There is a longstanding notion — that has not been easy to prove — that there is a political business cycle with booms timed to coincide with elections. Today, Bill Shorten raises the question — although not explicitly — of whether there is a political wage cycle in Australia (Click here for the news report).

Shorten accuses the Fair Pay Commission of playing to the electorate in giving a higher than expected wage rise last week.

“It’s an extra $27 you wouldn’t get unless there’s an election next year,” said Mr Shorten, as he farewelled union members before next year’s federal poll, in which he will be the Labor candidate for Maribyrnong in Melbourne’s outer west.

Unions fear the Fair Pay Commission’s surprise decision to compensate 1.2 million workers for inflation over 18 months was a “one-off” to boost the Coalition’s standing in the face of criticism about the harsh effects of the Howard Government’s new industrial laws.

Now there is clear politicking going on here. The wage rise is the sort of thing the unions would like, which, of course, makes it difficult to criticise the government. Not surprisingly, the government was pretty happy with the decision of its independent commission. This left Shorten to do the obvious thing and criticise the independence of the commission.

On the one hand, that critique sticks because there is no one from the economic left on the commission. My colleague, Ian Harper, who heads it is definitely on the right of these matters. On the other hand, what if that hadn’t been the case? If there was a commissioner from the other side of the political sense, would that person have opposed the current decision? I don’t think so.

Incidentally, had the Commission really wanted to be explicitly political it would have approved a wage rise of more than $30 per week; higher than the Union demand. In this way, the government would have been able to claim it was “more fair” than the unions. It didn’t do that, but it didn’t present itself as a target either.

So Shorten’s critique is somewhat weak this time around. It may be true but so what? More substantively, there is nothing special about this government if it is the case that wage rises are timed for elections. The incentive is there for any government. The question is whether it has occurred in the past. We have a long history of centralised wage fixation in this country. If there is a cycle, perhaps we would see it in the data? I don’t know but perhaps someone with the data might take a look.

I think a better line for Shorten would be to argue that it is all “smoke and mirrors”. The government gives with one hand and takes with the next. This is the suggestion borne out in today’s Age. Here is the summary of the NATSEM modelling:

It found those hardest hit by the compound effect of tax and a rapid withdrawal of benefits once income grows are single-income families relying on the minimum wage.

In a typical minimum wage family with one salary and two children aged eight and ten, a working dad would lose $9 in tax, while the stay-at-home mother would forfeit $13 in welfare benefits. That would leave them with just $5 extra a week.

The point here is that the government has effectively shifted the burden of welfare from itself to employers. Is that a good idea? In a sense, it is a privatisation of social security. This is surely the issue that Labor needs to hit upon. It can thank The Age newspaper for commissioning that study.

Joshua Gans is Professor of economics at the Melbourne Business School, University of Melbourne. He maintains a blog on such issues at economics.com.au.

Peter Fray

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