Will lower wages create jobs?

Wednesday, August 5, 1992

By Peter Boyle

The federal opposition says an 18-month wage freeze and $3-$3.50/hour youth wages will help solve unemployment. The Business Council of Australia (BCA) agrees, as does the National Farmers Federation. But according a July 23 Melbourne Age survey, the chief executives of Australia's biggest corporations have not been applying the same rules to themselves.

In the past year, 12 of the biggest corporations gave their chief executive officers (on yearly salaries ranging from $300,000 to $980,000) pay rises of 2.3-20%. But the "modest and responsible" $8-10 pay rise that the ACTU may seek for wage earners is "excessive" in the minds of these same executives. For most workers, such a wage settlement would reflect a cut in the real value of their wages over the 15 months since the last national wage case.

Employers' double standards aside, will wage restraint or wage cuts create more jobs? Is there a wage level at which market forces will automatically eliminate unemployment?

Some economists argue that labour is like any other commodity: if the price is right, there will be a buyer, and much of the present unemployment is due to high wages pricing many workers out of the market. If wages are cut enough, employers will take more workers on, the argument goes.

But this simplistic theory of supply and demand bears little resemblance to the real world. If it were true, we would expect Third World countries with the lowest wage levels also to have the lowest unemployment.

Not only that, but if wage cuts led automatically to higher employment, Australia's unemployment should have fallen in the '80s as the price of labour fell (real unit labor costs, as measured by federal Treasury, rose by 8% between 1973-1983 but fell by 8% in the next decade, thanks to real wage cuts under the Accord between the federal Labor government and the ACTU). However, unemployment remained about 6% through the last boom, and now has risen to 11.1%; in the previous economic cycle it ranged between 2% and just over 10.3%.

The Hawke and Keating Labor governments have tried to produce jobs by reducing the price of labour and making labour more "flexible" (cutting working conditions). For a while, this appeared to work as unemployment recovered rapidly from the 1983 recession. Keating was able to boast of 1.5 million new jobs. But it was job growth at the expense of workers: in the '80s, the average household maintained its income only by putting in more hours of work. Moreover, a large proportion of the new jobs were low-skilled, part-time — and, it turned out, short-lived.

The industries which created the most new jobs in the 1980s boom were also the quickest to shed jobs when the boom went bust. According to the Reserve Bank, the biggest contributors to Victoria's job losses (more than half the national total) are the construction industry; finance, property and business services; and the retail sales sector.

Labor's wage-cutting strategy also had a negative effect on productivity by slowing the replacement of labour by new technology, according to a study of Australian manufacturers between 1971 and 1988 by Newcastle academics John Burgess, Winston Dunlop and Barry Hughes.

The irony is that wage restraint produced lower labour productivity in these industries, thus making many manufacturers even less competitive than they might have been otherwise. If they are less competitive then there is less demand for their products (unless greater trade protection is offered) and these manufacturers may eventually go bust and shed all their workers or reduce production and employ less labour, as many have done in the recession.

The price of labour in Australia is now 10% lower than its peak in 1982 (when the union movement broke the Fraser government's wage freeze). Executive salaries, in contrast, have risen 49% in real terms since 1984.

So how low must the price of labour go before enough jobs are created for everybody? Obviously, even lower.

Employers argue that lowering their costs helps them to compete for a bigger share in the market, but workers in every country and in every corporation are being fed this story, creating a global auction for the lowest price for labour.

Meanwhile, there's plenty of international evidence that lower wages don't necessarily mean lower unemployment. The minimum wage in New Zealand under the union-busting, wage-cutting National government is A$174 per week (for those over 20; there is no minimum for under-20s) and unemployment is more than 11%.

In most of the developed economies, the '80s were a decade of wage restraint if not real wage cuts, yet unemployment levels at all stages of the business cycle were higher than in the 1960s and 1970s. Downward pressure on wages protected corporate profits, but didn't end unemployment. Instead, chronic high unemployment is now adding to the downward pressure on wages, setting up a vicious circle of wage cuts and job shedding.

In the name of greater efficiency, federal and state governments have been slashing jobs in the public sector. According to the Reserve Bank: "Employment in the public sector has also behaved very differently from previous cycles; in both the 1974 and 1982 downturns, public sector employment rose strongly, helping to dampen the decline in total unemployment. In contrast, public sector employment has fallen by about 1% since the September quarter of 1990." Private firms have also been cutting back, and according to some estimates the completion of this "structural adjustment" could cancel out jobs created by an eventual recovery from the current recession.