of employees belong to a union. But if you find that argument persuasive, you’re revealing your ignorance of our wage-fixing institutions.

Most workers are subject to an industrial award, and there’s a union (and an employer or employer group) on one end of every award, and almost every enterprise agreement. In the Fair Work Commission’s annual wage review – which sets the wages of about a quarter of all employees – it’s the ACTU that stands against the employer groups arguing that times are tough, and they couldn’t possibly afford a rise of anything much.

So, to say the unions have what economists would call a giant “free-rider” problem – a lot of people happy to receive benefits without paying for them – is not to say they shouldn’t be given a seat at the table.

Liberals, business and their media cheer squad may be appalled by sanctification of the unions, but at least Labor’s making it clear it wants business to keep its seat at the table. It will be consulted. This too is Labor’s inheritance from the Hawke-Keating experience: to the extent possible, keep business on side.

The ACT’s second-biggest industry – lobbying – will be busier than ever. It’s third-biggest – consulting – not so much.

What all agreed at the summit is that Labor has taken over an economy with many structural problems that need fixing. Not the least of these is that the wage-bargaining system is broken.

What we learnt last week, from everything ministers said and from the 14-page “outcomes document” is that, in marked contrast to its predecessor, Labor does intend to fix things.

The whole summit, tripartite business is about giving all the key players a say in how things are fixed, giving them a heads-up on the government’s intentions, and an introduction to the minister. About winning support – or, at least, acquiescence – from as many of the powerful players as possible, to minimise the political risks of making changes.

Under Labor’s tripartism, the three parties aren’t equal. The government will, in the end, do what it decides to do. The unions start well ahead of business, because of their special relationship with a Labor government.

They have a further advantage over business: solidarity. The many unions are used to speaking with one, unified voice through the ACTU, whereas business fractures into big versus small, and rival employer groups. The unions know all about playing one business group off against another.

What business has to decide is whether it wants to stay in the government’s tent or walk out. Because, in business, pragmatism usually trumps idealism, my guess is that business will play ball for as long as Labor looks like staying in office.

After the summit ended, the ACTU’s statement said it had always “been clear that we need to get wages moving and increase skills and training for local workers in order for unions to support lifting skilled migration levels. We welcome that this summit has delivered those commitments.”

It was all a talk fest? No, a deal was done and that quote reveals just what the deal was. However, a big part of the business side didn’t support fixing the wage-bargaining system by returning to “multi-employer” bargaining.

What’s clear is that the government will be pressing on with some form of multi-employer bargaining. What isn’t yet clear is what that form will be. Until it’s finalised, business will be busy inside the tent pushing for whatever modifications it can get.

With Labor back in power and the unions back walking the halls of power, it’s important to understand the relationship between the two arms of the “labour movement”. Whereas the relationship between the Libs and business is quite informal, the relationship between Labor and the unions is highly formal. They’re not mates, they’re close rellos.

Historically, the unions set up the Labor Party to be their political arm. To this day, those unions that pay dues to the Labor Party still wield considerable influence over it and the members of the federal parliamentary caucus.

Labor parliamentarians are affiliated with particular unions, which gives some of the bigger unions considerable influence over preselections, on who gets to stay leader of the party, and on certain policy matters.

When Labor is in government, businesses in certain industries use their unions to get to the government. This explains why Labor governments haven’t done as much as they should to tighten up our competition law.

And whereas Howard left the Libs with a visceral hatred of industry super funds, Labor’s links with the unions – and the unions’ links with the ticket-clippers of the super industry – mean it can’t always be trusted to favour the interests of super members over super managers.

Read more >>

Don't expect great productivity if we give business an easy ride

An unwritten rule in the economic debate is that you can say whatever you like about the failures of governments – Labor or Liberal; federal or state – but you must never, ever criticise the performance of business. Maybe that’s one reason we’re getting so little productivity improvement these days.

One reason it’s unwise to criticise big business is that it’s got a lot of power and money. It can well defend itself but, in any case, but there’s never any shortage of experts happy to fly to its defence, in hope of a reward.

But the other reason is the pro-business bias built into the standard demand-and-supply, “neoclassical” model burnt into the brains of economists. It rests on the assumption that market economies are self-correcting – “equilibrating” - and so work best when you follow the maxim “laissez-faire” – leave things alone.

So if markets don’t seem to be going well, the likeliest explanation is that intervention by governments has stuffed them up. Business people always respond rationally to the incentives that governments create, so if what business is doing isn’t helpful, it must be the government’s fault.

In theory, economists know about the possibility of “market failure”, but many believe that, in practice, such failures are rare, or of little consequence.

All this explains why almost all discussion of our poor productivity performance assumes it must be something the government’s doing wrong, which needs “reforming”. You’ll see this mentality on display at next week’s jobs and skills summit.

Which is surprising when you remember that, for the most part, productivity improvement – producing more outputs of goods and services from the same or fewer inputs of raw materials, labour and physical capital – occurs inside the premises of businesses, big or small.

Fortunately, one person who understands this is the new assistant treasurer, Dr Andrew Leigh, a former economics professor, who this week used the Fred Gruen lecture at the Australian National University to outline recent Treasury research on the “dynamism” of Australian businesses – how good they are at improving their performance over time.

The news is not encouraging. One indicator of dynamism is job mobility. When workers switch from low-productivity to high-productivity firms, they earn a higher wage and make the economy more efficient.

The proportion of workers who started a new job in the past quarter fell from 8.7 per cent in the early 2000s to 7.3 per cent in the decade to the end of 2019.

Another indicator of dynamism is the “start-up rate” – the number of new companies being set up each year. It’s gone from 13 per cent in 2006 to 11 per cent in 2019.

Over the same period, the number of old companies closing fell from 10 per cent to 8 per cent. So our firms are living longer and getting older.

The neoclassical model assumes a high degree of competition between firms. It’s the pressure from competition that encourages firms to improve the quality of their products and offer an attractive price. It spurs firms to develop new products.

Competition encourages firms to think of new ways to produce their products, run their businesses and use their staff more effectively, Leigh says.

“In competitive industries, companies are forced to ask themselves what they need to do to win market share from their rivals. That might lead to more research and development, the importation of good ideas from overseas, or adopting clever approaches from other industries.

“Customers benefit from this, but so too does the whole economy. Competition creates the incentive for companies to boost productivity,” he says.

As Leigh notes, the opposite to competition, monopoly, is far less attractive. “Monopolists tend to charge higher prices and offer worse products and services. They might opt to cut back on research, preferring to invest in ‘moats’ to keep the competition out.

“If they have plenty of cash on hand, they might figure that, if a rival does emerge, they can simply buy them out and maintain their market dominance. Monopoly [economic] rents lead to higher profits – and higher prices.”

Taken literally, “monopoly” means just one seller, but economists use the word more broadly to refer to just a few big firms - “duopoly” or, more commonly, “oligopoly”.

One indicator of the degree of “market power” – aka pricing power – is how much of a market is controlled by a few big firms. At the start of this century, the market share of the largest four firms in an industry averaged 41 per cent. By 2018-19, it had risen to 43 per cent. So across the economy, from baby food to beer, the top four firms hold a high and growing share of the market.

And the problem’s even greater when you remember that the rival firms often have large shareholders in common. For instance, the largest shareholders of the Commonwealth Bank are Vanguard and Blackrock, which are also the largest shareholders of the three other big banks.

But the strongest sign of lack of competition is the size of a company’s “mark-up” – the price it charges for its product, relative to its marginal cost of production. In the textbook, these mark-ups are wafer thin.

Treasury estimates that the average mark-up increased by about 6 per cent over the 13 years to 2016-17. This fits with the trend in other rich economies. And the increase in mark-ups has occurred across entire industries, not just the market leaders.

It seems that rising market power has reduced the rate at which labour flows to its most productive use, which in turn has lowered the rate of growth in the productivity of labour by 0.1 percentage points a year, according to Leigh’s rough calculations.

If so, this would explain about a fifth of the slowdown in productivity improvement since 2012. Lax regulation of mergers and takeovers has allowed too many of our big businesses to get fat and lazy, even while raising their prices and profits. But don’t tell anyone I said so.

Read more >>

Why labour shortages can be good for you - and the economy

In Professor Ross Garnaut’s much-praised speech to last week’s jobs summit, he told a story about politicians desperately seeking workers. At about the time Anthony Albanese was in Fiji talking about recruiting nurses, the West Australian premier was in Ireland, also trying to recruit nurses.

He sought a meeting with the Irish minister for health, but without success. Why? Because the Irish minister was in Perth trying to recruit nurses.

Garnaut’s point was that, when a country underpays its nurses, it’s open to having them pinched by another, better-paying country.

But I drew a different conclusion. It’s all very well for the nation’s employers to go to Canberra complaining about the desperate labour shortage and demanding that the government lift its target for how many visas for permanent immigrants it will issue this year.

Albanese was persuaded to raise the target from 160,000 to 195,000. But when we’re short of skilled labour at the same time many other rich countries are also short, raising the target and achieving the target are two different things.

My guess is that we’ll be hearing complaints about labour shortages for years to come. And I’m not sure that will be a bad thing. Give me a choice between a jobs market that’s “tight” – as it is now – and one that’s “loose”, with high unemployment, and I know which I’d prefer.

Journalists are trained to be sceptical of claims people make. And when economists hear people complaining that they can’t get enough workers, or that there’ll be shortage of X thousand teachers/doctors/chicken sexers by the year Y, they’re more questioning than sympathetic.

For a start, some part of the worker shortages we keep hearing about is caused by people off work because of COVID. This, surely, must be a problem that will ease in coming months. For another thing, while shortages of skilled workers get the most publicity, many of the shortages are actually for relatively unskilled work as a waiter or behind a counter.

When economists hear businesspeople complaining they “can’t get the staff”, their first question is: have you tried offering a higher wage? What employers never say is “with the low wage and bad conditions I’m offering, I can’t get any takers”. Think fruit-picking.

When you hear of bosses so desperate that they’re giving their existing workers a “loyalty bonus” or offering new workers a “sign-on bonus”, remember this: paying any kind of once-off bonus is a way of avoiding granting a proper pay rise.

This means they’re not yet at desperation point. Sometimes I wonder if businesses are delaying improving pay and conditions while they increase pressure on the government to solve their problem the easier and cheaper way, by hastening the post-pandemic inflow of skilled workers on temporary visas, plus backpackers and overseas students.

But though employers have used high levels of immigration to keep wages low and reduce the need for educating and training our own young people, I doubt they’ll be able to return to that lazy, second-rate world.

Garnaut says immigration is much more likely to raise, rather than lower, average real wages if it’s focused on the permanent migration of people with genuinely scarce and valuable skills that are bottlenecks to valuable Australian production, and which cannot be provided by training Australians.

The other much-praised speech at the jobs summit came from the boss of the Grattan Institute, our top independent think tank, Danielle Wood. Garnaut and Wood had the same message: with the unemployment rate down to 3.4 per cent, we must seize this chance to return to the “full employment” Australia hasn’t enjoyed since Garnaut (and I) were growing up in the 1950s, ’60s, and early ’70s.

Wood wants achieving and maintaining full employment to be our “economic lodestar”. Already being so close to it “means that more people who want a job now have one. It means that some people otherwise at the fringes of the labour market – young people looking for their first job, people with a disability, older workers, and the long-term unemployed – are now seeing doors open in ways they haven’t in the past,” she said.

“When unemployment is low, it lowers the cost of leaving a bad job and finding a better one. This is good for productivity.

“Poor-performing businesses that survive, not on the strength of their products or services but off the back of exploiting their workers, are driven out. Investments and workers flow instead to better-run businesses.

“And when workers are harder to find, businesses have an incentive to invest in new equipment and processes, which ultimately boosts productivity and drives higher living standards,” she said.

Garnaut agrees. “Full employment is hard work for employers,” he said. “Many prefer unemployment, with easy recruitment at lower wages. Yet full employment has advantages for many employers. It brings larger and more stable demand for consumer goods and services for businesses selling in the Australian market.

“And for employers who identify as Australians, it brings enjoyment of a more cohesive and successful society.” Sounds good to me.

Read more >>

Labor's 'plan' to fix the economy has three big bits missing

If you think the jobs summit was stage-managed, you’re right. Anthony Albanese & Co got the tick for policy changes they’d always wanted to make. But the two top-drawer economists who addressed the summit – Professor Ross Garnaut and Danielle Wood, boss of the Grattan Institute – proposed three other vital matters for the government’s to-do list, which it had better get on with if it’s to manage the economy successfully.

Both wanted action on competition policy, immigration policy and fiscal (budget) policy. All of these could play an important role in making the economy less inflation-prone, achieving and retaining full employment, improving our productivity and ensuring workers get their fair share of the proceeds.

The major element in our inflation problem that no one dares to name – certainly not Reserve Bank governor Dr Philip Lowe who, in a long speech about the problem last week, didn’t find time to mention it – is the pricing power that our oligopolised economy gives our big businesses.

Much Treasury research has found that Australia’s businesses lack “dynamism”. To be blunt, they’re fat and lazy. Wood reminds us that lower levels of dynamism and innovation have been linked to a lack of competitive pressure in the economy.

“In competitive markets, excess profits should be dissipated over time as new and innovative competitors enter. But increasingly in Australia and elsewhere, we have seen the biggest and most profitable firms remain largely untroubled by new competitors,” she says.

“While being relaxed and comfortable may be profitable, it is not good for Australia’s long-term economic prospects.”

So, what should Labor do about it? “Making sure that Australia’s competition laws are fit for purpose is part of the response ... The former head of the Australian Competition and Consumer Commission, Rod Sims, has argued that the current merger laws are failing to adequately protect competition. His warnings should prompt serious thought,” Wood says.

Garnaut agrees. He says we have to think about the increasing role of “economic rents” – the ability to earn profits exceeding those needed to keep you in the business. “Productivity is reduced and the profit share of [national] income increased by monopoly and oligopoly,” he says.

The answer? “Rod Sims has drawn attention to the increasing role of oligopoly in the Australian economy, and the competition policy reforms that would reduce it.”

The point for the government to note is that, if it leaves big business’s pricing power unchecked, but restores the unions’ bargaining power, that will be a recipe for a more inflation-prone economy – and a Reserve Bank using high interest rates to keep the economy comatose.

Both Garnaut and Wood gave the highest priority to urging a lasting return to full employment and the many social and economic benefits it would bring, if the jobs market was always about as tight as it is now.

But, as Garnaut says, full employment is hard work for employers. “Many prefer unemployment, with easy recruitment at lower wages.”

Which helps explain why they’re so desperate to get the immigration flood gates reopened and flowing. They talk about shortages of skilled labour but, in truth, they’re just as keen to have less-skilled labour. High immigration is just one of the instruments from their toolbox they’ve been using to keep their labour costs low, including the cost of training workers.

But we can’t keep our gates shut forever, so what should the government do to open up without losing the benefits of full employment (including a strong incentive to train our own youngsters)?

Garnaut says immigration is much more likely to raise, rather than lower, average real wages if it is focused on permanent migration of people with genuinely scarce and valuable skills that are bottlenecks to valuable Australian production, and cannot be provided by training Australians.

Wood says we need to fix “out-dated” skilled migration rules. “Targeting higher-wage migrants directly for both temporary and permanent skilled migration would improve the productivity of the migration system and the Australian workforce,” she says.

Which brings us to the budget. Wood says that although our response to the pandemic may now seem to have stimulated demand more than is helpful, these pressures will dissipate, “especially if the federal government and the central bank work in tandem to address strong demand, and do what is possible to boost supply”.

That’s her nice way of saying that, if the government fails to get its budget deficit down, the Reserve Bank will take interest rates higher than it would have. And she’s right, it will.

The deficit needs to come down despite Labor’s expensive – but welcome – promise to greatly increase the wage rates of the mainly female workers in aged care and other parts of the care economy.

How can this circle be squared? To Garnaut, the answer’s obvious. If the government has to do more and pay more – including on defence – it will just have to tax more.

He reminds us that “in the face of these immense budget challenges, total and federal and state taxation revenue, as a share of gross domestic product, is 5.7 percentage points lower than the developed-country average.”

And when it comes to what more the government could tax, Garnaut has some ideas. Disruption from the Russian invasion of Ukraine has given our fossil fuel companies record profits from higher coal and gas prices, while substantially lowering living standards by greatly increasing electricity prices.

Garnaut says the government shouldn’t kid itself that leaving this disparity unchallenged wouldn’t leave deep wounds in the public’s faith in government.

Introducing a tax on these windfall profits would be one solution, but I suspect he wants something more substantive. He says a significant part of the increase in the profit share of national income in recent years has come from mining.

One response would be for mine workers to get much higher wages. But, he says, miners are already paid much more than workers in other industries. So, the appropriate public policy response is a mineral rent tax – that is, a tax on the mining companies’ excess profits – which would share the benefits with all of us.

Finally, Garnaut rebukes those economists who rely on fancy calculations to tell them how low the unemployment rate can get before we have a problem with inflation. He says this is not an output from an econometric model, it’s “an observed reality”. That is, you have to suck it and see.

“Economics is less amenable than physics to definitive mathematical analysis because it is about people, whose responses to similar phenomena change over time. We build models in our minds or computers that fit observed reality at one point in time, and reality changes. Then we have to think harder about what’s going on.”

Economics is about the behaviour of people! Who knew?

Read more >>