Why paying workers higher wages improves productivity

For years we have questioned Australian businesses’ extreme reliance on cheap, exploitable migrant workers, explaining that it has contributed to the nation’s chronically low wage growth, in addition to stifling our productivity by discouraging firms from adopting labour-saving technologies and automation.

Without easy access to low-paid migrants, firms would be forced to lift wages to attract local workers. In turn, these higher wages would encourage firms to seek out labour-saving technologies and automation in a bid to lower their labour costs, which would ultimately lift the economy’s productivity.

Higher wages further improves productivity by encouraging the least productive businesses to lose people, shrink and go bust, transferring workers, land and capital to more productive businesses.

However, if policy makers continue to give Australian firms easy access to cheap, exploitable migrants, then wages will remain low, there will be little incentive for firms to automate, the capital base will shallow, and ultimately the nation’s productivity will stagnate.

This is basically the predicament Australia found itself in over that past decade, simultaneously suffering from both low wage growth and low productivity growth as immigration boomed.

Fairfax’s economics editor, Ross Gittins, touched upon these very arguments over the Easter long-weekend in an article entitled: “Cutting workers’ pay and conditions worsens our productivity”:

One way to cut labour costs is to install better labour-saving machines. Doing so does improve the productivity of the workers who remain – and will show up in the productivity figures.

But if you find ways to limit the increase in – or even cut – your workers’ hourly wage rate, this does nothing to improve your productivity, but does increase your profits…

[One] way firms have been saving on labour costs is by spending less on training their own workers and then, when they’re short of skilled workers, bringing them in from overseas on temporary work visas.

The trick is, these cost-saving measures don’t just fail to improve the productivity of labour, they can actually worsen it…

When wage costs are rising strongly, firms are more inclined to invest in labour-saving equipment. When wage costs are low or falling, however, firms become more inclined to avoid investing in machines and just hire more workers – even to perform quite menial tasks.

This above helps to explain why the Morrison Government’s proposed reforms to give businesses unbridled access to cheap migrant workers is so damaging.

Instead of allowing the ‘market’ to adjust wages upwards to entice workers into areas of shortage, the Morrison Government would prefer that firms import cheap workers from abroad, as well as abrogate their responsibilities to provide training.

The end result will be lower wage growth, less business investment in labour-saving technologies, and lower productivity growth.

Sadly, the Morrison Government is only concerned about boosting company profits, and is willing to throw Australian workers under the bus to achieve that goal.

Wages share of national income

Australian workers’ share of national income is tracking near historical lows.

Australian wage growth will inevitably remain in the toilet as long as the Coalition Government remains in power.

Unconventional Economist

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