As it makes it way gracelessly towards a post journalism future Fairfax is becoming a study in downsizing organisations, between the plethora of last comments from skilled writers who have shaped the way Australians see themselves and the world over a generation, to the desperation resonating exhortations of those still on the books as a guide to how desperate they are to remain thus.

Jess Irvine is one of the latter.  She regularly tees off with incoherent economic diatribes as a sort of backfill spakfilla when Gitto or the Pascoemeter take holidays, and occasionally limbers in with some reasonably pertinent observations on social phenomena (notably housing).  Sadly, todays serve is one of the former – another vacuous incoherent chunder of utter bilge revolving around the economy and labour economics, with a dash of an anti-Union slant.

I don’t have a problem with an anti-Union slant, and for a decade was an industrial relations official on the employer side for some of Australia’s larger employers – so I have seen them carry on with some weird shit.  But that same experience has led me to the view that the reason for the enduring popularity of Unions in some sectors of the economy is that any given management is highly likely to be carrying on with shit which is every bit as weird, and as far as most employees of their workplaces is concerned is likely to be far more pernicious shit in terms of impacting on their conditions, incomes, and the way they do their work.  In many workplaces it takes the form of a fairly vicious form of workplace politics, which can shape everything from hours worked to promotion or training opportunities, to allowances and workplace safety.  Depending on the workplace it can become serious.  And in many of those workplaces joining a Union makes sense as far as an address to those circumstances is concerned, and ultimately joining a Union is just another manifestation of the safety in numbers and organising in response to a threat phenomena – albeit where the threat is management.

And so we come to todays piece which ostensibly takes snippets of the Australian economy as it is, and attempts to make it stand up as an argument for more education to generate more income and then skips around aimlessly describing whatever economic thoughts have come to Jess at the time ………

…….if only it were so easy for ordinary Australians to earn their crust

 

Education, not revolution, our best hope to improve workers’ share of income

Jessica IrvineJessica Irvine

 

Thanks for the motherhood statement Jess, Education is generally a better bet than revolution. But when spouting education wouldn’t it be an idea to think about what sort of education is likely to generate an improved economic outcome, and from there it is not much of a skip to pose the question of at what point education itself is likely to be somewhat revolutionary itself.  Then there’s the not unrelated question of education in what?

 

Here’s a fact to make every trade union member weep – those few who remain, anyway.

The share of Australia’s national income being pocketed by workers has shrunk to its lowest in half a century, mirroring a decline in other countries which has sparked renewed popular interest in pro-union politicians like Bernie Sanders and Jeremy Corbyn.

 

Well it may be more than just Union members weeping Jess.  RBA Governor Lowe was out last week arguing that workers need to be more assertive in asking for pay increases – and if it’s assertive we are after then a foul mouthed tirade from a union official may just fit the bill.

From there we can ask ourselves if Jess is even remotely aware of economic history.  She is suggesting that over 50 years where the Reagan era in the United States and the Thatcher era in the UK and even the Hawke era forward in Australia have been largely about removing the additional margin that labour organisation can achieve in the economy, with neither the Democrats in the US under Clinton or Obama, Labour the UK under Blair, or the ALP in Australia under Rudd or Gillard showing the slightest semblance of an impulse to redressing the bargaining power of labour (all of which have also splashed private debt about as an antidote insofar as enabling material gains by workers while not taking more of the economic cake from capital).

But before we all take to the streets in protest, there are a few things you should know.

First, what exactly are we talking about here?

We sometimes do wonder that with your pieces, Jess

Economists often talk about the four “factors of production”. They are land, labour, capital and entrepreneurship.

Put ’em all together, and what do you get? A whole bunch of economic output.

But possibly abysmal English

Sell all that output – to foreigners as exports and domestically to consumers – and you get national income.

And the role of debt has what impact upon this model, Jess? More pertinently if any significant chunk of those domestic sales are funded by debt then to what extent are we pulling future demand forward to the present, and if that debt is made available on the expectation of income gains and the income gains never materialise then at what point do those making the debt available carry some accountability and at what point should those carrying the debt say to themselves that servicing the debt is no longer a viable economic activity.  How should they balance the debt servicing against other lifetime exigencies such as families food houses and energy?  Any thoughts you’d care to share with us Jess?

Who gets that income? Well, it is distributed as returns to the various factors of production.

The two main ones are capital and labour.

Careful Jess, your bosses might think you are starting to sound Marxist

According to the latest national accounts, the share of ‘total factor income’ going to workers as wages, fell to 51.5 per cent in the March quarter – a sharp 3 percentage point fall over the year. Meanwhile, the profit share – or the percent going to capital – rose by a similar amount.

So, are bosses just getting better at screwing over the workers?

Probably, a bit. It is true that the decline of trade union membership and decentralisation of wage bargaining have reduced the wage bargaining power of labour.

But for the ambient reader the answer to the question Jess poses is ‘yes’ and that this has been the policy of governments from both sides of politics since the 1980s in Australia, the 1970s in the UK and the 1960s in the US – largely embedding the 50 year decline in the labour take of economic gains that Jess refers to above

But there are other forces in play.

Australia, as we know, is a unique economy.

It is unique as an economy for being more privately indebted than almost any other economy, having a sole competitive sector of the economy in mining and agriculture which employs about 4% of the workforce, having a smaller manufacturing sector than any member of the OECD apart from Luxembourg, having a larger migrant intake per head of population than any other member of the OECD, and having the largest share of foreign born residents in the developed world.  To say it is a ‘unique’ economy, is, if you aren’t paying attention, to miss the fact that it is a spectacularly heavily indebted, unbalanced economy, reliant on debt and a population Ponzi, led by a political class which has its head up its China funded arse, and a corporate elite which is redolent of parasitism.

In particular, the steep rise and fall in our national terms of trade – the prices we receive for our exports versus the prices we pay for our imports – radically reshaped the economy in the 2000s.

Did it ever, Jess.  It enabled the nailing of the Australian dollar to the roof which burned off the export facing and import competing sectors of the economy, while at the same time enabling the force feeding of Australians with private debt, as they pushed their house prices to the global summit – leading plausibly to the question of where they go from here.  We assume you are suggesting they go and get some more education, but anyone reading your piece will be fairly sure the real answer is ‘down’ and that it will involve relieving themselves of debt while they descend, while trying to find jobs in sectors of the economy which are actually globally competitive (mainly a long long way down in the valley with the wildebeest and lions) or are protected from anything as distasteful as competition by government spending or law.

It led to a large expansion in our mining sector, which tends to be capital intensive and labour light. That is, it takes an awful lot of capital to build all those big trucks and build those railways, but relatively few workers to operate them, at least once they’re fully built.

If you really want to get to the economic narrative Jess then you could also identify that the largest beneficiaries of the mining boom (the large miners) have largely remained less taxed than would best be the case for Australia’s national interest – representing phenomena ranging from Singapore marketing to their decapitating an Australian Prime Minister – and that the incoming capital has been used by RBA and Treasury policy to nail the Australian dollar to the roof and make everything done in Australia by Australians globally uncompetitive.

In a 2013 paper for the Productivity Commission, economist Dean Parham, estimated that the entire fall in the labour share of income in the 2000s – about 4 percentage points – was due to this terms of trade effect.

In reality, according to Parham: “Labour was no worse off in the process. Labour income grew at a faster rate in the 2000s than in the 1990s through stronger growth in both wages and employment. The labour income share only fell because capital income growth accelerated even more.”

Jess, there is far more recent analysis of the Terms of Trade than Parham’s 2013 paper.  But seeing as you have raised it would you care to comment on why, as the terms of trade have receded since 2012 has the labour share of income diminished further?

As for misusing Parham’s quote to imply that there is nothing untoward in the labour take in the 2000s – to what extent does this reflect national debt being racked up (and accommodating pay increases) in circumstances where the debt (and the pay increases it has enabled) may not be sustainable unless there is ever greater take up of more debt and access to that debt?  Once the world eases off paying for Australian coal, Iron ore and gas Jess, would it start to question why it is allowing us so much debt? Would it raise interest on that debt?

And while the owners of capital were enjoying supersized returns, workers were also benefiting from cheaper import prices, which increased the real value of every dollar they earned.

“This purchasing power effect (which was available to all income earners) more than outweighed the apparent reduction in labour’s share of national income.”

This means that workers were going further into debt to buy trinkets and houses when the debt had a great value but that the repayment of that debt would occur at a time when the purchases it had enabled meant less to the beneficiaries, when their repayments would represent more of their financial basis, and when their capacity to service the debt was undermined by the uncompetitiveness of the economy they were working in – is that what you mean Jess?  And we note that you refer to capital owners getting ‘supersized returns’  whereas workers ‘were also benefiting’ (shall we assume their returns weren’t also ‘supersized’? – immigration floodgates again?

Overall, the Australian economy became more capital intensive, because of this rapid expansion of the capital intensive mining sector – which represents about one-fifth of all capital invested in Australia.

Yes, that one fifth going into mining investment has become the fulcrum used to expand the four fifths of Australias highly financialised economy, creating an asset bubble most obvious in the housing market, but also conspicuous as a factor in the uncompetitiveness of Australian employees, the large share of luxury car sales, the large numbers of accountants per head of population in Australia, and the large scale tax avoidance by certain sections of Australian society

If it takes more capital input, relative to labour input, to produce a certain amount of output, you would expect a higher return to capital relative to labour.

OK then, so will your next piece be an exhortation for labour intensive investment?

Until recent decades, economists had assumed that the share of income going to capital and labour would remain steady over time.

But the large decline in labour’s share globally has got them thinking again.

I don’t know which economists she is reading but most of those I read have been saying for a generation that diminishing the labour share of the economic pie and papering over the implications of that with debt is a long term recipe for major social problems, greater inequality, diminishing economic vibrancy and a more inwardly focused socio economic dialogue.  See Picketty.

Globally, most advanced economies have seen a decline in the labour share, which is often attributed to the twin forces of globalisation and new technology.

And overt adoption of legislation to limit the ability of labour to bargain – by both sides of mainstream western politics.

Globalisation has exposed workers in developed nations to competition from cheaper, lower wages workers in developing nations. This has reduced their wage negotiation power.

Seeing as you are there Jess, you could also add that Australia is distinctive for the rate at which it imports these lower cost developing workers and its range of means by which Australian employers (in particular) can undermine Australian workers conditions by employing foreign nationals using them

 Foreign born employees in Australia’s workforce

Technology has also undermined worker power, by replacing humans in many cases with machines, computers and robots. If it takes fewer workers to produce a certain output, you would expect them to get a declining share of income.

The continued weakness in Australian labour’s share of national income in more recent years may indeed be due to the lower labour intensity of the new economy.

Yep, but if we accept that then there is the question of why we would be exhorting private debt to the extent that we have done, and from there is the not unrelated question of why we are promoting a spectacular array of debt laden educational opportunities which will not offer a skerrick of additional competitive bargaining power in the face of robots computers and machines?

But nor can we assume the fall in labour’s share of national income is entirely structural.

Indeed, employees would do well at this point in the economic cycle to heed the advice from Reserve Bank governor, Philip Lowe, to not worry too much about “foreigners and robots” and to find the confidence to start asking for pay rises.

He certainly hopes they do.

Well we can assume it is structural to the extent that it is policy of both sides of politics to limit the bargaining power of labour, and that there is, as yet, no other economic sector which is likely to employ people which is free from the downside of automation, and that given the volume of debt they carry a lot of Australian employees will be keen to do that bit extra without asking for a pay increase if they fear their gigs will be taken over by robots or cheaper foreigners or migrants.

Because if they don’t, economic growth will remain anaemic. Indeed, when workers don’t get their fair share of the returns from their labour, the whole economy suffers from lower demand and lower consumer spending.

Indeed, there is little reason to prefer an economy in which a larger share of the economic pie goes to capital versus labour, given that the majority of households rely on wages for their income.

This is not just where we are heading, but policy, by every major economic player and both sides of politics.  For most people there is absolutely no reason at all to prefer that world, and every reason to prefer a world of reduced immigration, reduced private debt, greater investment in import competing or exporting services, reduced financialisation, greater corporate and political transparency, less tax avoidance and less corruption – which explains the pervasive disengagement of our elites from the experience of ordinary Australians.

So, what should we do about it?

In his 2013 paper, Parham cautioned against any moves to restore labour’s income share through a return to the old days of more centralised wage bargaining, warning of the inflationary risks.

More recent stagnant wages growth makes this less of a risk.

Well there are two choices at the individual level and two choices at the national policy level.

At the individual level you can find a skills set which is either globally competitive (and in Australia this will be in mining or agriculture) or is protected (see medicine and associated sectors – where the AMA in one of its guises controls course accreditation, traineeship numbers, the right to work, and minimum fees involved for every step of the way for members of Australia’s most powerful union – for the role model of best practice protection)

At the national economic level we can have

  1. legislators embark on a course of identifying where our national economic strong suites are and crafting an economy which is better prepared to compete and will be good enough at doing so to sustain aggregate demand at levels where material aspirations of Australians are largely met

or

  1. legislators enable the flooding of the country with additional immigration, without an economic narrative, in such a way as to sustain aggregate demand statistically, while adding to infrastructure overuse and congestion, and undermining wage growth potential, and promoting debt, in circumstances where the problem they face is handed over magnified to subsequent generations.

It would appear that currently the latter is our national strategy, and that for most people protected employment is a better bet than globally competitive employment.

But Parham’s call for greater focus on productivity-enhancing reforms, remains apt: “Wage growth without productivity growth is not sustainable. With declining terms of trade, a focus on re-invigorating productivity growth would provide the conditions for sustainable growth in real wages.”

Seriously? – its apt? (appropriate or suitable in the circumstances?) Is it the only apt thing Jess, or is it apt along with other apt things you haven’t seen fit to mention? Or is it apt to fill in your piece?  In quoting Parham here you have seemingly missed the fact that Australian labour productivity has been motoring along fine while wages have dropped off the perch…….

Australian labour productivity  – 3 charts

 

And that is before we get to the idea that productivity growth without wage growth is quite sustainable – and serves the interest of capital owners, and reflects a generations worth of regulatory settings brought about by both sides of Australian politics, and capitalised on by global capital and their Australian operations.

Wouldn’t that bring us somewhere close to the idea that a little bit of revolution – at least in a domestic political sense if not on the streets overturning cars –may well be called for?

Governor Lowe also warned this week that the next quarter century was likely to bring lower average growth in per capita incomes than the last quarter century.

Well he is the scion of an organisation which stood at the open gate while the horse bolted – and fired the interest rate pistols into the air.  He knows what is coming.  Your drag future demand forward with debt and you have to ease back at some point.  Australia will be easing back, if not actually going into a coma, for quite some time.

Investing in education – so-called ‘human capital’ – remains the “central ingredient” to re-envigorating growth, he offered.

It also offers the best hope we have that our children will enjoy a decent share of the economic pie.

Well that was it guys.  Anyone looking at the headline and wondering why education would be better for us than revolution gets their answer in the last paragraph after a motley collection of motherhood statements and misattributions and generally primary school level economic theorems – because RBA Governor Lowe offered it.  Thanks for that Jess.

Ross Gittins is on leave.

Jess could probably do with some too