Why do they keep going on and on about tax when they must know it’s not our real concern? Because the sudden dive in wage growth – the thing that is really worrying us – is beyond their control.
As recently as 2012, just six years ago, wages were growing like they usually had, at a touch under 4 per cent per year. The rapid dive meant that by June 2014, two years later, they were growing at 2.4 per cent, the lowest rate since the last recession, and a good deal less than the lows plumbed during the global financial crisis.
Another two years later they were growing at just 2 per cent; even less than in the early 1990s recession, and on the face of it, the least since the Great Depression in the 1930s.
Yet we weren’t in a depression, or even in recession. And we kept buying houses and other things as if wage growth would recover. It needs to recover to make those home loans and car loans manageable.
Banks and finance companies have formulas they use to decide how much to lend. Unchanged since the days when workers could expect solid wage rises, they are based on income and the size of a deposit. Difficult to manage at first, home loans became easier to repay as the borrower’s income climbed, meaning many were paid off early. But not now, not unless wage growth picks up.
Banks are advancing 30-year mortgages to 50-year-olds. Without faster wage growth, a lot of those borrowers will remain mortgaged into retirement, and have much of their pension eaten up in payments, a fate their parents escaped.
Reserve Bank governor Philip Lowe touched on the phenomenon in a speech last week. His bank has even coined a name for it: mortgage tilt. Whereas required payments as a proportion of income used to tilt down over time, now they are more horizontal, meaning a long horizon of fairly constant payments. Unless interest rates climb, in which case payments will climb, which would be even worse.
And he pointed to something else. He said low wage growth was “diminishing our sense of shared prosperity”. When I first visited Japan in the late 1980s the locals seemed optimistic and proud to be part of something big. When I next visited in the late 1990s after a decade of near zero wage growth, their faces and stories were glum, even though by international standards they were prosperous and had jobs. Glum Australians feeling they are not part of the Australian project can derail the project, as we have seen in Britain and the United States.
Why should wage growth have dropped so suddenly, when the unemployment rate is little different to what it was back when it was high?
The first thing to note is that we are not alone. It’s been a shift throughout the developed world, with Japan getting in early. Improved communications have made competition from cheaper workers overseas a potent threat. Also, unions no longer have the bargaining power that they used to.
In the words of Andy Haldane, chief economist at the Bank of England: “There is power in numbers. A workforce that is more easily divided than in the past may find itself more easily conquered.” As recently as 1990, 40 per cent of the Australian workforce was in a union. Now it’s 14.5 per cent.
Unions no longer have the unfettered right to enter workplaces, or the right to demand special clauses in awards that benefit only their members. Strikes are illegal in most circumstances, and require notice and hard-to-organise ballots in others. The Fair Work Commission can no longer intervene to resolve disputes without the consent of the employer.
And although employment is strong, people are losing their jobs. Telstra is letting go of 8000, many in its Melbourne headquarters. The National Australia Bank is shedding 2000 each year for the next three years. The NSW public service will lose as many as 11,800 jobs as a result of efficiency measures in this week’s state budget. Few workers, in any of those organisations, are going to feel game to make themselves expensive.
The way Dr Lowe sees it, a small number of Australian firms are investing massively in the technology needed to do things more cheaply. A much greater number are not, and are having to fight off brutal price competition. The only way they can do it is to hold the line against wage increases, even at the cost of missing out on good staff.
Added to this might be what US economist Paul Krugman calls the scarring effect of the global financial crisis. He says employers discovered during the crisis that they couldn’t cut wages, even though they needed to. It wasn’t socially acceptable. It taught them that “extended periods in which you would cut wages if you could are a lot more likely than they used to believe”.
So they’re keeping wage costs low, in preparation for the next crisis. It’s an awful response, with political as well as economic implications.
Government forecasts notwithstanding, it is hard to see anything changing for quite some time. Glum is starting to look like the new normal.