Why the Treasurer should celebrate higher labour costs

Holden is going to shut down in Australia, blaming high labour costs. The Holden 2011 EBA allows for trade employees to be paid between $1147 and $1547 a week, before allowances. Scarcely a fortune, but much more than the car industry pays workers in Thailand.

Wages in Australia keep going up.

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Curse you, unions! (source ABS 6345.0, Sept 2013)

Some of the same economists that champion “growth” and “productivity” suddenly get red in the face and tight around the mouth if the great material expansion leads to a higher cost of employing people. There’s a grain of truth in there. At the margin, sure, red tape makes employing people expensive. But mostly, the costs of employing people are wages and super. Direct transfers to employees. Fighting over these is a zero-sum game.

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ABS 6348.0 Labour costs 2010-11

Higher labour costs, when they take the form of higher compensation, are the exact reason we have capitalism.

That’s why I can never  believe my eyes when I read things like Myer CEO Bernie Brookes in the Australian demanding kids take to the streets for the right to be paid less

“We ain’t world-competitive and we ain’t got a chance of being world-competitive. We have seen an enormous uncompetitiveness occur and decreasing productivity in Australia, that I think the next generation should not only be scared about, but they should be frightened to the extent of making more noise to do something about it.”

I can’t believe these people are so disengaged as to make these statements and still expect the good-will of the populace.

The smarter politicians know they can’t directly complain about labour costs. Hockey said this in February in a speech about how expensive it is to do business in Australia.

“Australian employees receive a higher average rate of hourly pay which flows through to a higher average annual salary… Australian labour is expensive. Is that a bad thing? No, not at all… Australia’s standard of living must not go backwards. There is no national benefit in cutting wages.”

But they still rue the departure of businesses that can’t hack it in our high wage economy. And there will always be businesses going offshore. America is currently “enjoying” a spate of manufacturing “onshoring” (led by that cuddly corporate, Walmart). This to my mind is a very good indicator that America’s poor are now sufficiently poor to compare to anywhere in the world. Now that’s global competitiveness!

In Australia, higher wages means there will forever be parts of the economy where higher labour costs are sending businesses to the wall. It means bankruptcy and distress for their employees. This is from 1952:

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Should we still be making clocks?

Dying industries pinning the blame on labour costs is not new. It will forever be part of our economy – labour costs are the biggest costs for most businesses and businesses will keep failing. If you are of a bent to believe labour gets too much of a share of our economy’s output, then these complaints can become signal, rather than noise.

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Two-period average income shares. Source: ABS 5260.0.55.002 multi factor productivity estimates 2012-13.

Unions are not much better. Rather than understanding our economy as a Schumpeterian cycle of creative destruction, in which new better businesses are built on the smouldering remains of the old, they are the ultimate conservatives, wanting the jobs their fathers did to remain.

The end of Holden is not costless. I do not pretend people and areas will not suffer. Whole towns collect around big employers, and the outcomes for them can be grim when the big employers go.

Further, I do not want to belittle the plight of Holden workers. Maybe it is too soon for this kind of article – I suspect this is about as sensitive as talking about actuarial tables at a funeral.

It will never be easy to see the end of a business as part of a positive cycle of rebirth (remember – I recently left a newspaper business that is shutting titles and slashing staff, so this is not just the view from an ivory tower). But the end of Holden can be a good sign for the whole economy in the long-term. The point ought to be made sooner rather than later.

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thomasthethinkengine

Thomas the Think Engine is the blog of a trained economist. It comes to you from Melbourne Australia.

2 thoughts on “Why the Treasurer should celebrate higher labour costs”

  1. The real problem here is management of the macro economy. You don’t kill an industry without providing for a transition to something else. That requires a vision about where you want the country to go and is exactly what the carbon price was built for. You want a build a new, creative business from the ashes of the old, you’ve got to put up a price signal to direct capital to where your need it. High tech clean energy is our manufacturing future, but that’s completely destroyed by this turkey of a government.

    Despite all their hurumphing about it in opposition, this decision is the epitome of policy on the run, part of the discordant package of decisions these clowns have inflicted on the country because they are a policy vacuum. No vision, no leadership, just a lust for power for power’s sake.

    NB – I wouldn’t necessarily describe the union response as conservative, though it may come across that way. The broader issue for unions (beyond the devastating effect mass job losses has organisers and union officials personally) is that killing an industry kills the union business model. Now, I will bet the shirt off my back that the blow this will cause to the manufacturing unions is not some after thought in the LNP ranks, it will be front and centre to their thinking.

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  2. I have no affection for GM and have never driven their cars, but I’m not celebrating their decision to close. There are lots of good arguments why we should be wary of making a fetish of manufacturing. On the other hand I’m not convinced that skills, memory and infrastructure will not be lost forever from Australia which will prevent us from enjoying the more profitable higher end jobs that can be created around manufacturing – what country engages in this has mismanaged it’s manufacturing sector as convincingly as Australia.? Again a lot of economists would reply that it doesn’t matter how we make our money, but only someone detached from reality and brainwashed in free market purism would really think like this.

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