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Give tax cuts to companies who give workers wage rises

The federal government should only give tax cuts to companies who give their employees higher wages; this period of wage depression is one we had to have and the decimation of the union movement has left workers without collective power to demand pay rises.

These are some of the conclusions of the BusinessDay Scope economic survey, released on Saturday, which asked 26 of Australia's leading economists for their opinions on the year ahead as the economy endures an unusual paradox: a period of exceptionally high employment growth, coupled with historically low wage rises.

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Government's tax plan

Prime Minister Malcolm Turnbull reveals his tax cut plan for 2018, with Labor unconvinced and unlikely to support it.

The situation has left politicians frustrated and some economists puzzled, with only the most optimistic - Sarah Hunter from BIS Economics - pencilling in a wage rise of above 2.5 per cent by the end of this year among an average of 2.2 per cent, just a fraction above the forecast rise in inflation of 2.1 per cent.

Fixing the interminable situation is a priority of both the Turnbull government and the Opposition, as they vie for the votes of frustrated workers in what could be an election year.

"Australia is not alone in experiencing unusual weakness in wages growth," said Commonwealth Bank economist Michael Blythe. 

"At the very least, it seems we should be thinking about wages policy as well as the more traditional monetary and fiscal policies. Japan’s proposal to cut company taxes but only for those companies lifting wages and capital expenditure is an example."


The suggestion could open a pathway for Treasurer Scott Morrison to fix two of his biggest problems at the same time.

Negotiate tax cuts to 25 per cent for all companies through a fiercely resistant Parliament and give workers a much-needed pay rise.

At the centre of it all is a fundamental change in the way workers operate in a global economy, where they are no longer defined by where they are located.

Cruelly, the technology that has enabled flexibility also poses an omnipresent threat.

"The workforce has become more globalised as outsourcing has enabled people to compete for work regardless of their physical location," said Besa Deda from St George Bank.

"So employees may perceive they are part of a more competitive global labour force and are reluctant to ask for pay rises in such an environment. Moreover, technology has replaced jobs and concerns regarding this may be limiting employees’ requests for larger pay increases."

The result is a Phillips Curve - the half-a-century old model that suggests higher employment must eventually lead to higher wages - that is flatter now than it was in the past.

Steve Keen from Kingston University in London puts it squarely on the demise of the union movement. 

"Union power has been destroyed after 40 years of relentless demonisation of them, and today's job market with precarious employment gives workers no capacity to bargain for wage rises unless the economy is really booming," he said.

Bill Evans, chief economist at Westpac said the collapse in trade union density figures [39 per cent in 1983 to 15 per cent in 2017] was undeniably an influence, but businesses were also experiencing low pricing power.

Call it the "why should I give you a pay rise if I cannot get a price rise?" factor.

'Real wage overhang'

Others see the wage doldrums as a natural consequence of the extraordinary rate of growth experienced during the mining boom.

"Australia has a ‘real wage overhang'. Wages grew more than productivity during the terms of trade boom, and have been under pressure since the terms of trade peaked," said Macquarie Group's Ric Deverell.

The University of Tasmania's Saul Eslake said the situation had been predicted half a decade ago.

"Real unit labour costs are adjusting slowly to the large increase which occurred during the 'mining boom' in a manner half-consistent with that foreshadowed about five years ago by economist Ross Garnaut," he said.

Fuelling that longer recovery are Australia's comparatively high wages, according to RBC Capital Markets economist Su-Lin Ong, and the need to become more competitive internationally to attract global capital. 

"Australia remains a high cost labour country and in the absence of much higher productivity or a much lower and more competitive exchange rate pressure will remain on wage and labour costs," she said.  

University of Newcastle economist Bill Mitchell does not hold out much hope for the remainder of this year.

He is one of only three economists along with Dr Keen and Margaret McKenzie from the Australian Council of Trade Unions to pencil in a wage rise of as low as 1.8 per cent, below the rise of a consumer basket.

A result that low would put Australia into negative wage growth territory, meaning workers would be taking a pay-cut in real terms and the government heading for trouble at the polls.

The survey, published in Saturday's BusinessDay ahead of the first Reserve Bank board meeting for the year, paints a dismal picture of the year ahead with unchanged economic growth of 2.7 per cent, barely any real wage growth and a share market that will struggle to keep pace with inflation.

The panel expects the Reserve Bank to lift interest rates for the first time since 2010 in the second half of the year.