The Federal Budget comes out in Australia next Tuesday and the Government has been conditioning the public of the need to accept harsh spending cuts to achieve its much-touted, but poorly justified surplus by 2012-13 goal. Even with the economy slowing and possible actually sliding into negative growth as the combination of flat private spending and the withdrawal of the fiscal stimulus take their toll, the Government is blindly resolute that the decline in estimated revenue just means it has to cut spending even more than previously planned. The so-called party of the workers is proving to be more neo-liberal and anti-worker than the stated conservatives. We are seeing this elsewhere (Greece, Portugal, Ireland, the US) where the so-called progressive side of politics becomes repressive. In my view it is time for all progressives to abandon the Australian Labor Party (ALP) and create a new social democratic movement. Workers around the World should follow suit and withdraw their support for parties that deliberately erode their welfare provisions, working conditions and prospects for employment. It is also time for trade unions to step up and arrest the decline in their own membership by breaking their links with the Labor Party and throwing their support behind a truly progressive movement.
The Sydney Morning Herald article (May 6, 2011) – Budget spending cuts to help RBA avoid rate rises – examined the prospects for next Tuesday’s federal budget.
We read that:
The federal government next week will unveil spending cuts aimed at assuring a return to a budget surplus, helping the Reserve Bank contain inflation at the expense of growth in the economy’s 20th year of expansion …
Mr Swan has described it as a “tough” budget as the government tries to deliver a surplus in the year ending June 30, 2013, to improve its reputation for fiscal stewardship …
Australia will tighten fiscal policy by 3.7 percentage points of gross domestic product in the two years through 2012, the second-steepest reduction in deficits in the world, the International Monetary Fund predicted last month. GDP rose 0.7 per cent in the fourth quarter, accelerating from 0.1 per cent in the previous three months.
You would think that inflation was escalating sharply and that labour underutilisation rates were are historic lows. You would think that real GDP growth was pushing well above trend and straining capacity.
None of those empirical realities are being enjoyed by the Australian economy (or its citizens).
The explanation is to be found in politics and ideology rather than economics.
While they are claiming that austerity is important for economic management, the reality is that they promised a surplus a few years ago without any context because they wanted to sound more neo-liberal than the conservatives. Both sides of politics have conditioned the electorate to believe deficits are bad and surpluses are good.
The ideology underpinning this nonsense is exactly that which led to deregulation and other legislative outcomes that led to the financial crisis.
The Australian Labor Party Government is so keen to shed their image as social democrats that they are even more hard-line these days than the conservatives. It is a very damaging position to take. They should instead be extolling the virtues of the deficits they created to fight the slump associated with the financial crisis and educating the public on the need for continuous deficits in times when the external sector is in deficit (which is always is in the Australian context).
Unfortunately, it is now proposing to squeeze households which are already carrying record levels of debt and growth can only continue under these circumstances if the private domestic sector takes on even more debt.
This is exactly the sneaky austerity strategy that the British government is pursuing. Please read my blog – I don’t wanna know one thing about evil – for more discussion on this point.
The Sydney Morning Herald says that the changes hinted at already in the Budget will:
… add to a drag on consumer spending after households boosted savings rates in the aftermath of the global financial crisis.
In yesterday’s blog – When ideological blinkers lead to denial – I showed how rapidly retail sales was declining in Australia as private spending remains very subdued.
The Sydney Morning Herald quotes a leading bank economist:
The main impact of the budget on the economy will be quite contractionary in terms of growth …
So even the inflation-obsessed private bank commentators are acknowledging the pro-cyclical nature of the proposed Labor Budget.
So what gives?
History of ALP
The early roots of the party come out of the development of trade union in the 1860s before federation. The problem was that the power elites controlled the legislature and thwarted the attempts by unions to improve the circumstances of the workers.
Then came the 1890 maritime and shearers’ strikes which were dealt with harshly by the employers. As a response to the industrial defeat at the hands of capital, the striking shearers formed the Australian Labor Party in 1891.
By 1899, the first Labor government took office in the State of Queensland. The federal organisation formed in 1901 and ran a platform of democratic socialism although the substance of that ideology has always been questionable despite the popularism.
The commitment to socialism was not very well defined though and the party was not dominated by left-leaning trade unionists. It is often thought that trade unions provide most of the funds for the ALP while the corporate sector funds the conservatives. Examining the data will give you a very different picture of the funding sources and distribution of the major parties.
While a few years old now (2006) this study – Political finance in Australia: a skewed and secret system – will realign perceptions of these matters.
The fact is that the corporate sector provide a higher proportion of the ALP funds than the unions and only slightly less in absolute terms than what it contributes to the conservatives.
Vladimir Lenin made the following observation about Australia in 1913 (In Australia, Collected Works, Progress Publishers, Moscow, Vol. 19):
What sort of peculiar capitalist country is this, in which the workers’ representatives predominate in the upper house, and until recently did so in the lower house as well, and yet the capitalist system is in no danger?
The Australian Labor Party does not even call itself a socialist party. Actually it is a liberal bourgeois party, while the so-called Liberals in Australia are really conservatives.
Capitalism in Australia is still quite youthful. The country is only just taking shape as an independent state. The workers are for the most part emigrants from Britain. They left when the masses of British workers were Liberals …
The leaders of the Australian Labor Party are trade union officials, everywhere the most moderate and capital-serving element, and in Australia altogether peaceable, purely liberal.
That assessment resonates today.
But the links between the trade union movement and the ALP via the factions and paths for union leaders to move into Parliament are well-defined.
The ALP home page says:
Labor is committed to its future partnership with the trade union movement. The Australian Labor Party was born out of the trade union movement and its struggle for a secure, decent and dignified life for working people. In partnership with the labour movement, Labor governments in the past have achieved great things for working Australians. Labor is committed to protecting and advancing the rights of working families, including their rights to join trade unions, to organise in the workplace, to bargain collectively and to exercise their right to strike.
The trade union movement is one of the largest and most representative community movements in Australia, representing millions of Australians and their families. Our partnership with the trade union movement remains crucial for Australia’s future. We believe a strong trade union movement is not only good for delivering more cooperative workplaces, but it can also assist in strengthening our goals of a more equitable and democratic Australia. In government, Labor is committed to a constructive partnership with the trade union movement to build a stronger and fairer Australia.
The reality is that the trade union movement has been losing its way for years now and it is not only because it has been seen as a blokey club with racist, sexist and homophobic overtones. My view is that the unions have lost support because they haven’t been doing what their principle raison d’etre calls for – to protect workers and their families.
Instead, trade unions have allowed the party that is meant to represent their interests – the ALP – to government as if it is an agent of capital. History tells us that the periods when the ALP have been in government workers endure real wage cuts, loss of wage share and entrenched unemployment.
Please read my blog – A new agenda for our union movement – for more discussion of this point.
The Australian Bureau of Statistics (ALP) released the latest data for Employee Earnings, Benefits and Trade Union Membership, Australia today which provides information about “the distribution of weekly earnings of employees, their entitlement to core employment benefits such as paid leave (paid holiday, paid sick, paid long service and paid maternity/paternity leave), superannuation contributions made by employer on behalf of employee, and trade union membership.”
The data shows that:
- 20% of full-time employees, and 14% of part-time employees were trade union members in their main job.
- 41% of public sector employees compared to 14% of private sector employees were trade union members in their main job.
The following graph shows the proportion of trade union workers overall from 1990 to 2010. By way of historical context, this proportion was around 54 per cent in 1975.
You can see that the proportion of workers covered by trade unions has steadily declined since 1990. In that time the ALP has been in Federal government for nearly a decade (conservatives held office between 1996 and 2007).
What has happened to real wages and the wage share over this period? Real wages are what the wages received by the worker will purchase (so we compute them by deflating the nominal wages by movements in the price level).
The wage share in nominal GDP is expressed as the total wage bill as a percentage of nominal GDP. Economists differentiate between nominal GDP ($GDP), which is total output produced at market prices and real GDP (GDP), which is the actual physical equivalent of the nominal GDP.
To compute the wage share we need to consider total labour costs in production and the flow of production ($GDP) each period. Employment (L) is a stock and is measured in persons (averaged over some period like a month or a quarter or a year.
The wage bill is a flow and is the product of total employment (L) and the average wage (w) prevailing at any point in time. Stocks (L) become flows if it is multiplied by a flow variable (W). So the wage bill is the total labour costs in production per period.
So the wage bill = W.L
The wage share is just the total labour costs expressed as a proportion of $GDP – (W.L)/$GDP in nominal terms, usually expressed as a percentage. We can actually break this down further.
Labour productivity (LP) is the units of real GDP per person employed per period. Using the symbols already defined this can be written as:
LP = GDP/L
so it tells us what real output (GDP) each labour unit that is added to production produces on average.
We can also define another term that is regularly used in the media – the real wage – which is the purchasing power equivalent on the nominal wage that workers get paid each period. To compute the real wage we need to consider two variables: (a) the nominal wage (W) and the aggregate price level (P).
We might consider the aggregate price level to be measured by the consumer price index (CPI) although there are huge debates about that.
Now the nominal wage (W) – that is paid by employers to workers is determined in the labour market – by the contract of employment between the worker and the employer. The price level (P) is determined in the goods market – by the interaction of total supply of output and aggregate demand for that output although there are complex models of firm price setting that use cost-plus mark-up formulas with demand just determining volume sold. We shouldn’t get into those debates here.
The inflation rate is just the continuous growth in the price level (P). A once-off adjustment in the price level is not considered by economists to constitute inflation.
So the real wage (w) tells us what volume of real goods and services the nominal wage (W) will be able to command and is obviously influenced by the level of W and the price level. For a given W, the lower is P the greater the purchasing power of the nominal wage and so the higher is the real wage (w).
We write the real wage (w) as W/P. So if W = 10 and P = 1, then the real wage (w) = 10 meaning that the current wage will buy 10 units of real output. If P rose to 2 then w = 5, meaning the real wage was now cut by one-half.
Nominal GDP ($GDP) can be written as P.GDP, where the P values the real physical output.
Now if you put of these concepts together you get an interesting framework. To help you follow the logic here are the terms developed and be careful not to confuse $GDP (nominal) with GDP (real):
- Wage share = (W.L)/$GDP
- Nominal GDP: $GDP = P.GDP
- Labour productivity: LP = GDP/L
- Real wage: w = W/P
By substituting the expression for Nominal GDP into the wage share measure we get:
Wage share = (W.L)/P.GDP
In this area of economics, we often look for alternative way to write this expression – it maintains the equivalence (that is, obeys all the rules of algebra) but presents the expression (in this case the wage share) in a different “view”.
So we can write as an equivalent:
Wage share – (W/P).(L/GDP)
Now if you note that (L/GDP) is the inverse (reciprocal) of the labour productivity term (GDP/L). We can use another rule of algebra (reversing the invert and multiply rule) to rewrite this expression again in a more interpretable fashion.
So an equivalent but more convenient measure of the wage share is:
Wage share = (W/P)/(GDP/L) – that is, the real wage (W/P) divided by labour productivity (GDP/L).
I won’t show this but I could also express this in growth terms such that if the growth in the real wage equals labour productivity growth the wage share is constant. The algebra is simple but we have done enough of that already.
That journey might have seemed difficult to non-economists (or those not well-versed in algebra) but it produces a very easy to understand formula for the wage share.
The wage share is also equivalent to the real unit labour cost (RULC) measures that Treasuries and central banks use to describe trends in costs within the economy. Please read my blog – Saturday Quiz – May 15, 2010 – answers and discussion – for more discussion on this point.
The following graph is taken from the ABS National Accounts data and shows the wage share from March 1976 to December 2010. The trend is replicated in many advanced nations over the same period.
You can see that the proportion of output going to workers has been declining in fits and bursts over the neo-liberal period. Please read my blog – The origins of the economic crisis – for a discussion on this trend and how it is linked to the financial crisis.
Today’s ABS data release also provides information on “Mean weekly earnings in all jobs, by sex, 1975–2010”, I deflated the nominal earnings by the Consumer Price Index to get real weekly earnings.
The following graph combines the annual growth in real weekly earnings (green bars) with the annual change in the wage share (blue line) from 1976 to 2010. The shaded areas cover the periods the ALP has been in Federal Government.
You can see that the periods of negative real wages growth has mostly coincided with the periods that the ALP has been in power.
To interpret the blue line – think about the discussion above about the relationship between real wages growth and productivity growth. If real wages growth lags behind productivity growth as it has for most of the period shown then the wage share will fall (meaning the blue line will be below the zero axis) and vice versa.
So the times the green bars are positive yet the blue line is negative we know that while real wages grew they were growing more slowly than productivity growth. In these periods, the bounty of production was still being disproportionately captured by profits even though real wages were growing.
In periods where the green bars are negative and the blue line is negative, we know that not only is the real standard of living of workers falling but also the share of production going to profits is increasing.
You can conclude that in periods when the ALP has been in power federally, the share of national income going to workers has been systematically undermined and their real standard of living (sourced from wage labour) has been often falling.
These trends have not been coincidental. The ALP which claims it acts as a mediator between labour and capital to ensure the class struggle is contained has over the last three decades moved to being a pro-capital party.
The ALP abandoned its commitment to full employment in the mid-1970s and upon taking office again in 1983 embraced wholeheartedly what I call the full employability policy paradigm which aims only to “prepare people for work” rather than ensure there is enough work for all.
Governments who have adopted this policy agenda have allowed their economies to wallow in high states of labour underutilisation and have violated the 1948 Universal Declaration of Human Rights, which is underpinned by international law. In that sense they are violating the human rights of their unemployed and underemployed citizens.
From 1945 until 1975, governments in Australia (and elsewhere) manipulated fiscal and monetary policy to maintain levels of overall spending sufficient to generate employment growth in line with labour force growth. This was consistent with the view that mass unemployment reflected deficient aggregate demand which could be resolved through positive net government spending (budget deficits). Governments used a range of fiscal and monetary measures to stabilise the economy in the face of fluctuations in private sector spending and were typically in deficit.
Since the OPEC crisis in the mid-1970s – which gave the neo-liberal paradigm its opening – advocacy for the use of discretionary fiscal and monetary policy to stabilise the economy has diminished, and all but vanished. In the mid-1970s the opposition to the use of budget deficits to maintain full employment became visible for the first time and the inflation-first rhetoric emerged as the dominant discourse in macroeconomic policy debates.
Within this logic, governments adopted the goal of full employability, significantly diminishing their responsibility for the optimum use of the nation’s labour resources. Accordingly, the aim of labour market policy was limited to ensuring that individuals are employable.
So we have seen harsh welfare-to-work policies and anti-union legislation – from both the ALP and the conservatives over the last 35 years.
Even today, the ALP is claiming is has to get tough on single teenage mothers by denying them benefits if they do not search for work (that is not there). See this article – This is not tough love but rampant populism – for a reasoned assessment of the latest neo-liberal onslaught from the “workers’ party”.
The shift to an emphasis on full employability was accompanied by substantial changes in the conduct of macroeconomic policy. Not only have the neo-liberals rejected the notion that demand deficiencies can occur. They have also been successful in making inflation appear to be a worse bogey person than unemployment.
As Paul Krugman says in his New York Times column (May 5, 2011) – Fears and Failure – the politicians on both sides in the US (which generalises to other nations by the way) are promoting a:
… economic discourse … [that] … is saturated with fear: fear of a debt crisis, of runaway inflation, of a disastrous plunge in the dollar. Scare stories are very much on politicians’ minds.
Yet none of these scare stories reflect anything that is actually happening, or is likely to happen. And while the threats are imaginary, fear of these imaginary threats has real consequences: an absence of any action to deal with the real crisis, the suffering now being experienced by millions of jobless Americans and their families.
This is the stunning part of the political debate in most countries these days.
Previously, the mainstream economists attacked the use of fiscal policy because they claimed timing lags meant it was pro-cyclical – which means that it was stimulating when growth was occurring and vice versa. The timing lags were related to getting projects designed and implemented etc.
Now, without the slightest blink of an eyelid these characters are claiming it is optimal to deliberately implement contractionary fiscal policy when growth is itself falling. To deliberately undermine the growth process is madness. But how can these economists look in the mirror such is their hypocrisy.
Krugman loses the plot when he talks about the “what we do in the next couple of years hardly matters at all for U.S. solvency, which mainly depends on what we’ll do in the long run about Medicare and taxes”. There is no solvency risk for the US government – short-term or long-term – irrespective of how badly designed and implemented its pension and medicare system is. Krugman exposes his neo-liberal side here.
But he is absolutely right to highlight how the “scare-mongers” are not even consistent (eschewing tax increases yet claiming the deficit is about to explode).
He is absolutely right to conclude that:
Which brings me back to the destructive effect of focusing on invisible monsters. For the clear and present danger to the American economy isn’t what some people imagine might happen one of these days, it’s what is actually happening now.
Unemployment isn’t just blighting the lives of millions, it’s undermining America’s future. The longer this goes on, the more workers will find it impossible ever to return to employment, the more young people will find their prospects destroyed because they can’t find a decent starting job. It may not create excited chatter on cable TV, but the unemployment crisis is real, and it’s eating away at our society.
The trends in American politics are more or less being replicated here. The ALP is now to the right of anything that the conservatives represented in the full employment era (which they largely oversaw in government). The ALP now supports pro-cyclical fiscal policy which commentators are acknowledging will damage growth in an already slowing economy.
The ALP has promoted the fear of inflation to the top of the policy priorities and is willing to leave more than a million workers idle and continue policy which undermines their real wages and conditions.
The trade union movement is now in crisis. The successive anti-union laws and regulations coupled with the shifting macroeconomic dialogue – the embrace of neo-liberalism – has strait-jacketed them almost to the point of extinction. Their coverage has dropped across the board and in low wage industries the dominance of casualised job creation has made their task even more difficult.
The smart union leaders and their staff should be thinking of strategic approaches to restructure the overall public debate as well as attend to the “micro” concerns of their members on a daily basis. I think there is a great leadership role the smart unions can play in the future to build collaborations with true progressive thinkers – not those who say they are progressive but then talk about budget blowouts or “taxpayer funded spending” or “debt burdens” or all that neo-liberal macro that has caused most of the problems we are in now.
I think that unions should re-establish a community debate about “collective will” and the virtues of full employment – that is, true full employment – repeat – 2 per cent official unemployment – no underemployment – no hidden unemployment.
There is plenty of scope to also challenge the neo-liberal budget mantra that government surpluses are good and deficits are evil. Leaders who want to organise the community debate around social equity agendas which do not mean social inclusion agendas will have to develop a narrative to challenge the macro orthodoxy.
It is this orthodoxy that places the constraints on the entire economy and stops progressive social policy from being initiated.
I also think we have to have a dialogue on what we mean by work and what we mean by productive employment. A productive contribution has to be seen in terms of how well “society” benefits not how well the private profit line is enhanced. In general, the two aims won’t be counter to each other but sometimes they will.
For example, in determining what a minimum wage we have to calibrate the wage structure by setting a floor that means something in terms of our aspirations for a decent life. If the capitalist cannot profitably organise production at that wage then we don’t want them operating in this country.
I also think that the unions should advocate a Job Guarantee. The dynamics of the debates would change if a Job Guarantee was in place. It would set the wage floor and provide income security for low wage and otherwise disadvantaged workers. They all would know they could get meaningful and useful work in the Job Guarantee without the threats that arise from low pay and precarious risky work.
Private employers would then have to restructure their own workplaces to ensure they provided superior conditions to the Job Guarantee if they wanted to attract work. The dialogue that the union would then have with those employers would be conditioned by this new reality and would lead to new dynamic efficiencies which would benefit the low paid workers but also the economy in general.
And if some workers preferred to remain in the Job Guarantee workforce then we should be happy that they have income security and a sense of social value and purpose.
The data tells us that the ALP has not been a friend of the workers while in government. The upcoming Budget (next Tuesday) will provide further proof that any left- or centre-leaning social democrat should provide no further support to this Government.
Trade unions need to re-think their “loyalties” and abandon support for any political party that deliberately creates unemployment because they want to satisfy the scare-mongering conservatives who have been predicting the sky will fall in since the year dot.
We ran deficits for years and the only manifestation was full employment and stable growth!
The Saturday Quiz will be back sometime tomorrow – even harder than last week!
That is enough for today!