Latest news with #Sims'Law
Sydney Morning Herald
2 days ago
- Business
- Sydney Morning Herald
Want better productivity? Keep wages rising strongly
Our economy has become unbalanced and is in danger of slowing to a halt. But not to worry. The Reserve Bank is determined to ensure that, should we sink under the sea, we won't have had an inflation problem to worry about. This is the week we fix our productivity problem, but how far we get remains to be seen. The problem is that, while improving the efficiency with which the economic machine converts inputs of raw materials, capital equipment and human labour into outputs of goods and services has been the way we've raised our material standard of living over the past two centuries, there's been no improvement in this productivity for a decade. But if that's the problem, we still have a problem: no one wants to accept responsibility for fixing the problem. That's for the government to do. Even the Reserve Bank wants to pass the parcel to the government. Last week, while finally cutting the official interest rate by a click, the Reserve lamented the need to lower its assumed annual rate of improvement in productivity from 1 per cent to 0.7 per cent, with governor Michele Bullock noting there was nothing the Reserve could do about productivity. The weirdest thing about this episode is the way the business lobbies have got away with portraying the lack of productivity improvement as having been caused by the government. It's as though productivity is something created on the Cabinet room table, the product of good – or not-so-good – policy decisions. Loading You'd never know that the figure for national productivity improvement is largely the summation of what's happening in all our farms, mines, factories and offices. By how much have each of them become more efficient at doing what they do. But no one ever bothers to ask the bosses – or even their Canberra lobbyists – why they've stopped getting better at what they do. If they did, they'd be told it was all the government's fault. Too much regulation and red tape, too high taxes and too little freedom to change their employment arrangements. Yeah, sure. You get closer to the truth when you remember Sims' Law. Rod Sims, the former competition watchdog, never tired of explaining that improving their productivity was just one of the ways businesses could increase their profits.
The Age
2 days ago
- Business
- The Age
Want better productivity? Keep wages rising strongly
Our economy has become unbalanced and is in danger of slowing to a halt. But not to worry. The Reserve Bank is determined to ensure that, should we sink under the sea, we won't have had an inflation problem to worry about. This is the week we fix our productivity problem, but how far we get remains to be seen. The problem is that, while improving the efficiency with which the economic machine converts inputs of raw materials, capital equipment and human labour into outputs of goods and services has been the way we've raised our material standard of living over the past two centuries, there's been no improvement in this productivity for a decade. But if that's the problem, we still have a problem: no one wants to accept responsibility for fixing the problem. That's for the government to do. Even the Reserve Bank wants to pass the parcel to the government. Last week, while finally cutting the official interest rate by a click, the Reserve lamented the need to lower its assumed annual rate of improvement in productivity from 1 per cent to 0.7 per cent, with governor Michele Bullock noting there was nothing the Reserve could do about productivity. The weirdest thing about this episode is the way the business lobbies have got away with portraying the lack of productivity improvement as having been caused by the government. It's as though productivity is something created on the Cabinet room table, the product of good – or not-so-good – policy decisions. Loading You'd never know that the figure for national productivity improvement is largely the summation of what's happening in all our farms, mines, factories and offices. By how much have each of them become more efficient at doing what they do. But no one ever bothers to ask the bosses – or even their Canberra lobbyists – why they've stopped getting better at what they do. If they did, they'd be told it was all the government's fault. Too much regulation and red tape, too high taxes and too little freedom to change their employment arrangements. Yeah, sure. You get closer to the truth when you remember Sims' Law. Rod Sims, the former competition watchdog, never tired of explaining that improving their productivity was just one of the ways businesses could increase their profits.
The Age
18-05-2025
- Business
- The Age
Want greater productivity? Set wages to rise by 3.5 per cent a year
Remember this next time you see the (Big) Business Council issuing yet another report urging the government to do something to improve productivity. What businesspeople say about productivity is usually thinly disguised rent-seeking. '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. Loading 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.
