Feb 3, 2014

The real wage cuts you have when you’re not cutting wages

Having lost the productivity debate, some in business are pushing for real wage cuts -- an approach the Coalition supports but doesn't want to be seen endorsing. Bernard Keane and Glenn Dyer write.

A subtle shift -- or subtle as these things go -- has occurred over the last 12 months in the industrial relations debate, and it’s an important one. The business lobby, its media cheerleaders and the Coalition have shifted ground on IR, from productivity to wages. That’s primarily because business lost the productivity "debate", such as it was. We have a major problem with labour productivity, business insisted, via organs like the Financial Review, because the Fair Work Act is too inflexible. And every quarter from the end of 2011, the national accounts would emerge to show growing labour productivity under the Fair Work Act. Significantly, at last week’s SPC media conference, Prime Minister Tony Abbott was asked if he believed there was enough flexibility in the FWA to allow the company to negotiate lower costs with its workers, and he failed to deny it. By the second half of 2013, the productivity line was fading, even as a few holdouts manfully toiled to demonstrate the FWA had locked the economy into a straitjacket of laziness and trade union bastardry. It’s a crude measure, but somehow telling: the number of mentions of "labour productivity" in stories in the last six months in the AFR, which now essentially functions as a media release service for business, is half what it was in the same period in 2012, and lower than the first half of 2013, too. But while "productivity" was being retired, a new IR argument was being prepared: the wages of Australian workers were too high. A couple of weeks ago, the AFR explained that "business leaders and economists" believed Australians would need to accept wage cuts in order to reduce inflation. The "business leaders and economists" turned out to be Coalition-aligned businessman Don McGauchie and JP Morgan’s Stephen Walters, while the Grattan Institute’s Jim Minifie said real wage growth should be lower and Australian Chamber of Commerce and Industry’s Burchell Wilson said wage growth was already so low that real wages might fall (so much for the "Fair Work Act drives wages up" argument). Whether McGauchie is in a strong position to demand Australian workers take pay cuts is moot. This is the man who presided over a disastrous period in the life of Telstra as a private company, hiring the highly aggressive Sol Trujillo and his friends to pursue a strategy of all-out aggression against the government and regulators that failed disastrously. McGauchie is also chairman of agribusiness company Nufarm, which has been a serial disappointment to investors in recent years, at least until McGauchie gave them hope by declaring in July last year that the company had turned a corner and the worst was behind it. Alas for investors, McGauchie turned out to be wrong: in December, the company’s share price crashed yet again, and it is now back near its historic lows. Walters, who at the start of 2012 boldly suggested Australia could be in for a recession that year, followed up last week, saying that Australia could only restore its competitiveness by cutting wages. Then he confused things by saying that nominal wages "couldn’t" fall but that there should be "a demonstration of restraint". Presumably not by investment bankers and chairmen of underperforming companies, but by workers.
"It's a lazy call from 'business leaders and economists' -- and from politicians, too ..."
Walters’s nuance about nominal hourly wages is noteworthy. Calling for wage cuts outright is a bad look, and one Abbott sought to avoid last week at the SPC announcement when he said:
"I think that the unions should do everything they possibly can to ensure that this is a viable business for the long term, a viable competitive business and that obviously means not cutting wages -- no way."
The transcript doesn’t convey the strong emphasis that Abbott put into the final part of that statement, in a media conference that was fascinating for its positioning of responsibility for any future bad news from Goulburn Valley around the neck of Coca-Cola Amatil and David Gonski (no mention of Terry Davis, the CEO of Coca-Cola Amatil, who paid $500 million for SPC Ardmona a decade ago and is now about to retire from the company with his black hole still not repaired). But while saying that, Abbott also lamented that the company’s enterprise agreement was generous and above-award levels in areas such as loadings and leave, and that it needed to be renegotiated. If you had seen the Workplace Relations Minister Eric Abetz on Insiders yesterday morning, you would have got the feeling that neither Abbott nor Abetz had a good idea of what was in the industrial agreement at SPC Ardmona. Barrie Cassidy, quoting local MP Sharman Stone, who has gone hard at her own frontbench for last week's decision, noted that contrary to Abbott's claims, workers can't cash out sick leave and the company doesn't pay overtime. In neither case did Abetz answer the questions. This isn’t to say the SPC Ardmona agreement isn’t overly generous -- it may well be, particularly given it’s in an industry in which any trade-exposed Australian firm will struggle to compete. But Abbott's nuanced response on this point is important: nominal wage levels can’t be touched, but other forms of remuneration like loadings and leave are fair game -- even if they’re every bit as important to a worker’s income as base pay. And ACCI's Wilson is correct: real wage growth is slowing -- during the final half of 2013 the CPI rose at an annual rate of 4%, but the wage price index for the September quarter (when the CPI rose 1.2%) rose 0.5%, seasonally adjusted for an annual rate of 2.7%. In trend terms, the quarterly rise was 0.6%, for an annual rate of 2.6%. As it turns out, a softer economy is already delivering very moderate wage growth, and the FWA is doing nothing to prevent it. Cutting loading and leave still means a substantial cut in real wages, whether or not nominal rates of pay or awards change. And that will flow through to demand (particularly in more fragile regional economies). Cutting wages across industries, indeed across the economy, as McGauchie appears to suggest, would help guarantee that an economy currently running a little below trend would slow still further, lifting unemployment and exacerbating job security fears, which already appear to be growing. It’s a lazy call from "business leaders and economists" -- and from politicians, too, even if they want to disguise under talk of leave and loadings.

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11 thoughts on “The real wage cuts you have when you’re not cutting wages

  1. JohnB

    It’s all so depressing, but why, oh why, are the principal players recycled, overpaid players from yesteryear, elderly gents like McGauchie and Abetz? What do they know about labour productivity, in the first place?

    At the least, Crikey, please balance this story with one about comparative executive pay rates and workloads.

    I’d suggest starting with Australia Post’s CEO and a comparison on either a number-of-letters-delivered basis or some other measure of output, as against the equivalent from USA or Great Britain. I have heard that Mr Farhour is very well paid indeed. But don’t stop there… take a peek at executives from a few emerging nations as well – that would only be fair, because that is where our bottom rung jobs are going and the comparisons are being made.

    What does an executive in India, Bangladesh, Vietnam or the Philippines get paid?

    Even, because that seems to be where our businesses including BHP and RIO are headed some comparisons of executive and professional pay scales with the Old Dart. Our cream are doing very well, IMHO, while they belittle others.

  2. Bill Hilliger

    Many say, if you want to make a small fortune in business investment, start by investing a large fortune in a business where Mr McGauchie has an active involvement.

  3. Jimmyhaz

    Sickeningly blatant money grab from the already wealthy. High wages and increasing the minimum wage don’t increase inflation, there is no new money added to the economy, existing money is merely siphoned from profits to workers wages.

    Also, why are we aiming to decrease inflation? The lack of government expenditure is ensuring that we are already shooting under the RBA’s target.

    More rubbish from the people that brought us slavery in the form of work for the dole and workchoices. They don’t care about the plight of those without millions, when will people realise that enough is never enough for these sociopaths, and they will do everything in their power to ensure that their slice of the pie is growing.

  4. Electric Lardyland

    Interesting mention of sociopaths, Jimmy. One thing that I always find curious about the ‘market is always right, government is the problem’ crowd, is that the financial centres of the world, tend to attract far more than their fair share of sociopaths. That is, researchers into sociopathy, often point out, that outside of the prison system, the largest aggregation of sociopaths in America is in the Wall St financial district. Likewise in the U.K., where the hotspot for non-imprisoned sociopaths is ‘the city’ finance centre of London.
    I suspect that there’s a number of things that make the finance industry attractive to the sociopath. There’s the chance to make huge legal and not so legal profits; often without a great deal of previous work or study. There’s the morally neutral nature of the work. There’s the chance to work in an industry where honesty is often not the best policy. And finally, there’s only a small chance of being punished, for behaving like a sociopath.

  5. Malcolm Street

    What inflation?!

  6. Itsarort

    If the CPI is going up by 4%pa and wages at 2.7%pa, then a salary of $75K will only buy approx $65K after a decade. Even after one term of this government, buying power would be down about $5000. And what happens to the economy when people stop buying stuff?. Detroit here we come…

  7. CML

    All good commentary above.
    The best indication of where wages are at, is the ABS figures for the wages/profit split of GDP. I haven’t looked them up for awhile, but last year the wages component was around 40%, or perhaps a little above/below that figure. Which means ‘profits’ were around 60%.
    Thirty/forty years ago that split was around 50%+ for wages, with the corresponding amount going to profits. That doesn’t indicate to me that wages are too high. What it does say, is that business is doing very nicely, thank you very much. Greed is still good, it seems!!

  8. TheFamousEccles

    I’d like to second the suggestion of JohnB, a comparison of executive productivity and pay rates with equivalent people in the developing nations, as well as the developed nations would be interesting.

    Further, a detailed breakdown of the “bang-for-buck” of executive payrates and workloads, as compared to the workers in the various industries they represent (the supposed under productive class) would be revealing too.

  9. AR

    Should I get out the popcorn for ‘stagflation’, that pustule that tends to erupt when ‘known-nowt’ neocons meet reality, WHEN in office.
    A more stable (not suggest ‘sclerotic’)society than Japan could hardly be theorised this side of amphetamine but, still inexplicably enthralled to Ivy League MBAs,it is now entering its THIRD (fourth by some perspectives)of the apotheosis of capitalism plus ultra, deflation, plunging demographics, more incontinence pads than nappies (see JRRT’s fixed-in-aspic Arthurianism).
    How should any of this drivel apply to OZ? Obvious why it does but why, FFS?

  10. Dogs breakfast

    The retirement of the pre baby-boomer and the early baby boomer numbskulls at the top of the corporate tree in Australia is very likely to see an almighty rise in productivity all over the country, just by dint of their having left.

    Their commentary on what ails us as a country is an object lesson in avoiding responsibility for your incompetence and making sure that someone else pays for it.

    The damage that has been done to Australia’s balance sheet due to gross corporate stupidity over the last 20 years would come in at over $100b, easy. I’m sure Stephen Mayne could tally up $100b without needing to read his notes.

    Absolute tossers, with not the slightest idea that they are the problem.

    The next leaders can’t do any worse.

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