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Why Wages Are Growing So slowly

At the moment wages are stagnating throughout the developed countries and have been since the end of the global financial crisis. The standard response to the question ‘why is this happening’ is that productivity is declining, which is true, however this is not the whole story.

Firstly, although there has been a decline in productivity in 2018/19, the first decline for a very long time, most of this can be attributed to the drought. This outcome will be exacerbated in 2019/20 by the impact of the bushfires and the coronavirus even though the impact of the disease will be very hard to measure.

A second factor that needs to be taken into account is that Australians are significantly richer than they were even 20 years ago. It takes less hours of work to rent a three bedroom house, buy a car, clothes or shoes and electronic goods. On the other hand the cost of some services like energy has become more expensive.

Thirdly, the total number of people employed has increased since the global financial crisis, which means that total output (GDP) has continued to grow.

However, there are significant changes to the economy which are impacting productivity and the capacity to pay higher wages. There has been a marked shift in employment from manufacturing to services. When workers are producing goods it is possible to radically improve productivity through technological innovation. This is not as true for workers employed in hospitality. Also there has been a shift from employment in the private sector to employment in the public sector.

This has profound implications for the economy. The wages paid in the public sector are entirely dependent on the money earned by the private sector. If the private sector shrinks and the public sector grows, either taxes have to increase or public debt blows out. Queensland is currently experiencing this problem and is fast approaching a situation where it’s reaching its debt limits.

According to the Productivity Commission report on productivity growth, which was released on Tuesday, economists differ as to the basic causes of the productivity slowdown. The first cause is globalization. This has led to a decline in the manufacturing sector in developed countries as industries are exported to emerging economies.

Economists also point out that technology is being diffused through the economy at a slower rate than it was prior to the GFC. This is reflected in the slow-down in business investment and the lack of business confidence. There is also a contraction of investment in innovation.

At the moment business believes that there are better returns from cutting costs and increasing profits rather than making investments in new technology. This is typical of firms in highly concentrated sectors dominated by big firms. According to the Productivity Commission, the dominant sectors in the Australian economy are mining and banking, which are dominated by a few big players.

Over-riding all of this, is the macro-economic environment, where there is a debt overhang and a general lack of entrepreneurship. There are occasional ‘black swans’ like renewable energy and electric cars, but generally we are in the doldrums, so the fallback position is to resort to the government to solve the problem by spending more money. But this won’t improve productivity unless business can come up with ideas to use it productively.

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