Raising wages is good for the economy and society

Contributed by Joe Montero

On the day when the Fair Work Commission is to hand down its decision on penalty rates, the Australian Bureau of Statistics (ABS) has released date that shows that real wages have remained flat, at the level of four years ago.

Lending further credibility to the evidence of wage  stagnation was the Reserve Bank’s governor, Philip Lowe, coming out to say that “wage increases are likely to remain below average for some time yet”.  The reference to “average” is a touch of diplomacy from someone who must choose words very carefully. What he said is that there is going to be no change in the foreseeable future.

The December quarter figures showed the biggest fall and it occurred in both the public and private sectors.

Despite the evidence, leading employer groups and the government push for a decrease in wage growth. When real wages are not growing and nominal wages growth is at a record low of 1.9 percent over the period, it can only mean that the push is really to reduce wages.

The difference between nominal and real wage is that a real wage refers to the money paid and real wages to the value of the wage, in terms of what it will buy.

Suggestions that this is a good thing are extremely short-sighted. They ignore that falling wages have spinoffs that spread more widely; from the corner shop finding that the regulars come in less often, because they cannot afford to buy as before, fewer take that holiday and more put off buying that new television.

The lowering of wages will put downward pressure on the rate of return on investment, through the operations of the market.

A a dynamic interaction plays between labour and capital as inputs. And it is this interaction that must be the reference point, rather than seeing each as stand alone. A shift in the proportions will lead to either heightened labour or capital intensity in the longer-run. Lowering wages will have the effect of raising labour intensity and this will tend towards a slowing of employing new technologies and doing things better and at less cost. This will also work against shifting the economy to a more environmentally sustainable footing. Just ask people in Third World countries, whether cheap labour is good for economic  advancement of the economy.

Lower wages will also exert a downward pressure on prices. For the seller, it means a lower return on investment.  If the seller is already at he edge, this cold mean disaster.

The impact the flow on effects of lower wages will hit small businesses the hardest. Those at the top end can protect themselves by increasing their market share and the volume of  business. This means a further monopolisation of an economy that is already one of the most highly monopolised in the world.

Perhaps this is what is driving the peak employer organisations, which represent the biggest corporations operating in Australia and which the government follows like an obedient puppy.

There is a great deal of evidence that major corporations chase market share, rather than a higher rate of return. Greater volume can compensate for the difference. If you don’t believe it, an examination of the business plans of one or two of these corporations will convince you.

As a society, we do have to ask whether increasing monopoly  is a good thing. More monopoly will mean less competition, higher prices that would otherwise prevail and the decisions that affect us all being made by a smaller élite, mostly sitting in boardrooms in New York and London.

The Fair Work Commission should take these factors into account, along with the basic concept of justice. All bets are that it won’t.


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