This opinion article by Business Council chief economist Stephen Walters was first published in The Australian Financial Review on Monday 8 August 2022
Who benefits most from a growing economy, workers or business? Of course, the answer is both. This is truer still when productivity is improving, so we should all be worried about the Productivity Commission’s finding this week that growth is at a six-decade low.
Higher output per hour helps grow the size of our national economic pie more quickly, making squabbles over slices of a smaller pastry redundant.
Despite claims on these pages and elsewhere that business is benefitting at the expense of workers via a “profit overhang,” the facts don’t bear that out. Some have argued that this ‘overhang’ needs to be unwound via substantial wage gains to offset the spike in inflation. As with most things economic, it’s not that simple.
The Business Council also wants workers’ incomes to grow, but wage claims must be linked to productivity. Outsized wage gains now simply to match higher inflation would deliver only a fleeting win for a diminishing number of workers. Lower corporate profits ultimately would lead to less investment, weaker economic growth and higher unemployment. In the end, that would be lose-lose.
It helps to understand what’s causing changes in the respective profit and wages shares. The mining profit share has increased on the back of the huge resources investment boom, combined with a record terms of trade. Mining profits are notoriously volatile, though, like commodity prices, so miners shouldn’t and don’t expect such profit gains to continue indefinitely.
Similarly, the financial sector has profited thanks partly to the “cheap money” provided by the RBA during the pandemic. This unprecedented monetary support was a once-off and now is being withdrawn much more quickly than expected.
After excluding the miners and banks which are distorting this data and where wages are amongst the highest in the nation, the broader profit share actually has fallen. Indeed, many non-mining, non-financial businesses are struggling with cautious customers, cost blowouts, labour shortages and supply constraints. And, for many, there was the sledgehammer effects of COVID, from which many are still recovering. The pandemic isn’t over, either, with hospitalisations rising again.
It’s true that recent growth in profits has exceeded the rise in economy-wide wages, as unions claim. But, wages growth is “sticky”, as economists say. Very few employees are offered lower wages, even in an economic downturn. Company profits are not so sticky. For example, wages grew 3 per cent during the turbulent times of the GFC as profits cratered nearly 10 per cent.
It pays to take a longer-term perspective, too. Real wages actually had been rising for some years before the recent reversal, which the Treasurer acknowledges will be temporary. Inflation is above the RBA’s target zone now, but was persistently below the Bank’s 2-3 per cent comfort zone for the previous five years. This saw real wages rise over that same period.
Moreover, the latest rise in inflation is driven not by rising profits, as claimed, but higher costs. And, most of this price pressure is coming from overseas, including via a war and a massive supply crunch. Profit margins for most businesses have not expanded. Producer price inflation – the wholesale price paid by businesses - is growing broadly in line with the gain in prices businesses charge consumers.
A key driver of sluggish nominal wages growth is deteriorating productivity. It averaged around 1 per cent in the decade to 2021, half the rate from the halcyon days of the 1990s, despite the bounce out of the pandemic as output recovered faster than hours worked. We need to turn this dismal productivity performance around fast. Rebooting a national reform agenda is essential, including in the contested area of company tax.
Productivity is about driving investment and innovation across the economy, working smarter not harder. It’s about putting Australians at the frontier to do things better and more efficiently, by doing new things together and by taking every opportunity to find new markets, to deploy new technology and make everybody in an enterprise more successful.
Low productivity delivers sluggish wages growth, alongside lower profitability. And let’s not forget that the lowest income earners, including those on the minimum wage, just received one of the largest mandated pay rises in recent decades.
The role of enterprise bargaining in lifting productivity and living standards is critical. EBAs allow workers and businesses to share the spoils of a growing economy by incentivising everyone towards better performance. The dwindling influence of EBAs, then, with most weighed down with rigid rules and unnecessary complexity, needs to be addressed with urgency.
The mutual interests of business and workers align in other ways. Growing superannuation balances, for example, mean employees benefit from better company performance. Profitable companies pay dividends as well as invest for future jobs and growth. These dividends support returns of employees’ superannuation funds. It’s win-win, again.
Stephen Walters is the chief economist of the Business Council of Australia