The wages Frankenstein has come for its creators

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It’s amusing to watch those most responsible for Australian wages destruction step up their campaign to have it fixed. Ian Narev wants gubmint to do it:

“The absolute key and No.1 question we should be demanding of policymakers is for households to feel better off, and the No.1 metric is wage growth,” he said at the Morningstar Individual Investor Conference in Sydney on Friday.

Do-nothing Malcolm added to the chorus:

Prime Minister Malcolm Turnbull has blamed low wage growth for the worst monthly drop in consumer spending since 2010.

Retail turnover in August declined for a second month in a row, according to official data released on Thursday, with the -0.6 per cent drop in trade the worst monthly performance in more than four years – putting economic growth at risk.

“While we’re seeing strong growth in employment, we’re yet to see stronger growth in wages, so people feel as though they’re not getting ahead,” Mr Turnbull told Neil Mitchell on 3AW radio on Friday.

“That’s why economic growth is so important.”

The Prime Minister said wages would naturally rise as unemployment falls. “It’s supply and demand. Phil Lowe, the governor of the Reserve Bank, was making this point just the other day,” he said.

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Yet this is what you call hiding an issue in plain sight. Where is the actual discussion of the drivers of the weak wages Frankenstein monster? Unemployment has already fallen to levels that should see wage growth. It ain’t that:

The last time unemployment was at 5.6% the wages index was at 3%. Today it is 1.9%.

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Just as interesting, the great wages deflation is universal:

Mining has led the decline but it is in every single sector including such booms as health, education and the public sector. It is actually even worse than this because there is also large sectoral rotation from high paying jobs such as mining to low paid such as barristing.

This reeks of labour market oversupply. And, as we know, there is an abundance of it once we look past the headline number. Underemployment is rife:

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And it all appears very nicely in the OECD measures of output gaps, in which Australia’s is the largest:

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Good luck with that forecast closure next year!

What we have here is structural change. The Australian economy is brimming with labour market slack as we rotate from full time to part time jobs, from high paying tradable jobs to lower paid menial roles and from a regulated and closed industrial relations system to an open and flexible market exposed to global inflows.

As a backdrop to this we can add that this was all very predictable. As the terms of trade crash that ended the mining boom works its way through the economy, wages were always going to have to adjust to lower growth. The nation is in the process of taking a massive pay cut for the same amount of work so slack was bound to expand.

We can add that we’re also going through a second and so far roundly ignored structural adjustment: reductions in the pace of growth of household debt which is about to turn much slower again, so more slack is guaranteed.

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The question is, how does one best manage these structural adjustments? Both booms leave your economy very inflated and its cost structure uncompetitive. So the way to fix it is to engineer a real exchange adjustment so that you can once again grow the export and import competing businesses which comprise 40% of the economy.

To do that you do is this:

  • explain it the people so that the burden of adjustment can be shared appropriately to stabilise the political economy;
  • support the vulnerable;
  • boost productivity reform so that as much of the adjustment as possible can be absorbed by efficiency gains;
  • contain asset prices to improve competitiveness;
  • contain other input prices like energy;
  • pursue weak dollar policies to ensure that as much of the deflation is absorbed externally as possible;
  • use fiscal stimulus to absorb labour market slack as the private sector deflates and deleverages, and
  • ensure industrial relations fairness so that capital doesn’t force the entire adjustment onto labour.

What have we done?

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  • raised expectations with parlour tricks and cheap excuses that of course failed, destabilsing the political economy and throwing out multiple governments;
  • blamed the vulnerable;
  • zero productivity reform;
  • deliberately juiced asset prices with failed credit containment and mass immigration;
  • blown energy prices sky high;
  • pursued strong dollar policies at every quarter;
  • deployed fiscal austerity (until recently);
  • trashed the industrial relations structure via mass visa rorting.

In fact, pretty much the only input cost in the economy that we’ve let deflate is wages and by doing so have launched a massive class war on labour to take the full brunt of the structural adjustments emanating from the end of the mining and household credit booms.

Now, you could accuse MB of making hay in retrospect here. But that’s not true is it? We have been saying this now non-stop for six years. This is not MB schadenfreude, it is political mismanagement at work in the executive, the bureaucracy, the dominant private sectors of mining and banking, and the media. A corrupted and broken elite that is suspended somewhere between a lost ideology and personal greed.

So, let me warn again just for the Hell of it. In trend terms, wages growth is not going to get better, it’s going to get worse. The terms of trade deflation has far yet to run and the household deleveraging has not even begun in earnest.

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Anyone who hopes to remain in power more than one term needs to adopt a policy matrix that prepares for these outcomes. Nobody has.

The wages Frankenstein has come for its masters and they are welcoming it like a long lost son.

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.