Living wage is living in the past

Simon Cowan

16 March 2019 | The Sydney Morning Herald

“The old order changeth, yielding place to the new,” progressives cry. Or they would if Tennyson had sufficient diversity points to be included in the modern school curriculum.

Yet modern progressivism is remarkable for the fact that its face is so often an older man, spouting even older ideas.

The savant of America’s young radicals is Bernie Sanders, who is gearing up for another run at the US presidency at the tender age of 77. Jeremy Corbyn in the UK has ‘momentum’ among British youth, and a reheated plate of British socialism (though I’ll bet he at least learned Tennyson at his grammar school).

In Australia, it is Bill Shorten’s turn to reach back into the graveyard of abandoned ideas, with the revelation that his government and the unions share a common goal of mandating a ‘living wage’ for workers — though they may differ over the details.

It’s only natural that a former union leader would harken back to the days when union officials were instrumental in making decisions in the economy. But the choice to expand government’s influence over wage bargaining, and to signal a move back towards a more centralised model of determining pay rises, would be absolute folly. As it was the last time we tried it.

Paul Kelly famously described it as the Australian settlement, established in the early 20th century; and three of its chief components were centralised wage fixing, industry protectionism and immigration controls.

Unions, business, and government all cosied up together dividing the economic pie. Each element of the system reinforced the others, and was necessary for it to ‘work’.

Without restricting immigration, along with things like closed shops and pattern bargaining, unions could not effectively control the supply of labour (and hence push up its price). Centralised wage fixing effectively replicated union gains in one sector across the economy.

Protectionism allowed business to pass on the expense of these wage claims to consumers without fear of competition from cheaper, and better, imports.

The consumer was the loser in all of this. Far from having their living standards boosted by artificially inflated wages, their living standards were actually lower. They were forced to accept inferior, more expensive, Australian made products. They were denied access to innovative new technology from overseas.

Australia stuck with that system for as long as possible, well past the point at which stagflation and economic underperformance proved conclusively it didn’t work. Our country was poorer for it. Which is why successive Labor and Liberal governments junked the system. The government stopped trying to prop up living standards through macroeconomic control and focused instead on microeconomic reform. They effectively replaced ‘living wages’ through industrial relations system with ‘social wages’, a strong safety net of welfare and programs like Medicare.

This allowed them to free up immigration, introduce competition through imports and dismantle much of the antiquated industrial relations architecture. So effective was this effort that the percentage of workers who are dependent on awards for wages has more than halved in the past 25 years.

It is also worth noting that this fall in workers on awards will actually blunt the effectiveness of increasing the minimum wage as a way of generally increasing wages. However, it will make unskilled labour even less competitive with capital investment (for example automated check-outs in supermarkets).

But it’s not a coincidence that the dismantling of the Australian Settlement in the 80s and beyond, and the concurrent decline in union membership, led to a period of sustained economic growth, and perhaps more importantly widespread income growth.

A system of free trade, high immigration and workplace flexibility is inherently better than a closed shop, a closed economy, and a closed country. It’s better for everyone — except those in charge of the old system.

Maybe that is why, despite the failure of the Australian settlement and the last quarter-century of sustained economic growth, unions and Labor are pushing to move us forward to the past.

Donald Trump is rightly criticised for trying to take America back to the 1950s with his tariffs: how is it different to try and reincarnate Australia’s industrial relations system from the 1970s?

Yet what is perhaps even worse, is that Shorten is proposing to significantly increase the cost to business of employing workers, in an environment where Australian firms are subject to strong competition from overseas.

Government cannot simply decree an increase in wages without cost. If it could, the western world would not be facing the common problem of sluggish wage growth. No matter how slowly this increase is phased in, it will cost jobs. It will harm Australian businesses.

Governments and unions are not good at determining what is best for the economy. They are terrible at determining what is best for consumers. Shorten should rethink this policy.

Simon Cowan is research director at the Centre for Independent Studies.

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