The new Treasury research reveals that stubborn workers who decline to switch to more dynamic and productive companies are a main cause of the country’s record-low wages growth.
Australia’s lead economic advisers are urging Scot Morrison to set out amendments for wage increase as a major number of employees continue to work for unproductive organisations pull down salary increase across the economy.
The country’s most senior bureaucrats who attended the Economic Society of Australia’s yearly conference in Melbourne also pressed lawmakers for “more honesty” in debates regarding the limits of economic modelling and to involve voters with “accessible” language that “demonstrates respect for the person you’re talking to”.
Treasury deputy secretary Meghan Quinn, who spoke in the conference, will launch the new study and analysis presenting how the broken connection between salary increase and company-level productivity could be viewed as the major reason for as much as a third of the “unexplained” weakness in wages growth over the past ten years.
The research shows that the lack in organisational reforms to encourage employees to switch jobs and motivate innovation across industries causes wage growth to “unlikely” to return to pre-global financial crisis levels.
“Treasury work highlights the fact more frequent job switching is associated with higher real wage growth, even for those that stay in their job,” Ms Quinn said.
Productivity Commission chair Karen Chester said that effective government policymaking was a significant factor to “avoid the risk of growing mistrust in public administration” as she gives a follow up warning to the proposal to drive salary increase.
“If we find ourselves in the ¬absence of effective government, competitive markets delivering growth with fairness will become elusive,” Ms Chester told the Economic Society conference. “Our equality-enhancing tax and transfer system will become unaffordable. And our vision of handmade policies for the truly disadvantaged will be relegated to the Bardo world of policy intractables.”
As the trends baffle world policy makers, Ms Quinns’ proposal for employees to easily change jobs comes in time of record low salary growth. While wages in Australian were increasing at a nominal rate of 4% in five years prior the global financial crisis, they have since weakened to just 2.1%.
Although lower inflation, slower productivity growth and a ¬weaker-than-usual labour market all contributed to the downshift of wage growth, Ms Quinn believes that these factors only relatively affected salary increase.
In order to find out the reasons of the stalling of wage increase that affected employees, Treasury omitted “cyclical factors” from its analysis of wages growth in the new “microdata” project by the government’s key economic department. Results were: “across income, education, age and occupation categories”.
As a result of the Treasury research, a one-¬percentage-point fall in the job switching rate is partly associated with a 0.5-percentage-point decrease in average wage growth. The national job-switching rate has also declined from 11% in the early 2000s to 8% in the present.
Ms Quinn said that the results of the study “warrants further attention” and that major downturn decline can be accounted to workers choosing to stay at older, less productive firms rather than jumping to new, more innovative companies that are participate in technological advancements.
“The rate at which labour is ¬reallocated from low-productivity to high-productivity firms has declined by around two percentage points since the early 2000s,” Ms Quinn said.
Budget Officer Jenny Wilkinson told the conference yesterday that the halt in the economic reform agenda was due to the evolving nature of political ¬debate, the contribution of the 24/7 media cycle and the “changing appetite among the decision makers” to champion ambitious policies.
Ms Wilkinson strongly advised economists to “speak the language of the person you’re engaging with” and “use language that is accessible” and which “demonstrates respect for the person you’re talking to”.
“You have to articulate your argument or position in a way that is most likely to persuade the person you’re talking to,” she said.
Acting Treasury secretary Maryanne Mrakovcic said that the move to reduce the corporate tax rate to 25% was “dominated” by confusing competing economic modelling that obscured public debate and declined the passing of the reform. Before the election Treasurer Josh Frydenberg already indicated that the government would not revive its proposal to cut the corporate tax rate for businesses with more than $50 million in annual turnover, after the policy was blocked by a hostile Senate.
But Ms Mrakovcic said public debate over the proposal was sunk down by “rival estimates”. “No model is perfect and they do not produce facts,” Ms Mrakovcic said.
“The winner was not a genuine or helpful debate. There was just confusion. If you followed the company tax debate at the time there was a lot of modelling that was done. It seemed for a period of time that every week or second week there was yet new modelling.”
Treasury’s own modelling pointed out that lowering down the corporate tax rate from 30% to 25% would have boosted economic growth by about 1% over the long run.
The cost of the forgone income would have seen the federal budget drop an estimate of $65 billion over a decade. Ms Mrakovcic said economists had a “responsibility for the way in which we tell a narrative” about policy proposals and “recognise the power of the anecdote”.
The Treasury’s wishlist of policy reforms which includes a revamp in city planning and zoning restrictions and the replacement of stamp duty in favour of a land tax will be outlined in the conference.
Reserve Bank governor Philip Lowe sent a warning to the government to ¬restore the growth potential of the economy after the central bank cut interest rates twice in the past two months to a record low of 1%. The response resulted in making reforms for productivity boost a top priority.