The recent Productivity Commission five-yearly inquiry into productivity was an example in how economics is often used as an excuse to give more power to the powerful.
The entire premise around the need to increase productivity is that it will improve living standards.
That’s it.
There’s no reason to improve productivity if living standards don’t increase. Why make more with less time if doing so does not actually enable you to have a better life?
But living standards can only improve if household incomes improve and thus we need wages to grow. If your focus is instead on “national income” including profits then you will have a very different outlook on why we need to improve productivity and how to do it.
Productivity is important for income because wages should grow faster than inflation by at least the amount of productivity achieved.
In simple maths: long-term inflation of 3% plus 1% productivity growth = 4% wages growth.
It’s a nice assumption that has worked better in theory than in reality over the past 25 years:
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When we split up the past 32 years into four-year lots we can see that mostly the benefits of productivity have not gone to workers as the textbook would suggest.
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It’s because in theory workers benefit from productivity, in reality it comes down to power.
This is something even acknowledged by a recent Reserve Bank research paper which suggested industry-wide wage agreements are associated with lower productivity growth. But after all the mathematics and high-level economics were done, the author had to admit that “another potential explanation is that firms’ bargaining power may have increased, allowing more of them to lower wages down to the industry awards level”.
Well, yeah.
It’s amazing how scared economists are to admit that power plays a role in industrial relations (and the entire economy) and instead rely on models with markets operating like their equations say they should.
The political economy involves politics and politics is about power.
Everyone who has ever tried to get a pay rise knows it comes down to bargaining between the employer and the employees. And anyone who has been involved in that process knows that the rules of the negotiation affect who has the most power in that negotiation.
Remove, for example, the ability to go out on strike and you remove a powerful card workers can play:
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There’s no strong link between industrial disputes and productivity, but it sounds like there should be and thus it has become an article of faith that we need fewer strikes in order to improve productivity.
This is because too often productivity is used as a synonym for profits and this ensures changes to industrial relations can be sold as being about productivity improvements rather than power and profits.
Take for example the latest Productivity Commission inquiry. The PC is often suggested to be some apolitical, neutral organisation just handing out great advice for free. In reality, its reports are fairly ideological.
Consider its recommendations for changes to the objectives of the modern awards.
These might seem dull and trivial, but the changes are aimed at reducing the ability of workers to get wage rises.
At the moment for example, the Fair Work Act requires that awards take into account “relative living standards and the needs of the low paid; and the need to encourage collective bargaining”.
The commission wants this to be replaced with just “the needs of the employed”. This aversion to collective bargaining (and the protection of the low-paid) has nothing to do with productivity but is about an ideological aversion to systems that give workers greater bargaining and protection.
Next the commission wants to replace the current requirement to take into account “the need to promote social inclusion through increased workforce participation” with instead “the need to increase employment”.
The removal of “social inclusion” reveals the belief that awards are not about protecting lower paid workers or producing a better society, but instead promotes the theory that higher wages reduce employment – a line used time and again by employer groups when arguing against minimum-wage increases.
Then the commission argues the current requirement of taking into account “the likely impact of any exercise of modern award powers on business, including on productivity, employment costs and the regulatory burden” should be replaced by “the needs of employers”.
This is a significant shift that would give employers greater say in what they believe should be considered, especially as their “needs” have very little to do with improved wages.
Rather incredibly the productivity commission also believes awards should now need to take into account “the needs of consumers”. The point of this, which has long been a desire of employers, is to reduce wages growth. Employers would be able to argue that if wages increased, they would have to increase prices or reduce services and that this would be against the needs of consumers (it also bizarrely ignores that workers are themselves consumers).
The impact of these changes is reinforced by the commission’s suggestion that employers should also have choice about how they can meet award requirements “subject to meeting the modern awards objective”.
If the objectives were changed this would mean employers would be able to choose how they meet award requirements subject to considering among other things “the needs of employers”.
How wonderful for them!
Productivity is important, but just as important is who benefits from its growth. Too often suggestions about improving productivity are actually about increasing the benefits to companies.
After nearly a quarter of a century of lost gains, it is time to focus more on the need to give workers the chance to properly benefit.
• Greg Jericho is a Guardian columnist and policy director at the Australia Institute’s Centre for Future Work
