Ross Gittins has his orders from Labor today:
This is an issue we’ll keep hearing about this year. Much – even the fate of the Turnbull government – will turn on an issue it doesn’t want to talk about: what happens to wages.
There’s great optimism among economists and business people about a return to strong growth in the economy this year.
While economists and business people sing eternal praises to the great god of Growth in the size of the economy, voters care most about increased Jobs. The two usually go together, but they’re not the same.
There’s just one problem with the rosy prospects for Jobson Grothe this year: wages have grown no faster than consumer prices for the past four years. Employees have gained nothing from the improvement in productivity during that time, with all the lolly going to profits.
Does that sound like heaven on a stick for our business people? Many are yet to realise it’s a fool’s paradise. But, rest assured, if it keeps up for another year, light will dawn.
There are rival explanations for the weakness in wage growth. Some say it’s temporary, others that it’s lasting.
The econocrats – whose forecasts for wage growth have been way too high for years – say it’s just a result of the economy’s slow recovery from the resources boom, plus maybe a little digital disruption, and will go away if we’re patient a bit longer.
…Others fear the problem is deeper and long-lasting: it has been only the collective bargaining strength conferred on employees by industrial relations law that has allowed them to extract from employers the wage growth (above inflation) that has been their share of improved productivity.
By now, however, years of “reform” have swung the industrial relations pendulum too far in favour of employers, thus allowing them to avoid sharing any of the productivity gains with their workers.
What do I think? My guess is it’s a bit of both. It’s too soon to be sure how much of the problem is temporary and how much is permanent, requiring governments to do more to roll back the Howard government’s measures to discourage collective bargaining.
Here’s what Ross Gittins thought about wages before Domainfax became so completely dependent upon property revenue (and immigration).
Back in May 2010, Gittins gave the below seminal speech, entitled Does the economy depend on population growth?, which neatly set out why he believed that never-ending population growth via mass immigration is deleterious to Australian living standards:
I’ll start by stating upfront where I’m coming from on population: I believe we should do what we can to limit the growth of our population, and do that by focusing largely on immigration…
What are my reasons for favouring limiting immigration to limit our population growth? It’s mainly my concern about the damaging ecological effects of population growth, as much from a global perspective as from a local Australian perspective. But this concern is augmented by my belief that economic growth (ie increase in material standard of living, as conventionally measured by the real growth in GDP per person) does nothing to increase subjective wellbeing (happiness) in developed countries. If so, why pay a social or environmental price to pursue it?..
For a rigorous economic analysis it’s not good enough to simply assume that bigger is better. Why exactly is it better? The conventional answer is that bigger is better if it brings us a higher material standard of living – if it makes us more prosperous. But for this to happen – not necessarily for each individual, but on average, and for the community as a whole – the economy must grow faster than the population grows ie there must be an increase in real GDP per person.But there’s a third layer: even if increased population does lead to higher GDP per person, who shares in that increase? Conventional economics is about self-interest, so for immigration to be justified economically it has to be shown that the pre-existing population benefits from the decision to increase the population. If instead all the benefit went to the immigrants, then the immigration program would be merely an act of charity…
The most recent official attempt to answer those questions came in a report prepared by the Productivity Commission in 2006, Economic Impacts of Migration and Population Growth. Now, the Productivity Commission is a body of impeccable credentials in economic orthodoxy, it’s one of the leading advocates for economic growth and you’d expect it to be very favourably disposed to the belief that immigration makes us better off materially. Which makes its findings all the more significant…
The proposition the PC modelled was the effect of a 50 pc increase in the level of skilled migration over the 20 years to 2024-25. It found that this did cause real GDP to be 4.6 per cent bigger than otherwise in 20 years time. And, yes, this did lead to an increase in real income per person, but the increase was pathetically small: 20 years later real income per person would be 0.7 per cent higher, or $380 a year. The PC found that ‘the distribution of these benefits varies across the population, with gains mostly accrued to the skilled migrants and capital owners. The incomes of existing resident workers grow more slowly than would otherwise be the case’.
The PC concludes that ‘factors other than migration and population growth are more important to growth in productivity and living standards’. Indeed, growth in income per person from technological progress and other sources of productivity growth, and long-term demographic changes, could be expected to be about 1.5 pc per year, or more than $14,000 a year by 2024-25.
So that’s an end point of $380 a year from immigration versus $14,000 a year from technological advance. On this evidence, a rational economic rationalist would have little enthusiasm for population growth. From my perspective, it leaves me confident my opposition to immigration-fed population growth on ecological grounds would not come at any great cost in terms of our material standard of living (or our happiness, for that matter)…
I doubt that it [the modelling] takes sufficient account of the effect of the extra pressures migration creates for the public sector: the extra public infrastructure needed to meet the needs of the bigger population and the greater demands on the budget for services provided to immigrants and their families. This implies a need for higher taxation – paid by the original residents, not just the immigrants. And any delay or foul-up in providing the extra housing, roads, public transport, utilities, schools and hospitals etc could have significant negative effects on road congestion and other aspects of our amenity.
Even more significant, conventional economic analysis abstracts from the effect of economic activity on the natural environment, essentially assuming the environment to be a free good…
In August 2010, Gittins returned with an article published in Fairfax arguing against a “Big Australia”, again on the grounds that it will harm Australia’s natural environment and erode living standards:
The original bipartisanship was a kind of conspiracy. The nation’s business, economic and political elite has always believed in economic growth and, with it, population growth, meaning it has always believed in high immigration…
We can’t continue treating the economy like it exists in splendid isolation from the natural environment. And even when you ignore the environmental consequences, the proposition that population growth makes us better off materially isn’t as self-evident as most business people, economists and politicians want us to accept. Business people like high immigration because it gives them an ever-growing market to sell to and profit from. But what’s convenient for business is not necessarily good for the economy.
Since self-interest is no crime in conventional economics, the advocates of immigration need to answer the question: what’s in it for us? A bigger population undoubtedly leads to a bigger economy (as measured by the nation’s production of goods and services, which is also the nation’s income), but it leaves people better off in narrow material terms only if it leads to higher national income per person.
So does it? The most recent study by the Productivity Commission found an increase in skilled migration led to only a minor increase in income per person, far less than could be gained from measures to increase the productivity of the workforce.
What’s more, it found the gains actually went to the immigrants, leaving the original inhabitants a fraction worse off…
Why doesn’t immigration lead to higher living standards? To shortcut the explanation, because each extra immigrant family requires more capital investment to put them at the same standard as the rest of us: homes to live in, machines to work with, hospitals and schools, public transport and so forth.
Little of that extra physical capital and infrastructure is paid for by the immigrants themselves. The rest is paid for by businesses and, particularly, governments. When the infrastructure is provided, taxes and public debt levels rise. When it isn’t provided, the result is declining standards, rising house prices, overcrowding and congestion.
I suspect the punters’ heightened resentment of immigration arises from governments’ failure to keep up with the housing, transport and other infrastructure needs of the much higher numbers of immigrants in recent years…
In 2011, Gittins appeared on SBS Insight complaining that Australia’s temporary visa system is robbing youth of job opportunities:
And in March 2015, Gittins complained that mass immigration is destroying Australia’s productivity and ergo lowering living standards:
No discussion of our present and future productivity performance is adequate without assessment of the role being played by our policy of high immigration. But all we get is the throwaway line that “there is some evidence that” high levels of migration increase productivity because our focus on skilled migration raises the workforce’s average skill level and because “migrants can be highly motivated”.This is true and quite dishonest at the same time. It minutely examines the dog in the room while studiously ignoring the elephant. What economists know but try not to think about – and never ever mention in front of the children – is that immigration carries a huge threat to our productivity.
The unthinkable truth is that unless we invest in enough additional housing, business equipment and public infrastructure to accommodate the extra workers and their families, this lack of “capital widening” reduces our physical capital per person and so reduces our productivity.
Think of it: the very report announcing that our population is projected to grow by 16 million to 40 million over the next 40 years doesn’t say a word about the huge increase in infrastructure spending this will require if our productivity isn’t to fall, nor discuss how its cost should be shared between present and future taxpayers.
To which he followed-up in July 2015 explaining how “population growth can make us worse-off”:
Just about every economist, politician and business person is a great believer in a high rate of immigration and a Big Australia. But few of them think about the consequences of that attitude – which does a lot to explain our economic problems…
It shows even our economists have turned off their brains on the question of immigration and lost their way between means and ends. Now they believe in growth for its own sake, not for any benefits it may bring us.
Of course, slower growth in the population means slower growth in the size of the economy. But what of it? What do we lose?
The economic rationale for economic growth is that it raises our material standard of living. But this happens only if GDP grows faster than the population grows. So it doesn’t follow that slower GDP growth caused by slower population growth leaves us worse off materially.
That would be true only if slower population growth caused slower growth in GDP per person. I suspect many people unconsciously assume it does, but where’s the evidence?…
Politicians are always boasting about record government spending on this or that, but never make allowance for population growth in making such claims. (Why would they when often they don’t even allow for the effect of inflation?)
As for the claim that slower population growth will make it harder to reduce the budget deficit, it reveals just how unthinking we’ve become on immigration. It’s true enough that slower growth in the workforce means slower growth in tax collections.
But is that all there is to it? What about the other side of the budget? Aren’t we assuming a bigger population is costless? Skilled immigrants and their dependents never use the health system? They don’t have kids needing to be educated? They don’t add to traffic congestion, wear and tear on roads and 100 other taxpayer-provided services? Since there’s often a delay while they find jobs, who’s to say budgets, federal and state, wouldn’t be better off with fewer immigrants?
But what’s strangest about the economic elite’s unthinking commitment to high immigration is the way they wring their hands over our weak productivity growth and all the “reform” we should be making to fix it, without it crossing their minds that the prime suspect is rapid population growth.
It’s simple: when you increase the population while leaving our stock of household, business and public capital unchanged, you “dilute” that capital. You have less capital per person, meaning you’ve automatically reduced the productivity of labour.
So you have to do a lot more investing in housing, business structures and equipment and all manner of public infrastructure – a lot more “capital widening” – just to stop labour productivity falling…
Lower immigration would help reduce a lot of our economic problems – not to mention our environmental problems (but who cares about them?).
In 2015 came the coup de grace:
Standard economic theory claims that net inward migration has minimal long-term impact on wages. That is, when the quantity of labour increases, its price (wages) falls. This will supposedly increase profits, eventually leading to more investment, increased demand for labour, and a reversal of the initial fall in wages. Immigration, so the theory goes, will enable the larger domestic population to enjoy the same incomes as the smaller population did before.
However, a recent study by Cambridge University economist, Robert Rowthorn, debunked this argument. The so-called ‘temporary’ effects of displacing incumbent workers and lower wages can last for up to ten years. And if there is a continuing influx of migrants – as is the case in Australia – rather than a one-off increase in the size of the labour force, demand for labour will constantly lag behind growth in supply.
In other words, if the federal government was to stem the inflow of foreign workers, then workers’ bargaining power would increase, as will wages growth.
It is basic economics. As noted in April last year by The Australia Institute’s chief economist, Richard Denniss, the very purpose of foreign worker visas is to “suppress wage growth by allowing employers to recruit from a global pool of labour to compete with Australian workers”. In a normal functioning labour market, “when demand for workers rises, employers would need to bid against each other for the available scarce talent”. But this mechanism has been bypassed by enabling employers to recruit labour globally. “It is only in recent years that the wage rises that accompany the normal functioning of the labour market have been rebranded as a ‘skills shortage'”.
You can say it, Ross. Or does your own wage prevent it?
