Why pay rises won’t screw the economy
I’ve long believed that no government – state or federal, Liberal or Labor – should be in office for more than a decade before being put out to pasture. But I can’t say the demise of the 12-year-old Perrottet government in NSW filled me with joy.
Liberal-led governments have been falling like ninepins. But this one happened to be the only one genuinely committed to limiting climate change, improving early childhood education and care, and getting more women into politics (even if its party members weren’t playing ball).
Illustration by Simon LetchCredit:
The best thing about Dom Perrottet’s departure is the end of his cap on the size of public sector pay rises. Its removal will add to pressure for higher public sector wages in the other states – particularly Victoria – and at federal level.
It will even put a bit of upward pressure on wage rates in the private sector.
If you wonder why pay rises have been so small over the past decade, government wage caps – in Labor states as well as Liberal – are part of the reason. They’ve reduced the price competition for workers throughout the economy.
But don’t take my word for it. When he was desperate to get inflation up to his 2 to 3 per cent target range, Reserve Bank governor Dr Philip Lowe said the same.
Premier of NSW Chris Minns will scrap the public sector wage rise cap.Credit:Kate Geraghty
In NSW, public sector wage rises were capped at 2.5 per cent in 2011. Only when the inflation rate started heading to 8 per cent was it lifted to 3 per cent.
There’s never a shortage of people predicting that higher wage rates will lead to death and destruction. Many Canberra lobbyists make a good living crying poor on behalf of the nation’s employers.
I’m sure there must be some businesses somewhere doing it tough, but you don’t see much evidence of it in the business pages of this august organ. The reverse, in fact.
But won’t higher wages just lead to higher prices? Yes, but not to the extent it suits business groups to claim. Wages and other labour costs don’t account for anything like the majority of the costs most businesses face.
It won’t say so, but the RBA is hitting the brakes precisely because businesses were getting a bit too willing with their price rises.
If all firms do is pass on their higher labour costs, all it will do is slow our return to low inflation. It’s when firms use the cover of the highly publicised rises in their costs to add a bit extra to their price rises that inflation takes off.
But that’s less likely now the Reserve Bank is jacking up interest rates to slow the economy down. It won’t say so, but it’s hitting the brakes precisely because businesses were getting a bit too willing with their price rises.
Certainly, it’s not because wage rises have been too high. Few if any workers have been getting – or are likely to get – wage rises anything like as high as the rise in prices.
That’s likely to be true even for the “frontline” nurses and teachers in NSW, whose unions will be celebrating the end of the wage cap by hitting Premier Chris Minns for big increases.
It will be least true for the bottom quarter of workers dependent on the national minimum wage and the range of minimum wage rates set out in awards, who are likely to be awarded decent pay rises by the Fair Work Commission, as they were last year.
We can’t possibly afford that? Really? Nah. “If you made a list of all the things that are giving us this inflation challenge in our economy, low-paid workers getting paid too much wouldn’t be on that list,” Treasurer Jim Chalmers has said.
Why am I happy to bang the drum for higher wages? Because, as any year 11 economics student could tell you, the economy is circular.
Business people may begrudge every cent they pay their workers, but they’re pretty pleased to have all those dollars back when the nation’s households front up at their counters.
A big part of managing a capitalist economy involves saving short-sighted business people from their folly.
As for minuscule public sector pay caps, ask yourself why it’s fair enough to expect people who work for the government to accept lower rates of pay. Because they’re second-class citizens? Because they stand around leaning on shovels?
Because they’re not as smart as the rest of us? Well, if you go on doing that for long enough, you probably do end up with the cream of the crop going to higher-paying jobs in the private sector.
Which means it’s not just a matter of fairness. Underpay your nurses and teachers and then wonder why you can’t get enough recruits.
Yes, but how will Minns possibly pay for those higher wages? He could cut the number of nurses and teachers he can afford to employ, but I doubt he will.
No, he’ll do what a business would do: raise his prices. Except that, in government, prices are called taxes. You want the workers? You pay the going rate. It’s the capitalist way.
Ross Gittins unpacks the economy in an exclusive subscriber-only newsletter every Tuesday evening. Sign up to receive it here.
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