Want greater productivity? Set wages to rise by 3.5 per cent a year
'You want higher productivity? Simple – give me a tax cut. You want to increase business investment in capital equipment? Simple – introduce a new investment incentive. And remember, if only you'd give us greater freedom in the way we may treat our workers, the economy would be much better.'
Why do even economists go along with the idea that poor productivity must be the government's fault? Because of a bias built into the way economists are taught to think about the economy. Their 'neoclassical model' assumes that all consumers and all businesspeople react rationally to the incentives (prices) they face.
So if the private sector isn't working well, the only possible explanation is that the government has given them the wrong incentives and should fix them.
Third, businesspeople, politicians and even economists often imply that any improvement in the productivity of labour (output per hour worked) is automatically passed on to workers as higher real wages by the economy's 'invisible hand'.
Don't believe it. The Productivity Commission seems to support this by finding that, over the long term, improvement in labour productivity and the rise in real wages are pretty much equal.
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Trouble is, as they keep telling you at uni, 'correlation doesn't imply causation'. As Nobel Prize-winning economist Daron Acemoglu argues in his book Power and Progress, workers get their share of the benefits of technological advance only if governments make sure they do.
Fourth, economics 101 teaches that the main way firms increase the productivity of their workers is by giving them more and better machines to work with. This is called 'capital deepening', in contrast to the 'capital widening' that must be done just to ensure the amount of machinery per worker doesn't fall as high immigration increases the workforce.
It's remarkable how few sermonising economists think to make the obvious point that the weak rate of business investment in plant and equipment over the past decade or more makes the absence of improvement in the productivity of labour utterly unsurprising.
Fifth, remember Sims' Law. As Rod Sims, former boss of the competition commission, often reminded us, improving productivity is just one of the ways businesses may seek to increase their profits.
It seems clear that improving productivity has not been a popular way for the Business Council's members to improve profits in recent times. My guess is that they've been more inclined to do it by using loopholes in our industrial relations law to keep the cost of labour low: casualisation, use of labour hire companies and non-compete clauses in employment contracts, for instance.
Sixth, few economists make the obvious neoclassical point that the less the rise in the real cost of labour, the less the incentive for businesses to invest in labour-saving equipment.
So here's my proposal for encouraging greater labour productivity. Rather than continuing to tell workers their real wages can't rise until we get some more productivity, we should try reversing the process.
We should make the cost of labour grow in real terms – which would do wonders for consumer spending and economic growth – and see if this encourages firms to step up their investment in labour-saving technology, thereby improving productivity of workers.
Federal and state governments should seek to establish a wage 'norm' whereby everyone's wages rose by 3.5 per cent a year – come rain or shine. That would be 2.5 percentage points for inflation, plus 1 percentage point for productivity improvement yet to be induced. Think of how much less time that workers and bosses would spend arguing about pay rises.
Governments have no legal power to dictate the size of wage rises. But they could start to inculcate such a norm by increasing their own employees' wages by that percentage.
The feds could urge the Fair Work Commission to raise all award wage minimums by that proportion at its annual review. If wages of the bottom quarter of workers kept rising by that percentage, it would become very hard for employers to increase higher wage rates by less.
A frightening idea to some, maybe, but one that might really get our productivity improving.
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News.com.au
4 hours ago
- News.com.au
EV cuts loom while Aussies pay for ute tax
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ABC News
5 hours ago
- ABC News
The ACTU is pushing for a four-day work week
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SALLY MCMANUS: Sarah, I say we should spend just as much time talking about making sure the productivity gains are fairly shared as we should about improving it and I say that because the last 25 years, working people in Australia have not fairly shared in productivity increases. We would be much better off, working people, your average working person, $350 a week better off if we fairly shared. So we've heard all types of claims by all sorts of people, saying if only we lifted productivity, automatically everyone is going to be better off. Well, guess what? It doesn't work like that. There is no direct debit system that employers have got set up that automatically flows on those benefits to workers. We have to continually fight for it whether it be in pay rises or shorter working hours. So need to talk about this issue because why are we talking about productivity? We are talking about it because we want people's lives to be better, and people's lives aren't better if companies are just doing better. If their profits are doing really well and we're not sharing in it, well then, it's defeating the purpose of improving productivity in the first place. SARAH FERGUSON: Let me ask you about the timing and in a sense the politics of this. You knew in advance that the Government wasn't going to take up the proposal, so why are you proposing it now for the roundtable, I mean. SALLY MCMANUS: Well, Sarah, I know decision-makers say no 100 times before they say yes. It is the job of the union movement obviously to advocate the things we actually believe in, and we believe in this and we also believe that it is good for productivity if you have healthy and happy workers, and that we should be talking about fairly sharing the gains, and we should be talking about less working hours if the AI revolution also leads to less need for workers. 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Sydney Morning Herald
12 hours ago
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Two-thirds of voters want the right to work from home protected
About two-thirds of voters support proposals for a new right to work from home and a four-day work week, including most Coalition supporters, proving the political upside for Labor governments and unions advancing the ideas of contested economic benefit. Union leaders put up the idea of a four-day work week before Treasurer Jim Chalmers' economic reform summit this week, and Victorian Labor Premier Jacinta Allan rekindled debate by pledging to give workers the guaranteed ability to work two days a week from home. On the eve of the roundtable, Productivity Commission chair Danielle Wood dismissed the need for government intervention in flexible work, suggesting bosses and workers were finding a 'sweet spot' on hybrid work. But the Resolve Political Monitor showed widespread support for both ideas. Sixty-four per cent said they backed the idea of using legislation to lock in flexible work arrangements. Nineteen per cent were unsure when asked about the proposal, while 17 per cent were opposed. Of Labor voters, 74 per cent backed the idea, as did 51 per cent of Coalition voters, a reminder of why former opposition leader Peter Dutton was forced to ditch his pre-election push to force public servants back into the office. The Coalition proposal was pounced on by Labor, which used Dutton's public sector policy to stoke fears that private sector workers would also be ordered back to the office full-time. Allan's pitch to legislate the right to two days working from home was built on the successful political campaign against Dutton's plan. The Resolve survey showed 89 per cent of those who currently work from home supported Allan's idea. Just under two-thirds of those who never worked from home also backed it.
