Last week, the results of a survey of Australian economists was released which showed that the majority supported freezing minimum wages, which normally are adjusted annually in June. The minimum wage case is currently being heard in the wage setting tribunal (Fair Work Commission) and a host of antagonists have assembled arguments to stop millions of the lowest paid workers getting a pay rise. In effect, they are advocating a real wage cut for these workers given inflation is running at around 1.8 per cent per annum at present. The Australian government is also claiming it will not extend the already inadequate fiscal support measures that have left more than a million low-paid, casual workers without any wage support since the lockdown began. And they have started winding back support in key sectors like child care which will impact disproportionately on low-paid women’s employment opportunities. But, some are still claiming that neoliberalism will not recover from this pandemic. That all the myths we have been fed about government fiscal policy capacity have been exposed for what they are and we will come out of this with a new economic paradigm. Not so fast. Not a lot will change yet. The struggle goes on.
The survey of the economists (reported here)
A freeze in the minimum wage will support Australia’s economic recovery.
I did not participate because it was organised by The Conversation and I decline invitations from them to contribute in any way after they published the disgraceful article by one Richard Holden on MMT, which invented statements attributed to me to suggest I was an idiot and incompetent. The Conversation refused to retract the libellous article.
21 of the 42 economists polled agreed, “seven of them ‘strongly'”. 2 were uncertain.
The ABC report said that “Weighted for confidence, support grew to 51.6 per cent.” So a majority of Australian economists can’t get their heads around the fact that paying low paid workers a bit more will stimulate demand (and revenue) more than unit costs.
Which means that, despite claims that I see regularly from commentators that this crisis is creating the conditions for a fundamental shift in economic thinking among policy makers and the economists that advise them, the evidence tells a different story.
Holden, by the way, was one of the 21 and one of the seven who “strongly agreed” that minimum wages should be cut in real terms. And he purports to advise the Australian Labor Party on matters economic. No wonder they cannot win an election.
Further, the – Australian Government Submission to the Annual Wage Review – conducted by Fair Work Commission (April 3, 2020), didn’t demand a freeze but its arguments amounted to the same thing.
It wanted the FWC to:
1. “take a cautious approach, prioritising the need to keep Australians in jobs and to maintain the viability of the businesses, particularly small businesses, that provide those jobs.”
2. Accept “Research shows that the employment impacts of the minimum wage are most likely to be felt by vulnerable cohorts, such as youth and the low skilled, and that risks to employment from minimum wage increases are more pronounced during economic downturns.”
3. Understand “that Australia already has the highest real hourly minimum wages (in Purchasing Power Parity terms) in the OECD.”
In other words, don’t increase minimum wages.
I was in a meeting last week where one of the attendees declared that neoliberalism is dead and that we could not think of returning to the old narratives. I didn’t agree with that assessment.
Juxtapose that with the latest report from Eurofound.
On June 4, 2020, Eurofound published its most recent report – Minimum wages in 2020: Annual review
The European Foundation for the Improvement of Living and Working Conditions (Eurofound) is part of the EU “whose role is to provide knowledge to assist in the development of better social, employment and work-related policies”.
So while the European Commission at the macro level works relentlessly to destroy prosperity and jobs, Eurofound works hard to provide information that helps sustain better jobs.
As an aside, I saw an ABC news report at the weekend – Europe secures 400 million potential coronavirus vaccines from British drug-maker – which indicated that a “British drug-maker … [has] … signed a contract with Italy, Germany, France and the Netherlands to supply Europe with a vaccine against the coronavirus, with deliveries starting by the end of 2020.”
The report went on:
The European Commission received a mandate from EU Governments on Friday to negotiate advance purchases of promising coronavirus vaccines, the EU’s top health official said, but it was unclear whether there would be enough money available.
So, we are in a life-threatening crisis that is destroying jobs and lives at a rate not seen before in our distant memory and the EU’s top official is not confident there will “be enough money available” to purchase a vaccine, should one eventuate.
The ECB could buy enough vaccines for the entire world if it wanted to. One click of a computer key with sufficient numbers entered on the screen would do it!
But back to Eurofound’s latest report.
The Eurofound work is part of the – European Pillar of Social Rights (introduced in November 2017) – which aims “that by 2024 all workers in the EU should earn a fair and adequate wage, no matter where they live.”
So it is superimposed over the system of statutory minimum wages that many EU nations have in place. Six EU nations do not currently have minimum wage laws (Austria, Cyprus, Denmark, Finland, Italy, and Sweden).
The Pillar stated that:
Member States are free to go beyond the minimum standards set at EU level …
Of course, like everything that is European Union, there is no agreement among the Member States.
The Nordic states, in particular, reject the notion of an “EU-wide minimum wage” (Source).
Eurofound noted in its review that:
The trade union movement is divided on whether there is a need for the initiative, and, if there is, how to implement it. Employer organisations point to the principle of subsidiarity and state they are not willing to negotiate on the issue from their end.
And, combined with the opposition from “social partners and governments from the Nordic countries” the end result may not be what it should be.
But aside from these usual European-style disputes that hamper progress at all levels, the Eurofound report presents interesting arguments that bear on the question of minimum wages.
1. It finds that since the turn of the century, “Statutory minimum wages have become fairer as compared to other workers’ wages” across the EU nations, although the exceptions were in Belgium, Ireland and the Netherlands.
2. But “Despite this upward trend, minimum wages in the majority of countries remain below 60% or even below 50% of median wages.”
3. And levels matter more than relativities:
… increases in the relative level of minimum wages within a country on its own may not be sufficient to decrease the share of workers who report that they find it difficult or very difficult to make ends meet. It’s the level of minimum wages and what they can buy that matters more.
The research is clear – countries with “a higher absolute level of minimum wages in PPS … have lower proportion of workers reporting difficulties” in making ends meet. PPS is purchasing power standards (a sort of composite measure to aid comparison).
4. “The latest research on minimum wages confirms that the employment effects of minimum wage increases are relatively small but decreases in working hours can occur.”
In particular, the introduction of a minimum wage in Germany in 2015 has given researchers a good dataset to assess the impacts of such an initiative.
A number of research studies have shown that:
… there were no negative employment effects other than a small reduction of marginal part-time jobs (mini jobs) … There has been no effect on labour productivity … but there has been some reallocation of workers to more productive, higher-paying firms …
Interestingly, there have been a lot of academic papers making predictions about negative employment impacts but subsequent applied research covering many countries, finds that the theory did not match the empirical reality.
Eurofound surmise that:
This is due to the high dependence on this type of study’s underlying theoretical economic model. Neoclassical economics predict that employment will decline, whenever wages rise above workers’ marginal productivity. The expected effect can be different under an alternative economic reasoning.
Over my career I have been an expert witness in wage tribunals on many occasions and prepared many research reports for trade unions as part of their submissions to these tribunals.
I have never been surprised by the mindless evidence that employers submit (drafted by mainstream economists) who predict drastic employment cuts which never materialise.
I learned, at a young age, about the GIGO principle.
I wrote about the latest scam – cuts to penalty rates in Australia for the lowest paid workers – in this blog post – Employer groups in Australia lied about the impacts of penalty rate cuts (July 5, 2018).
The coronavirus pandemic is now bringing out these arguments again – the neoliberal agenda is far from done.
Solutions to the economic impacts of the virus are focusing on the low paid – as Eurofound point out “wage freezes or cuts” to low-paid workers while adopting a “wage cushion” approach to “higher-ranking jobs”.
The impact is to reinforce the rising incidence of the working poor and increasing the already appalling wage inequality.
Remember my rule of thumb – cleaners and lower paid health professionals (nurses, orderlies etc) should be the highest paid workers given the importance of their work, which the pandemic has brought into relief.
Eurofound argue that:
While it is of utmost importance to ensure that companies stay afloat and can afford to retain and pay their workers, wage cuts or freezes are not the first tool to resort to …
Because protecting workers’ incomes, especially those with a high marginal propensity to consume (as in the case of low-paid workers):
… is important to avoid that peoples’ incomes and expectations of their future earnings will aggravate recessionary forces, as demand declines. In the context of this sudden ‘external shock’ or ‘black swan’ to the European economies, minimum wage policies can also play a role in acting as stabiliser of demand; particularly in cases, where other social protection measures are linked to the minimum wages rates.
Clear as one can be.
Cut the pay of the low-paid in times when the non-government sector needs to sustain spending is the worst thing a nation can do.
We should disregard the worn-out opinion of the mainstream economists who cannot get beyond the chapter on labour demand in their irrelevant labour economics textbooks.
This is all relevant to the discussions I keep hearing about ‘game changers’ and the ‘death’ of neoliberalism.
So far 423 thousand people have died from the coronavirus ((Source) but to say neoliberalism is dead is another matter.
As Modern Monetary Theory (MMT) gains in presence in the public debate and proponents/supporters declare ‘victory’ (yes, I have heard that said) I remind everyone that a paradigm shift doesn’t occur until the academy is full of MMT economists with PhDs, the undergraduate programs are based on our textbok, and postgraduate economics programs have jettisoned the mainstream religious studies they offer.
We are some distance from that.
No matter how may activists there are supporting a view, until the academy shifts, the mission is not complete.
That is because the policy makers and decision-makers come out of the academic programs and reflect what they have absorbed from that participation.
On this theme, there was a useful discussion by Michael Pascoe in the New Daily today (June 15, 2020) – The neoliberals back in charge – let ‘market forces’ rip – where he makes the case that:
… the Morrison government will leave the problem of high unemployment to market forces – the fling with major Keynesian stimulus is over. Don’t expect any more serious economic support. The neoliberals are back in charge.
It was always obvious that the fiscal stimulus was less than half that required to stop unemployment (and hidden unemployment) from rising sharply during the lockdown.
Further, the fact that they excluded more than a million casual workers who are mostly on low-pay and have their penalty rates cuts by the FWC from the so-called JobKeeper wage subsidy scheme signalled their intent.
Michael Pascoe rehearses the findings of the OECD released last week in their latest – Economic Outlook June 2020.
The OECD made it clear that in – Australia’s Case:
(a) “Strong fiscal support is warranted … to support the most vulnerable and provide the investment needed for a sustainable recovery”.
(b) “There is ample fiscal space to support the economic recovery as needed.”
Note the poor framing here. Their definition of ‘fiscal space’ is flawed and defined solely in terms of financial aggregates like public debt ratios.
Fiscal space can only be meaningfully defined in terms of the available real resources that can be brought into productive use.
Please read the following introductory suite of blogs:
1. Fiscal sustainability 101 – Part 1 (June 15, 2009).
2. Fiscal sustainability 101 – Part 2 (June 16, 2009).
3. Fiscal sustainability 101 – Part 3 (June 17, 2009).
If there are no idle resources, the real constraints on public spending emerge and the issue of diverting resource use away from the current users so that they can be deployed by the government sector through taxes etc become relevant.
But there is massive fiscal space in the Australian economy at present. The OECD get that right for wrong reasons.
(c) “The authorities should be considering further stimulus that may be needed once existing measures expire at the end of the third quarter 2020. Such support should focus on improving resilience and social and physical infrastructure, including strengthening the social safety net and investing in energy efficiency and social housing.”
But the emerging reality is that the government is trying to avoid having to extend the rather inadequate measures introduced to date when they expire in September.
The problem is there is no way, with the number of failed businesses that will not return after the lockdown ends, that unemployment will return to the already elevated levels pre-crisis.
So what to do?
Neoliberals say do nothing.
And it seems, from Michael Pascoe’s surmise, that this view dominates the government thinking – “the doctrinaire right wing has never been stronger in the Coalition.”
A senior spokesperson for the government said during an ABC interview yesterday:
People should be under no illusion that the tap is going to be turned off.
So the OECD position is being ignored by the government.
We are a long way from abandoning neoliberal thinking.
There is a lot more work to be done on that front.
That is enough for today!
(c) Copyright 2020 William Mitchell. All Rights Reserved.