Last week, Bill Shorten said a Labor government “will fix the law so that the Fair Work Commission has the tools to deliver a living wage for Australia’s low-paid workers”. On Tuesday in the budget, Josh Frydenberg delivered money to workers without involving Australia’s centralised industrial relations system.
PwC’s Federal Budget Insights made this point about the 2019-20 budget: “Although designed to solve a completely different political equation, the tax cuts announced by the Treasurer will boost household disposable incomes and will go at least some way towards filling the gap that moribund wages growth otherwise will leave in the real economy.” In short, there are alternative ways of assisting Australians on medium to low wages rather than putting the burden on employers. Australians learned this more than a century ago when the nation first experimented with the concept of a living wage.
In the Harvester judgment of 1907, Henry Bournes Higgins (in his capacity as president of the Commonwealth Court of Conciliation and Arbitration) determined what should be the living wage of a normal family. This was classified as a man, his wife and three children. But it was paid to fathers of 10 and single men alike.
Without question, Higgins was a decent, compassionate person, as is evident from a reading of his personal papers in the National Library of Australia. However, he was naive when it came to economics. For example, Higgins believed that wages should not be determined by the “higgling of the market” but rather with respect to what was “fair and reasonable”. The problem was that private sector employers operated within the market.
Higgins’s naivety was never more evident than in his decision in the 1910 Broken Hill Mines case. Here he declared that it would be better for an employer to go out of business than to pay employees less than the fixed rate decided by his court. Needless to say, many members of the Broken Hill Mines workforce did not agree — including those with families to support. For them, a lower wage was better than no wage at all.
Edward Shann’s brilliant Economic History of Australia was published in 1930. He was one of the first commentators to recognise the burden that Higgins’s living wage had imposed on the Australian economy. Shann understood that a trading nation such as Australia could not continue to award itself high wages unrelated to productivity.
The Harvester judgment prevailed until the mid-1920s when, because of economic necessity, greater account was taken by wage-fixing tribunals to the capacity of the economy to pay. Indeed, some wages were reduced during the Depression of the early 30s. But the hankering for a living wage has not really gone away. And now it has returned with a vengeance.
It’s true that wage rises in Australia in recent years have been flat — just ahead of inflation. But it’s also true that a similar situation prevails in many of the OECD western economies. Moreover, as Gianni La Cava pointed out in last month’s edition of the Reserve Bank of Australia Bulletin, since around 1990 wages in Australia have broadly increased in line with productivity growth.
The best way for wages to increase is for productivity to rise. Without an increase in productivity, the most appropriate way for a government to increase household disposable incomes is by tax cuts or transfer payments.
Last month, 124 Australian labour market researchers published an open letter on the benefits of promoting faster wage growth. The lead signatory was law professor Andrew Stewart of the University of Adelaide’s law school. Overwhelmingly, the signatories did not come from the private sector.
Employers (big and small alike) understand that labour costs are an expensive part of conducting businesses. The problem with across-the-board wage increases, unrelated to the productivity of a business, is that they hit hardest at marginal operations.
As Finance Minister Mathias Cormann has consistently pointed out, one of the great successes of the Coalition government since September 2013 has been to preside over a significant increase in employment and a significant decrease in unemployment. This has had a beneficial effect on the expenditure side of the budget. More important, it has led to a situation where numerous Australians who would otherwise have been on welfare payments have experienced the dignity of work.
In the wake of Labor’s commitment to a living wage, Cormann reminded Australia of the fact “anyone who loses their job because we increase the minimum wage by too much will not get a wage, they will get the dole”.
Former ACTU secretary Bill Kelty issued a similar warning that “Labor and the unions need to take into account the economic capacity of the nation and of industry to afford a minimum-wage increase”. Kelty played an important role in economic reforms implemented by the Hawke and Keating Labor governments.
Kelty’s considered position stands in dramatic contrast to his successor Sally McManus, who became ACTU secretary in March 2017. In her recent booklet On Fairness (MUP, 2019), McManus runs a class-war line.
McManus alleges “the Murdoch press, big business and the Coalition … are desperate to prevent working people realising that campaigning for fairness alongside their workmates is the solution to low pay and unsecure work”.
Like many a trade union official, McManus focuses on the employed and not the unemployed. Moreover, she believes big business and the Coalition favour low pay. In fact, it is in the interests of business that wages are high (provided they are accompanied by productivity increases). Moreover, Coalition parliamentarians represent some of the lowest socio-economic areas in Australia.
McManus also overlooks the fact wages in Australia are among the highest in the world. The question is how to increase payments to low-income workers. The evidence of history indicates that an across-the-board living wage is not the answer.
Gerard Henderson is executive director of the Sydney Institute. His Media Watch Dog blog can be found at theaustralian.com.au.