Why Fair Work’s wage decision reveals Australia’s biggest economic shortcoming

The 5.75 per cent lift in the wage rates for a fifth of the working population goes to the heart of the economic issues facing Australia.

There was always going to be a substantial increase, welcomed by the nation’s lowest paid workers. And it was always going to be bemoaned by businesses that will have to increase the pay of those workers, given the state of the jobs market, inflation and the economy.

The increase is technically the largest in 41 years (since a 7.1 per cent bump in 1982) though the proportion directly affected by the decision is vastly lower.

By some estimates, the direct cost will be almost $13 billion a year. That’s in total wage costs of more than $1.1 trillion.

In aggregate, it’s modest. But for affected employers it will be measurable, while for those getting the pay rise it actually means a likely fall in their real take-home pay.

In other words: no one is a winner, and perhaps everyone is a loser.

At the macro level, the first issue is whether it forces the hand of the Reserve Bank. By most estimates, the increase adds about 0.1 percentage points to total wages growth.

It means it is more likely wages growth this year will hit the Reserve Bank’s end of year forecast of 4 per cent.

When the RBA board meets next Tuesday, the increase and its impact on the overall economy will be discussed. On top of this week’s inflation data, it does lift the chance of another interest rate rise.

But more broadly, it goes to the underlying problem facing the economy and policymakers. That being the absolute slide in Australian productivity growth.

A 5.75 per cent increase in wages to low-paid workers will add to inflation pressures while leaving people with falling real incomes.

Gabriele Charotte

It’s not as if the issue of poor productivity – and the economic problems it causes – has been hiding away for the past decade.

Philip Lowe, in his first appearance before the House of Representatives economics committee as RBA governor in September 2016, made clear the case for productivity-enhancing reforms and their importance to the overall welfare of all Australians.

“The only way that we can go back to having anything like the previous rate of growth in our living standards is by focusing on productivity growth,” he said.

This week, during what may have been his last parliamentary appearance, Lowe said that productivity remained the issue.

“Nominal wage growth has not been a source of inflation. I want to make it clear the problem is weak productivity growth,” he said.

“Over the last three years, there has been no increase in the average output produced per hour worked in Australia. No productivity growth for three years. And that’s a problem.”

The failure to lift productivity is not just the fault of the federal parliament (though both sides of politics are responsible for a fair degree of the problem).

The nation’s businesses leaders talk a great game about lifting productivity, but fail to follow through by backing their rhetoric with investment in productivity-enhancing research.

There’s always a hand out for a tax concession or a subsidy for what should be core business for any operation.

Unions have their hands out for a pay rise without offering productivity improvements across the workplace.

And the voting public, enamoured increasingly by populists on the left and right who seek to blame rather than come up with an idea that may cause any sort of discomfort to their supporters, have shown resistance to any real change for years.

There’s a price to be paid by this failure. No increase in the minimum wage will be able to cover that cost.

( Information from politico.com was used in this report. Also if you have any problem of this article or if you need to remove this articles, please email here and we will delete this immediately. [email protected] )

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