The Dog’s Bollocks

Truth is like a dog’s bollocks – pretty obvious if you care to look.

The limits of productivity as a wage determinant

In the face of the latest post-budget concern by the commentariat that there will be a wages break out under Labor’s Industrial Relations regime, the Government is at pains to assure us that wages will only increase by improvements in productivity.

Productivity increases for wage increases have been a feature of Australian IR since the days of Hawke’s Wages Accord. While productivity is certainly an important factor in wage remuneration, it cannot logically be the only determinant. For example, a worker employed in the public sector would have to be twice as productive to earn the same relative amount once the cost of living has doubled.

While this could conceivably be the case in a manufacturing job with changes in technology (ignoring the likelihood that less people would be employed), how does this sensibly apply to nurses, police, doctors or teachers, where productivity isn’t determined by numbers of widgets produced? Will teachers need to teach twice as many kids or teach the same number twice as quickly? Will public hospital surgeons be required to operate on twice as many patients, or the same number twice as quickly? Such scenarios are patent nonsense.

The profit sector typically aspires to grow at 10% per annum. In this case, productivity increases in wages sufficient only to keep pace with the cost of living (say 4% per annum) will lead to a wage increase of around 30% after 5 years. Profits in the same period will have doubled.

Clearly wage determination must also be linked to profitability for an equitable growth in prosperity. This was a factor in The Accord’s Enterprise Agreements. Presumably market forces in the private sector, such as limits in the supply of highly skilled labour in the mining industry, for example, will lead to wage growth beyond that determined by productivity. In the public and not for profit sector wages growth must necessarily be linked with the increased cost of living and not on productivity alone.

Wages limited to productivity alone is the dream of free market ideologues as a means of enhancing profits by reducing the cost of labour inputs. Work Choices was an audacious and clumsy attempt to enshrine this imbalance in the Australian economy. It inevitably leads to greater profits and dividends for executives and shareholders to the detriment and cost of working families.

20 years ago, nearly 50 percent of working men and women in Australia were clustered around the middle income band. By 2005 that proportion has slipped to 37% for men and 44% for women*. The increased casualisation of the workforce, longer working hours and 7 day working weeks are all having an impact on the quality of family and community life with growing numbers of overworked or under-employed individuals suffering stress, family dysfunction, anxiety and depression.

Linking wages growth to productivity alone, without consideration of the growth in profits it brings and the burden of the increased cost of living, is inequitable and socially destructive. I guess how you see it depends on whether you think we live in a civil society or The Economy, or whether you are a worker or a business owner.

* Hugh Mackay, 2007, Advance Australia Where? p83.

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Filed under: Economics, ,

5 Responses

  1. Hanrahan says:

    Captialism seems only to grow by orders of magnitude, when it either and temporarily is riding on the wave of the latest new gizmo, or when and then has access to cheap labour. Cheap labour hasn’t been available in Australia for a long time, if ever, although under Howard it looked like it was could almost be realised. Labor have a plan and we could be about to witness a 21st Century version of ‘blackbirding’.

    I agree with you about the nonsense of productivity growth being the only determinant for wages growth, as there are, as you point out, many areas that are not necessarily able to be shown to be productive per se. (I also find it irritating that banks now offer ‘products’ but can’t decide whether this new fangled term is an abuse of language or, more cynically, an abuse of our credulity.) but that’s btw

    I saw that coal had gone up from $100 a tonne to $300 tonne and immediately wondered, but then thought the better, whether this price increase would flow downwards to higher wages for miners etc. Of course not! Silly me.

    But back to the latest idea of importing cheap unskilled labour. I can hear agribusines rubbing its hands in delight and anticipation and unionists muttering, ‘muddy black bucket of pitch’.

    In egalitarian Australia, the main problem for capitalism is that in order to survive it needs people both wealthy enough to buy what it offers and people insufficiently wealthy to labour away at inputs it can afford. (Whilst maintaining CEO’s income at 1000% of what the lowliest earn). We’re all more or less struggling for the same standard of living and so one party is, when viewed logically, doomed to struggle. As always between industry and unionists, in this situation, ne’er the twain will meet. One side unfailingly wants more money for less work, while the other unfailingly wants more work for less money. Either way we’re rooned, unless we can agree that the world’s less fortunate, struggling on less than a dollar a day, come to Australia temporarily (of course) and earn a whopping ten. But I can’t see how a spin can be doctored to make this idea seem anything other than anachronistic/Dickensian.

  2. derrida derider says:

    Sorry, as an economist you’ve got a long way to go. Where to start?

    For example, a worker employed in the public sector would have to be twice as productive to earn the same relative amount once the cost of living has doubled.
    Indeed, and the nominalcash value of his output would indeed be doubled. But as, by assumption, cash is now worth half of what it used to be the real productivity and real wage would be unchanged.

    Only in a perfectly competitive market does the individual wage coincide with individual marginal productivity, and government employment hardly meets that. But absent any systematic changes in the competitive composition of the economy, at the macro level changes in real wages will track changes in productivity. In the statistical jargon the error term (ie the average distance between individual wages and individual productivity) is fixed. In fact, both long-run compositional changes and shorter-run business cycle variations mean that even this macro-level correspondence is imperfect, but the data do show the correlation is there.

    At the micro level I’m an exponent of the “new labour economics”, which argues in effect that information imperfections allows them to be paid less than their marginal product (ie be exploited in the Marxist sense), and that careful regulation can correct that without harming employment levels. But that’s quite different from the macroeconomic arguments about rates of growth in average real wages.

  3. slim says:

    Right then.

    That must explain why teachers are paid about 40% less than they were 30 years ago. I thought we were just being screwed over.

    Those darned information imperfections will get you every time.

  4. Hanrahan says:

    You’re right slim, you’re being screwed over.

    With all due respect dd and no doubt, you’ll just roll your eyes and give up. But really what a load of obfuscatory, essentially meaningless ‘theory’. It cannot possibly be as complicated as you make it sound and if it is, then is it any wonder we’re going down the gurgler at a rate of knots?

    ‘Information imperfections’ seem to be writ large, all over at present.

  5. […] Slim argues there is a limit to productivity as a wage determinant. […]

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