I don’t think most people have much of a sense of what the typical Australian’s income is. Research backs this up – low income earners tend to overestimate their own position in the income distribution, while high-income earners tend to underestimate theirs. In short, we all think we’re middle class.

The chart below shows this quite starkly. It compares the actual income distribution, in which 10% of people are in each decile of income, with the results of a survey that asked people to place themselves into income deciles.

The Australian income distribution: perception and reality

Source: Saunders and Wong (2011).

You can see that 83% of people think they’re in the middle four deciles of the income distribution, when of course only 40% are in the middle. Peter Martin recently wrote about this phenomenon after a reader took umbrage with his (perfectly defensible) claim that a pre-tax income of $210 000 makes you ‘ultra rich’.

It’s this widespread misperception that led me to write a fairly dry post a few years ago setting the record straight about the typical Australian’s income. Since then, the battler threshold has apparently been raised, such that “you can be on a quarter of a million dollars family income a year and you’re still struggling,” according to Labor backbencher Joel Fitzgibbon.

Tomorrow’s Budget, if the past few are a guide, will contain some measures that attract the ‘class warfare’ tag and bring out the $250k battlers, so I thought this might be a good time to update the numbers in that earlier post and set out the facts on Australian incomes.

What is the typical Australian worker’s wages?

Among full-time workers, the average wage is $72 800 per year. But remember – the average (ie. the mean) gives a misleading impression about what the typical worker earns. It is pushed upwards by the large salaries of a small number of very high income earners.

The median gives a more accurate sense of the typical worker’s wages. If you earn the median salary, your wage is in the middle of the distribution – it’s higher than 50% of workers and lower than the other 50%. Among full-time workers, the median was $57 400 in August 2011, which is the most recent figure.

Even this figure, though, is a little higher than the typical worker’s wage. That’s because it doesn’t include the 3.5 million people who work part time. When you bring them into the fold, the average wage drops to $56 300, and the median  drops to $46 900.

What is the typical taxpayer’s income?

Not everyone has a job – a little less than 62% of adult civilians over the age of 15 had a job in April – so the figures on average wages don’t apply to everyone. Instead of just looking at workers’ wages, then, we can look at the statistics on taxpayers’ incomes to get a sense of the typical income.

According to the tax data, the median taxpayer had a taxable income of $48 684 in 2010-11, the latest figures the ATO has made available.

Here’s a summary of the ATO’s data for 2010-11:

These figures only include people who paid income tax, so while they’re useful, they’re far from ideal. To get a clearer sense of the typical Australian’s income, we need to include everyone, and we need to look at households rather than individuals.

What is the typical household’s gross income?

All the figures above were for individuals, but most of us live with other people and pool our resources with them to some extent. To get a more accurate sense of the typical Australian’s income, we need to compare households. We’ll look first at the gross (ie. pre-tax) incomes of households, without adjusting for the size of those households.

In 2009-10 (the latest ABS figures), the median pre-tax income of Australian households was around $68 800.

So a household with a gross income of $250 000 in 2009-10 would just miss out on the top 3%, but would almost certainly be in the top 4% of households ranked by gross income.

What is the typical household’s net income, adjusted for household size?

A single adult living alone and earning $100 000 per year will have a higher material standard of living than a couple with the same income. So if we’re concerned about measuring material standards of living, we can’t say that the single adult and the couple on $100 000 are equal. Instead, we need to adjust the figures for household size. You might think that this is straightforward – the couple has to share $100 000 between the two of them, so simply divide the number in half and you’ll have your adjusted income figure.

But it’s not as easy as that. If you live with a partner, your household costs aren’t double those of someone who lives alone.To account for that, researchers usually use something called an ‘equivalence scale’ to compare incomes between households of different sizes. Using the standard equivalence scale, you’d divide a couple’s income by 1.5 to compare it to the single adult. A couple household would therefore need to have an income of $150 000 to enjoy the same standard of living as someone living alone on $100 000.

All the figures above also referred to wages or incomes before income tax. If we want to compare material standards of living between households, a better measure is the disposable (ie. net, or post-tax) income of households.

The latest ABS figures for equivalised household disposable incomes are from 2009-10, but NATSEM has published estimates of these figures updated to December 2012. According to NATSEM, the median equivalised disposable income for Australian households was $43 100 in December last year. That means that if you were a single person living alone  who took home $43k in 2012 after income tax, then your material standard of living was higher than 50% of the population, and lower than 50% of the population.

To convert that $43 100 figure for different household types, just use the equivalence scale. For example, a childless couple would need 1.5 times that amount to attain the median standard of living – that’s $64 650. Each child in the house adds 0.3 to the calculation, so a couple with one kid would need 1.8 times the single person’s income to have the same standard of living – that’s $77 580 at the median.

This is the key table for comparing net household incomes:

The typical Australian income, after tax, is $43 100 for a single person, or $90 510 for a couple with two kids. If you’re on a quarter of a million, you might find it hard to get by if you’ve over-extended yourself, but your income is higher than the vast, vast majority of Australians.

Note: When I refer to income as your ‘material standard of living’, I’m ignoring the value people derive from consuming their assets, such as living in owner-occupied housing. That’s an important issue, but beyond the scope of this post.

Hat-tip to Martin Jones.

The wages breakout

The first big claim after the Act came in was that it was causing, or would soon cause, a ‘wages breakout’. I understand this to mean a situation in which real wages rise at a rate well in excess of productivity growth over an extended period, thus increasing labour’s share of income and reducing the profits share. This could also result in an inflationary spiral.

The Australian spent much of 2010 and early 2011 warning of this breakout. In a particularly strident editorial, the paper warned that “the economy, unfortunately, is facing an economically irrational assault on a scale we have not witnessed for a quarter of a century.” You would think that, in the fact of an ‘assault’ of this nature, that we would’ve seen overall wages growth start to soar by this point, given that the Fair Work Act has been in place for nearly four years now. Instead, the WPI has been growing by a little less than its average pace.

Wage Price Index

Source: ABS 6345

Today, the RBA said “growth in wages in the December quarter continued at around the same rate seen in the September quarter, which was lower than that of recent years, in line with softer conditions in the labour market over the past year”. No wages breakout to be seen here. In fact, in the past decade or so we’ve had the opposite of a ‘wages breakout’, as I explain in a recent paper. Inflation is also well contained, with no signs of an unsustainable wage-price spiral.

Productivity

Strangely enough, The Australian seems to have forgotten about the wages breakout. Google can only find three instances of the phrase “wages breakout” at the Oz in the past year – one of them is a reference to my paper, another is a speech given by my boss, and the third pertains to the Fraser Government.

Instead, the line of attack has shifted. The problem, we are now told, is that the new IR laws are suppressing the rate of productivity growth. For businesses and the economy as a whole, this isn’t too much different to a wages breakout – sluggish productivity growth or elevated wages growth both result in a rise in the cost of producing a given unit of output (‘unit labour costs’).

Although the claims regarding productivity haven’t disappeared, as with the ‘wages breakout’ warnings, they have become somewhat more muted in recent months. The reason for that is that labour productivity growth has picked up, growing faster in 2012 than it had in a decade.

Labour productivity – GDP per hour worked

Source: ABS 5206.

Now, to be sure, labour productivity doesn’t tell the whole story. Multi-factor productivity, which takes into account increases in the capital stock as well as increases in hours worked, has been more sluggish, although we only have figures up to June of last year. This sluggishness is a long-running phenomenon – productivity growth slowed at around the turn of the century, many years before the Fair Work Act came into effect.

I don’t suggest that the recent increase in labour productivity growth is due to the IR legislation, just as I don’t think that the presence of Work Choices was a major cause of weak growth in the mid-2000s. In both periods, there have been far bigger forces at play. We’ve had a mining investment boom that sucks up inputs during projects’ construction phase, thereby depressing productivity growth in the short run and boosting it when projects start to generate output. We’ve had big investments in utilities capacity that haven’t resulted in a proportionate increase in output. We had droughts in the 2000s that damaged agricultural productivity. In short, I’m not convinced that the sort of IR changes we’ve had, at least in the past couple of decades, make much of a difference one way or the other to our rate of productivity growth.

Labour productivity growth over the past twenty years

(dotted lines are averages during the period)

Source: ABS 5206.

The RBA has noticed the increase in labour productivity growth. Today the Bank said: “Despite a pick-up in the December quarter, growth in unit labour costs remained relatively slow over 2012, reflecting continued strong growth in labour productivity. Measured non-farm labour productivity growth over 2012 was well above its average of the past 20 years.”

Productivity is looking like more difficult terrain for The Australian to wage its campaign against the Fair Work Act.

Industrial disputes

A third area on which The Australian has focused is the number of industrial disputes. It’s true that disputes are a little more common than they were during the Work Choices period, but they are still near record lows. This chart puts things in perspective:

Days lost to industrial disputes

Source: ABS 6321.0.55.001.

Since the Fair Work Act came into effect, there has been an average of 5.1 working days lost per 1000 workers per quarter. This is a little higher than the 3.4 day average under Work Choices, but well below the 13.7 day average over the life of the Howard Government. In the 1994-96 period, when the Keating Government’s IR laws were in place, the average was 22.9 days. With these figures, you also need to bear in mind that many recent, large disputes have been in the State public sectors – the workers in these sectors (with the exception of Victoria) are regulated by State legislation, not the Fair Work Act.

Today, the RBA characterised the data as follows: “ABS data indicate that the number of working days lost per employee as a result of industrial disputes in the December quarter fell back to a very low level.” This is not a compelling basis for a continued campaign.

Conclusion

Of course, none of the above proves that the Fair Work Act is not having the effects that The Australian and others have spent the past few years warning about. It’s possible that in the absence of the legislation, wages growth would be even further below its long-run average, or that labour productivity growth would be even faster than its decade-high pace, or that we wouldn’t have anyone going on strike at all. But at this point, I think it’s fair to say that the onus of proof rests firmly with those who are claiming that the Act is having a seriously negative effect on the economy.

Now imagine I travelled to Siberia. Having never needed thermal underwear or gloves before, would it be right to conclude that I wouldn’t need them in Siberia? Clearly not. Walking around Oymyakon in jeans and a hoodie would be a recipe for a rapid and unpleasant death. The fact that I’d endured countless Perth winters with only a jacket would be no defence against the cold.

In a Perth winter, a jacket and jeans might be enough to stabilise my temperature. In Siberia, I’d require much more. The ‘neutral’ clothing differs depending on the circumstances. Just as it makes sense to adapt to your circumstances when getting dressed, so does the Reserve Bank need to adapt to changes in the economy.

Central bankers generally think there’s a “neutral” rate of monetary policy – one that is neither stimulating nor slowing down the economy. The problem is that this neutral rate is changing all the time. Shifts in the global economy, or in the behaviour of Australian businesses and households, affect the neutral level of Australian interest rates.

Say the neutral rate was 4.5%, and the cash rate was set at this level, so it was neither heating up, nor cooling down, the economy. Then things change – foreign central banks loosen monetary policy, commodity prices fall but the exchange rate stays high, banks widen their margins – and the neutral rate falls. Let’s say it falls to 3.5%. Now, a 4.5% cash rate would be contractionary – it would tend to slow down the economy. In these circumstances, the Bank could cut the cash rate from 4.5% to 3.5% and it would just be keeping monetary policy neutral.

In these circumstances, it would make no sense to just compare the cash rate to its historical levels and declare that it’s at an emergency low. This would be like me showing up in Siberia and saying “I’ve never needed gloves in the past, why would I need them now?” If your circumstances have changed, you should respond to them, and not just rely on your history to guide you.

I think this is the point that Glenn Stevens was trying to make, in his central bankerly way, when he appeared before the House of Representatives Economics Committee a few months ago.

The committee chair asked Stevens the following:

The cash rate is three per cent. As you said in your opening statement, they are getting towards where they were at historic lows. When we spoke to you when they were at historic lows, you were very keen
really to start bringing them back up as soon as you could because you felt they would create distortions et cetera, yet you seem more comfortable now with them sitting at three, and I am wondering what the difference is between where we were last time they were down here and this time.

He responded:

If we then come along to where we are now, we have had pretty reasonable global economic growth overall in the ensuing period, but we have had, I think, this prolonged period of very low rates in the major countries that is having an effect on interest rates everywhere in the world, unavoidably. I think it is clearer and clearer as time goes by that we have the household sector in particular looking to behave differently in its borrowing and saving behaviour. I think it is appropriate that it does, but that is quite a material change. And, of course, in the present setting, we have had the resource investment boom of very, very large proportions, but we are now facing that starting to tail off. We have fiscal policy tightening. We have the exchange rate, unlike 2008 and 2009, not falling. It has remained very high. That is relevant. So with all these things, at least at the moment, my sense is that the appropriate interest rate for the economy’s circumstances is in fact the pretty low one we have, not because we face an emergency like we did back then but because we face some other forces of a more slowly evolving nature that combine to mean that the correct rate really is lower than it was a couple of years ago. So I am not uncomfortable with this setting of rates.

The cash rate is now lower than it was during the GFC, but that doesn’t mean that the RBA thinks we’re facing a deeper crisis in 2013 than the one that loomed in 2008. It just means the circumstances have changed. The neutral monetary policy setting is now lower than it was then. The RBA is still clearly on the stimulatory side of things – the cash rate is lower than neutral – but it’s wrong to conclude that this means we’re at “crisis levels”.

The Accord is back in fashion. The past few months have seen a lot of pining for the “Hawke-Keating model,” particularly the compact between the two wings of the labour movement. A lot of the discussion seems to me to lack a sense of what made the Accord necessary (in the eyes of the protagonists), what made the Accord possible, and the ways in which our current circumstances differ from those of 1983.

The unemployment rate in Australia

The month after the Hawke Government took office, the unemployment rate hit 10%. It was the first time the jobless rate had gone into double digits since the Great Depression.  The rate had been 5.4% just a year earlier. A widely held view among economists was that the jump in unemployment was at least partly caused by large real wage rises. Real wages were rising much faster than productivity. As a result, the share of national income paid to workers was rising and the profits share was falling.  In 1982, average earnings for full-time workers rose by 14.6%, with inflation up by 10.9%. Inflation and unemployment were both high and rising – the misery index was shooting off the charts. The “stairs were aflame,” as Peter Cook put it.

The chart below compares growth in hourly labour income (wages plus some non-wage benefits) with the change in productivity (real output per hour worked). You can see that in the 1960s and early 70s, real wages and productivity grew at more or less the same pace. Real wages then shot up, much more rapidly than productivity. This was dubbed the “real wage overhang”.

This was the economic context that made the Accord necessary, in the eyes of its creators.The union leaders of the day saw that their wage gains were pushing inflation ever higher, eroding a big chunk of the wage rises they’d won. Bill Kelty reflected on the 1970s experience at last year’s ACTU Congress – he said “when we totted up what we got at the end of a decade of fighting, we’d made but marginal gain.” Bill Hayden, Kelty and other labour movement leaders, like Bob Hawke, thought that wage restraint might help to reduce inflation and bring down unemployment. They didn’t pursue wage restraint because they thought that lower real wages were inherently preferable to higher real wages. The Accord was a response to very specific economic circumstances: unemployment and inflation rates that were high and rising, with a historically elevated labour share of income.

The Accord was possible due to two institutional features of the time. First, around half of all workers were members of a trade union. Second, the Australian system of wage fixation was quite centralised, with tribunals setting the wages of a large proportion of the workforce. These two facts meant that the decisions of unions about the size of the wage increases they would pursue through the tribunals and through direct bargaining were very important for overall wages growth

In 2013, we lack the economic circumstances that arguably made the Accord necessary. In my second chart, above, you might have noticed that the 2000s look quite different to the late-70s and early 80s. In the pre-Accord era, real wages had outpaced productivity growth, pushing up labour’s share of income. Since the turn of the century, the opposite has occurred. Real wages have lagged behind productivity growth, so labour’s share has fallen. We also have low and contained inflation, and relatively low unemployment.

We also lack the institutional features that made the Accord possible. Less than 20% of the workforce belongs to a union. Around 5 in 6 workers have their wages set through enterprise bargaining, either through a collective agreement or through an individual arrangement. When the industrial relations system moved away from centralised wage-setting towards enterprise bargaining in the early 1990s, the ability to pursue across-the-board wage restraint was lost.

We’re not in 1983 anymore. Our current economic circumstances are a far cry from those that of the pre-Accord era. Changes in the labour market mean that we couldn’t have an 80s-style Accord now even if one was wanted. A policy agenda for 2013 needs to come to grips with the ways in which the world has changed in the past thirty years, rather than replicating the policies of yesteryear.

Note: If you enjoyed this post, you may be interested in my recent ACTU paper, A Shrinking Slice of the Pie. The paper discussed the Accord period and the 2000s in a little more detail, and includes information about the sources and methods used in the second chart in this post.

The Beveridge Curve shows the relationship between the unemployment rate, along the horizontal axis, and the job vacancy rate, along the vertical axis. You generally observe a stable relationship between these two things – when unemployment is high, vacancies are low, and vice versa. As the state of the economy improves or worsens, we move along the curve.

If the Beveridge curve moves outwards, that’s usually taken as a sign that the labour market has become less efficient. An outward shift means that there is a larger number of unfilled vacancies per unemployed person  at every given level of unemployment. Confronted with an outward shift in the Beveridge curve, most economists would conclude that ‘structural unemployment’ has risen.

The following chart shows what has happened to the Beveridge curve since 2000. Each dot represents a month. You can see that from 2000 to mid-2009, the labour market remained on a stable Beveridge curve, but since 2009 the curve has shifted outwards.

Beveridge curve: 2000 to 2013

So, is this evidence that the Fair Work Act has made the labour market less efficient? No, it isn’t. If you’d looked closely at the chart above, you’d realise that that it doesn’t show the Australian Beveridge curve at all – it depicts the US labour market. The US Beveridge curve just happens to have shifted outwards at around the time that Australia adopted new labour laws. I may be wrong here, but I don’t think even the staunchest critics of the Fair Work Act would blame the Australian legislation for developments in America.

I have posted this for two reasons. First, as a little reminder about correlation and causation. Everyone knows that correlation doesn’t equal causation, but that’s often forgotten in the heat of making some argument or another. If the graph above was indeed of the Australian labour market, there would have been a glut of op-eds pointing to this as evidence of the legislation’s pernicious influence on the economy.

The second reason for posting this is to register a note of discomfort about the way the Beveridge curve is sometimes used. I think it’s a very useful tool for visualising the relationship between two key labour market variables, but I think economists can be too quick to look to labour market institutional arrangements to explain shifts in the curve. Recessions make a lot of people unemployed and some of those people will remain unemployed for a long time. The longer they’re out of work, the less likely they are to be hired – this shows up as an outward shift in the Beveridge curve. But the key policy implication of this, in my view, is that we should be extremely concerned about avoiding recessions, as well as getting out of them as quickly as possible if we do find ourselves in a hole. A Beveridge curve shift need not have policy implications for labour market regulation itself.

In case you’re wondering, here’s the Australian Beveridge curve over the same period. The latest observation, for the February quarter this year, has us right around the trend line for the past couple of decades.

Australian Beveridge curve: 1992 to 2013

Note: The ABS Job Vacancies survey was suspended between May 2008 and August 2009, so the quarters in between are not able to be represented on this chart.

The IPA has tried to whip up a bit of a scare about public sector employment, which is rising much, much faster than private sector employment. The only problem with this claim is that it isn’t true. Between 2000 and 2012, public sector employment (federal, state, and local) rose by an average 2.1% a year. Jobs in the private sector rose by 2.0% per year.  Not exactly an eye-popping difference. This means that over the 12 year period, the number of private sector workers per public sector worker went from 5.1 to… 5.1. [fn1]

The number of private sector workers per public sector worker

Source: My calculations using ABS 6248.0.55.002 and ABS 6202.

That doesn’t make for a dramatic story. If you’re writing about the out-of-control growth of government, these numbers don’t really fit.  The IPA, instead, chooses to focus on a different measure, one based on the industry people are employed in rather than a strict public/private sector divide.

The IPA suggests that if we’re looking at the growth of the state, we need to include people whose employment depends in some way on government – private school teachers, say, or carers in non-government organisations that receive funding from public agencies. They say that this broad measure of public and publicly-subsidised employment “includes government employees, and employees in education, healthcare, social assistance, arts and recreation, and some utilities.”

When you use what appears to be the IPA’s definition of the “public sector,” the story is quite different. Instead of a stable ratio of private to public workers since 2000, the ratio has steadily fallen – this means that “public sector” jobs have come to occupy a larger proportion of the workforce.

The number of “private sector” workers per “public sector” worker – IPA definition

Source: My calculations using ABS 6291.0.55.003. [fn2]

I’m pretty sure that the definition of the “public sector” I used to construct the chart above matches the IPA’s, as they say that the ratio of “private” to “public” jobs has declined from 3.2 to 2.5 since 2000.

Under what I believe is the  IPA’s definition of “public employment”, some of the following industries are included:

• Casino operation - like Crown Casino;
• Creative Artists, Musicians, Writers and Performers - like First Dog on the Moon, or Paul Kelly;
• Sports and Physical Recreation Clubs and Sports Professionals - like the Sydney Swans;
• Physiotherapy services; and
• Electricity generation - including the generators that were privatised in the 1990s.

Some things that don’t appear to count as the public sector, according to the IPA:

• Libraries and archives - like the National Library of Australia;
• Radio broadcasting – like Radio National; and
• Customs agency services.

It’s pretty clear, to me at least, that the definition of the “public sector” used by the IPA is not particularly useful. Any definition of public employment that includes Gotye but not the person stamping your passport at the airport seems to me to be a poor basis for an op-ed in a national newspaper about the growth of government.

[fn1] I’m using the ABS figures on public sector employment. To calculate private sector employment, I’m subtracting these from the ABS Labour Force data for June of the relevant year. The public sector jobs figures are affected by privatisations, but most of these occurred in the 1990s and earlier.

[fn2] In accordance with what I believe the IPA’s definition to be, I have included in the “public sector” all of the following industries: public administration and safety; education and training; health care and social assistance; arts and recreation services; and electricity, gas, waste and water services. The private sector is the sum of all other industries. If the IPA figures are constructed on some other basis, I would be happy to correct this post.

The Chamber of Commerce and Industry advanced this as evidence that the flexibility of the then-legislation helped to prevent a big rise in unemployment as seen in other countries:

The fact that large scale job losses have been avoided through the voluntary action of employers and employees highlights a major benefit of the current flexibility in the industrial relations system. If the only alternative for a struggling business to cut costs was to reduce employment the increase in the unemployment rate would have been much more severe. (p. 13)

Judith Sloan has a similar view. Yesterday in The Australian she said, while discussing the financial crisis, that:

A flexible labour market at the time – the Fair Work Act had not come into effect – meant that working hours were cut, rather than the number of employed persons.

I don’t want to take issue with the ACCI and Sloan’s analysis of the 2008-09 period, but with their implicit critique of the Fair Work Act. Sloan seems to be suggesting that the presence of the FW Act means that we no longer have a flexible labour market; presumably this would mean that a period of weak economic activity would result in a fall in employment, rather than hours.

The problem for Sloan’s argument is that in 2012 we saw a (mild) re-run of the 2008-09 slowdown. Economic activity slowed, and some of this was felt in the labour market. But instead of seeing hours and employment fall at around the same pace, as they did in the recessions of the early 1980s and early 1990s, the number of hours worked fell while employment kept growing (albeit slowly). So the very criterion that Sloan (and ACCI) use to judge that we had flexible labour laws before July 2009 tells us that we still have a flexible labour market in 2013.

]]> http://mattcowgill.wordpress.com/2013/04/07/how-would-we-know-if-the-labour-market-was-flexible/feed/ 6 mattcowgill Screen Shot 2013-04-07 at 2.42.08 PM http://mattcowgill.wordpress.com/2013/04/05/on-tax-expenditures/ http://mattcowgill.wordpress.com/2013/04/05/on-tax-expenditures/#comments Fri, 05 Apr 2013 04:54:38 +0000 Matt Cowgill http://mattcowgill.wordpress.com/?p=1427 ]]> Imagine if everyone with a surname starting with the letter C didn’t have to pay income tax. For some arcane reason, back in the mists of time when the tax was introduced in Australia, those with a ‘C’ name were completely exempted, and the exemption remained on the books, stubbornly resistant to efforts to remove it.

This exemption for people with ‘C’ names would be classed as a ‘tax expenditure’. This is what it’s called when some group of people, or some class of activity, is taxed at a lower rate than others in similar circumstances (or is not taxed at all). They’re called tax expenditures because in the end there’s not a huge difference between exempting everyone with a ‘C’ name from income tax and just sending them all a cheque. That’s why tax concessions are sometimes described as “hidden spending” or “spending through the tax code”.

There’s often a good reason to provide a tax concession. For example, war veterans’ pensions generally aren’t taxed, and nor are “particular World War II-related payments for persecution”. Fair enough, I say. But people receive a benefit from tax concessions, and providing them reduces government revenue, so it’s a good idea to keep them on the public record and detail how much they’re worth. This enables people to debate whether particular concessions are a good policy idea, or whether the revenue that’s foregone in providing them could be better put to some other use. As George W. Bush’s chief economic adviser put it, “it is just as important to focus on stealth spending implemented through the tax code as on explicit spending.”

But not everyone sees tax concessions as “stealth spending”. To some, the money that isn’t taxed belongs to the individual, not to the government, so it isn’t right to view the absence of a tax as a concession. The close examination of tax expenditures, Judith Sloan suggests, can lead down a slippery slope in which it’s thought that “100 per cent of all income should belong to the government and any residual that taxpayers are allowed to keep should be regarded as a concession”.

I think this is hyperbole. Suppose that a federal government proposed to close my imaginary income tax loophole and subject everyone to the same rules regardless of the first letter of their last name. This act of alphabet warfare would raise revenue that could be used to cut taxes for everyone, or to boost spending on all those worthy things that governments spend money on. Ending the exemption would also make things fairer: after all, why should all the Browns and DiPierdomenicos of Australia pay tax while the Cowgills get off scott free?

Do you think it would be right to view the alphabet-based exemption as an unjustified tax expenditure, eroding the revenue base and undermining equity for no good reason? Or do you think that applying income tax to the Cowgills should be seen as the illegitimate encroachment of a bloated state onto its citizens’ private property? I tend towards the former view, as you might have guessed.

All of this might seem a little arcane, but it’s really at the heart of the superannuation debate Australia has been embroiled in for the past week or two. That’s because the concessions associated with super are, collectively, the biggest tax expenditures in the Australian system. This year, the Treasury estimates that super concessions will be worth around $32 billion to the people who receive them, and this will rise to around $45 billion by the middle of the decade.

That’s a lot of money. About 20% of the benefit is enjoyed by people in the top 5% of the income distribution, while the top 1% receive around 5.3% of the benefit. I think there’s grounds for reducing the tax expenditures on super both in order to increase revenue and to reduce the unfairness of the system.

Tax expenditures on super are large, and they flow disproportionately to people at the top end of the income scale. But it’s important not to fall into the trap of thinking that Government could raise $32 billion by ending these concessions, or the trap of thinking that they should completely eliminate them.

The first mistake represents a misunderstanding of what the tax expenditure figures mean. The $32 billion figure is an estimate of how much the super concessions are worth to the people who receive them. If government ended the concessions tomorrow, it wouldn’t raise $32 billion. Instead, people’s behaviour would change – they’d put less into super, or take more out, and avoid paying the tax that way. Treasury thinks that the two main super concessions are worth around $30 billion to the people who receive them in 2012-13, but it estimates that tax revenue would only rise by around $23 billion if the concessions were removed. The difference between these two figures is due to the change in behaviour that would happen after the rules are changed.

The second error, at least in my view, is believing that tax expenditures on super should be completely removed. Super concessions lie somewhere between the income tax exemption for ‘C’ named people and the exemption of payments to people persecuted during WWII. They’re there for legitimate reasons – to promote saving for retirement and as compensation for the compulsory nature of the scheme – but the size and distribution of them is difficult to justify. I think that super concessions should be scaled back a little, particularly for high income earners, to improve the equity and sustainability of the system, but that doesn’t mean that they should be cut to nil.

The tax expenditure figures can be misused on both sides. The existence of a concession doesn’t mean, in and of itself, that there’s a loophole that should be closed, and the amount of money that would be raised by doing so is often overestimated. On the other hand, a concession is a concession, not a “concession”. Just like the exemption of people with ‘C’ names from income tax, treating some people or types of activity differently from others amounts to much the same as just giving them a cheque, so tax expenditures should be closely scrutinised and justified.

…nobody starts to pay tax until their earnings exceed $18,200, but the Australian Bureau of Statistics shows that 60 per cent of all households receive more in cash benefits than they pay in tax.

A household in the middle 20 per cent of the earnings distribution pays income tax of $143 a week but gets cash social benefits totalling $164. Subsidised health, education and childcare deliver that average household a further $346 a week.

To use these figures in this way is disingenuous and potentially misleading, as they don’t include the indirect taxes that households pay, like GST and excise on fuel and alcohol.

Any complete calculation of the net amount a household receives from, or pays to, government would need to take account of these four things: direct (income) taxes, cash payments, indirect taxes, and in-kind benefits. Uren cherry-picks three of the four and in the process gives a misleading sense of how much middle-income Australian households receive from government.

Every six years the ABS tries to figure out how much households at each level of income receive from or pay to government. Table 9 of this ABS publication is the source for Uren’s figures. If you have a look at the numbers, you’ll see that Uren faithfully reproduces the following figures for middle-income households:

• Income taxes: $143 per week
• Cash social assistance benefits (eg. age pension,parenting payments): $164
• Social transfers in-kind (education, health, etc.): $346

If you add these together, you’ll see that the amount that middle income households receive in cash and services ($510 per week) is $367 per week more than the amount it pays in income taxes. Uren has ignored the fact that those same households pay an estimated $171 per week in indirect taxes, including $59 on the GST. That reduces the net benefit received by middle-income households by nearly half, to $196 per week.

With that in mind, let’s go through Uren’s piece line by line:

…nobody starts to pay tax until their earnings exceed $18,200…

False. Nobody starts to pay income tax until $18200 (actually it’s $20542, but let’s not quibble). Low income earners still pay other taxes.

…the Australian Bureau of Statistics shows that 60 per cent of all households receive more in cash benefits than they pay in tax.

False. The bottom 40% receive more in cash benefits than they pay in tax. The middle 20% do not (if you include indirect taxes). If you include in-kind benefits, then the true figure is somewhere between 40% and 60% of households that receive more in total (not just cash) benefits than they pay in tax. The quintile figures in the ABS publication show the averages; they don’t mean that all households in that quintile match the average.

…A household in the middle 20 per cent of the earnings distribution pays income tax of $143 a week but gets cash social benefits totalling $164. Subsidised health, education and childcare deliver that average household a further $346 a week.

Incomplete. On average, households in the middle 20 per cent also pay $171 in indirect taxes.

This isn’t just a minor quibble. Have a look at how the inclusion of indirect taxes affects the amount of tax that households pay as a proportion of their gross incomes:

We’re starting to see in Australia the infiltration of the “moocher class” rhetoric that has coloured American politics in recent years. It’s an unfortunate development. Uren’s piece will fan those flames.

David Uren is usually among our less sensationalist economic commentators of the centre-right, and his piece does note that “redistribution brings its advantages,” particularly in the way we reduce poverty by a greater amount per dollar spent on welfare than any other advanced economy. His argument is done no credit by selectively omitting indirect taxes from the equation.

After posting this chart on Twitter I received quite a few responses from people who suspected that this wasn’t really a big deal. I’d like to deal with them in turn.

First of all: what about part time work? If Tasmanian men choose to work part time at a higher rate than mainlanders, then they might have a low full-time employment rate, but a healthy overall employment rate. My first response to this is that this doesn’t explain why full-time work has become so much less common in Tasmania in just the past few years. Did Tasmanian men decide en masse in 2009 to  suddenly cut back their hours? That seems implausible. In any case, it’s not what happened.

61% of Tasmanian men are in work of some kind, but the national figure is 67.8%. Tasmanian men are a little more likely to work part-time than mainlanders, but this barely closes the gap between the employment rates. Plus, the overall employment-to-population ratio has plummeted in Tasmania in the past couple of years, just as the full-time rate has.

This isn’t just a story about men, either. In December 2008, 26.9% of Tasmanian women had full-time jobs. Now the figure is down to 23.2%, whereas 30% of Australian adult women are in full-time work. The decline has been steeper for men, which is why I’m focusing on them, but it’s been present for both genders.

One persistent question that people had was about age. Could the difference just be that Tasmania’s population is older than the rest of Australia? . On the mainland, 18.3% of the adult population is aged between 25 and 34; in Tasmania it’s just 13.9%. Those 65 and over account for 19.5% of the population in Tassie, compared to 16.2% in the other states.

So there’s something to this story – Tasmania’s population does skew towards seniors, and this does drag down the employment rate. But it doesn’t account for the big difference in employment rates between Tasmania and the mainland.

Tasmanian men of all ages over 20 are less likely to be in full-time work than their mainland counterparts. For example, 78.4% of mainland men aged 25-34 are in full-time work; in Tassie, it’s 72.9%. They’re a little more likely to be in part time work, as I noted above, but this doesn’t offset the difference in full-time employment rates.

You can put these numbers together and figure out exactly how much of the 7.2 percentage point gap in the male employment rates of Tasmanians and mainlanders is caused by the fact that Tasmanians are older, on average; and how much of the gap is due to the fact that Tasmanians are less likely to be in employment than mainlanders of the same age.

When I do this decomposition analysis, I find that the Tasmanian male employment-to-population ratio is:

• Reduced by 5.7 percentage points due to the fact that Tasmanian men are less likely to be in full-time work than mainlanders of the same age;
• Increased by 1.4 percentage points due to the fact that Tasmanian men are more likely to be in part-time work then mainlanders of the same age; and
• Reduced by 2.9 percentage points by the fact that the Tasmanians are older, on average than mainlanders.

In other words, less than half of the gap between Tasmanian and mainland employment rates (2.9 percentage points out of 7.2) can be explained by the fact that Tasmania’s population is older than their mainland counterparts.

This leaves the question of why, exactly, Tasmanian men are less likely to be in full-time work than mainland men of the same age. That’s a topic for another post.

Note: the data source for everything in this post is the ABS Labour Force survey, here and here. For my decomposition and the final three charts, I am using non-seasonally adjusted data. The decomposition and the charts are therefore based on annual averages for 2012.

The election brought a new generation of MPs to Parliament, including Tony Blair, who resolved to reform Labour to make it electable again. Squarely in the sights of this new crop of reformers was the infamous Clause IV of the party’s constitution, the clause that committed Labour to the “common ownership of the means of production, distribution and exchange”. They finally re-wrote the objective in 1995 after a bitter tussle.

By that time, Australian Labor had already made its choice about the need for a greater reliance on markets to achieve social democratic ends. The federal parliamentary party, under the leadership first of Bill Hayden and then Bob Hawke, tried to distance itself from the (real and/or perceived) chaos of the Whitlam government, particularly its latter period. The Hawke Government was motivated by a desire to prove to the public that Labor could be economically responsible.

For Blair and his antipodean antecedents, the internal fight over the direction of Labo(u)r was one of the defining events of their political lives. The next generation of politicians, like Mark Latham, came of age in a period apparently defined by this binary choice: you can pine for the old socialist ways of nationalised industry and high tariff walls, or you can have a new, modern, market economy and success at the ballot box. Take your pick. One or the other. All or nothing. That choice defined the group of politicians I think of as the Clause IV generation.

Latham’s new Quarterly Essay, Not Dead Yet, is shot through with the binary distinctions of the Clause IV generation. You’re for the new ways, the Keating legacy, openness and markets, or you’re a smokestack troglodyte. You’re a moderate reformer, or you’re an extremist. Voters are ‘aspirational’ (and therefore to be courted) or they’re inner-city elites (and to be ignored). The problem for Latham and the Clause IV generation is that these battles and these dichotomies are tired, decreasingly relevant, and don’t really square with reality.

Latham thinks that the ALP has drifted away from “the Keating model” and that this drift accounts for its poor political standing. According to Latham, “given a choice between traditional left thinking – reflected in the paternalism of welfare-state programs – and the aspirational demand for individual entitlements and flexibility, Labor still sides with the former”.

How does he reconcile this argument with Labor’s creation of the (as yet embryonic) National Disability Insurance Scheme? The NDIS is based on a system of individual entitlements – under the scheme, people with disability will make choices about which services they’d like to use, rather than being dictated to by a bureaucracy. How does that represent the “paternalism of welfare-state programs” rather than “individual entitlements and flexibility”? Similarly, what of MySchool and NAPLAN, initiatives Latham praises, that are designed to arm parents with sufficient information to make informed choices about their children’s schooling? These policies are hardly evidence that modern Labor is in thrall to the dead hand of pre-1983 bureaucratic centralisation. Like it or not, the ALP has not shied away from pushing further in the direction of individual entitlements and quasi-vouchers in the delivery of public services.

In his desire to squish the past thirty years of Labor history into binary categories, I believe Latham oversimplifies and misrepresents both the Hawke-Keating period and the recent period. It seems to be Latham’s view that the modern ALP has pandered to old-fashioned welfarism at the expense of middle-class ‘aspirationals’, while the Hawke and Keating governments had their priorities right. How does this fit with the facts? Between 1983 and 1996, the real value of the unemployment benefit rose by 27.4%, a $52 a week increase in today’s money. Under the Rudd and Gillard governments, there has been no real increase. Modern Labor is hardly emblematic of “traditional left thinking,” as Latham puts it, and nor was the “Keating model” the rigid, purist neoliberal regime of Latham’s imagination.

Latham’s narrative also ignores the records of the respective governments on taxes. Keating left office with a top marginal tax rate of 47% that kicked in at 1.4 times average full-time earnings. In 2012-13, the top rate (45%) doesn’t apply until around 2.5 times average full-time earnings. At the other end of the scale, the effective tax-free threshold has risen from 17.4% of average earnings ($6150) at the end of Keating’s reign to 28.2% of the average this year ($20542). This boost at the bottom end should surely square with Latham’s call for public policy that supports those who work, those who aspire to improve their lot through labour, yet it goes unremarked upon. Latham’s story rests on his view of the ‘Keating model’ as a paradise lost, a policy panacea spurned by a crop of politicians determined to turn back the clock. Policies that inconveniently don’t fit Latham’s frame, whether they be the refurbished safety net of the Keating era or the tax cuts of the past five years, are ignored.

Another dichotomy that rings false in Latham’s essay is that between the ‘aspirationals’ and everyone else. The aspirationals, to revive a phrase I thought we’d left behind in 2004 along with ‘dial-up’ and ‘schools hit list’, are those mainstream suburban families who have a good material standard of living and are concerned, above all else, with keeping it that way. I have always struggled with this term. Who doesn’t aspire to better for themselves or their children?

Latham’s vision of a party that meets “the economic aspirations of the new middle class while also addressing underclass poverty” calls to mind Mike Konzcal’s memorable description of this sort of welfare-state residualism as “pity-charity liberal capitalism”. That’s the view that we should have essentially a laissez-faire minimalist state in nearly all respects, but with a welfare safety net on the side that protects people against the ravages of absolute poverty, ‘real’ poverty. Even then, though, Latham’s concession to egalitarianism is minimal at best. He takes the view that more money won’t help poor people, saying quite clearly that the problem “is not the adequacy of income support… [the] system is generous enough for recipients to cover basic living costs”. He doesn’t produce evidence to support this proposition, beyond noting that real income support allowances have risen in the past three decades (though he elides the fact that they’ve barely risen in the past two).

Just as he turns his nose up at the idea that low-income people might benefit from higher incomes, Latham also rejects the paternalist interventions of Noel Pearson; instead he casts his policy of dispersing the poor from their home neighbourhoods as the reasonable third way between “the welfare statism of the 1970s” and Pearson’s program. Latham’s prescriptions spring from the Clause IV generation orthodoxy: the most important thing we can do for poor people is to get out of their way, rather than getting sucked into the misguided belief that we can help them. His agenda is more or less indistinguishable from that of Iain Duncan Smith, Nick Clegg, or Joe Hockey.

Of course, as Don Arthur put it, “the only serious problem with Latham’s plan to end poverty is that it won’t do much to end poverty.” This identifies another key weakness of Latham’s essay: the conflation of good politics with good policy. Latham’s prescription for “the underclass” is rooted in the electoral advantage he sees for Labor in playing up to the electorate’s alleged anti-welfare prejudices. “If taxpayers see evidence of welfare recipients taking advantage of the system, they want governments to take a tougher approach,” observes Latham, truthfully enough. But what if taxpayers don’t really see much evidence of that sort, and they want a tougher approach anyway? Latham’s argument seems to be that policymakers should succumb to the popular perception regardless.

In his pining for the ‘Keating model’, I think Latham misses some key ways in which the world has changed since the 1990s. First of all, Keynesianism (by which I mean counter-cyclical fiscal policy) has been revived in theory and in practice. Our own Treasury was stuffed to the brim with senior officials who had lived through the 1990s recession and regretted the relative inaction of the time. This begat Ken Henry’s famous advice to Kevin Rudd to “go hard, go early, go households” in 2008. This advice was borne of the errors of the 1990s.

The second shift I believe Latham misses is the widespread repudiation of laissez-faire financial regulation in the wake of the financial crisis. Ian Harper, a conservative economist who was a member of the Howard Government’s Wallis Inquiry into the financial system, recently conceded that the Inquiry, upon which much of our current regulatory architecture is founded, placed too much faith in a strong form of the efficient markets hypothesis. The willingness of Harper and others (like Adair Turner in the UK) to revise their view of the role of financial regulation in the wake of the criss stands at odds with Latham’s view that the policy agenda of 1995 can be effortlessly ported into 2012.

Latham also fails to mention one of the key developments of the post-Keating period: the increase in house prices relative to median incomes. It’s possible that Latham’s aspirationals were all born before the mid-70s or so, and were able to get in before the boom.

The essay isn’t all bad. I applaud Latham’s goal, announced in the first chapter, of producing a work that is more focused on policy proposals than on blood-letting and carping from the sidelines. I do, strange as it might seem, agree with him about many aspects of policy. Labor has always been a pragmatic party, a party that seeks to govern. It’s not a dogmatic party, driven by purist ideology. Latham has that right. I think that Labor was right to float the dollar and to pursue some of the more market-oriented reforms it has implemented over the past three decades.But I think that Latham is wrong to miss the other half of the picture, Keating’s view that if people “fall off the pace you will reach back and pull them up.” Some members of the Clause IV generation are too keen to leave behind central elements of the centre-left agenda.

This post is a temporary dip into the waters of more ‘political’ discussion. I’ll be back to my usual chart-blogging soon.

Some details might trickle out. We hear that Hawthorn was up at quarter time. The crowd noise is deafening early on, but quieter as the game goes on. Word gets out that Buddy Franklin and Cyril Rioli have both been injured and that Mark LeCras has kicked seven goals for West Coast.

Would you want to call the result of the game based on this information? It sounds like West Coast has the upper hand. Journalists with space to fill and eyeballs to attract might want to grope for a sensational sounding headline – ‘Signs Not Good for Hawks’ doesn’t quite rate alongside ‘Hawks in Shock Loss’. But really, there’s no way to know the result of the game based on that information.

State economies are a bit like that ‘black box’ MCG . We get bits and pieces of information month-by-month and quarter-by-quarter, some of it very useful and important, but we only find out how much each state has grown once a year. The ABS tells us about unemployment and retail trade each month, and something called ‘state final demand’ each quarter, but to diagnose a recession we need something more – we need to know the gross state product (GSP) of each state, the equivalent of GDP for the country. Only with this figure can we diagnose a recession, by which we usually mean a sustained fall in the volume of goods and services produced in an economy.

That hasn’t stopped media outlets talking about a recession in Victoria on the basis of the state final demand figures that were released yesterday. Ross Gittins explained why this is potentially misleading in The Age and the SMH at the end of last year. The crux of the matter is that the SFD figures don’t take into account trade between the states. If spending in Victoria falls, but demand from West Australia for Victorian goods and services soars, then the Victorian economy might be humming along at a reasonable pace. Has this happened? I’ve no idea, and neither does anyone else.

Gittins said that the state final demand figures:

…exaggerate the true extent of the differences between the states.

So why do the media make so much of them? Because, at a time when the resources boom is doing so much to change the industry structure of our economy, there’s much interest in what this is doing to the respective sizes of the state economies.

The quarterly state final demand figures don’t give reliable answers to this question, but they’re the best that regularly come our way.

But also because the ever-intensifying competition between the news media has prompted them to select their news on the basis of all care but no responsibility. If some information is interesting or controversial it will be published, even if the journalists know or suspect it’s dodgy. After all, if I don’t do it, my competitors will.

It’s possible that Victoria is in recession. Nobody knows. The Victorian economy certainly isn’t performing very well. Unemployment has risen, and a range of partial indicators (including state final demand) don’t look good. I’m happy to call that a ‘slump’, a ‘slowdown’, even a ‘shitstorm’. I’d rather reserve the ‘R’ word for times when we’re sure.

Incidentally, I’m not wedded to the definition of a recession that journalists like to use, either – the one that calls a recession based on whether we’ve experienced two consecutive quarters of declining output. The two quarters definition doesn’t really work at the state level, given that we don’t have quarterly data. In the US, an expert panel decides when to label a soft patch as a ‘recession’. That seems like a good idea. What doesn’t seem like a good idea is calling a recession based on partial, and potentially misleading, information, just as I wouldn’t want to call the winner of a football match based on the volume of cheers emanating from the ground.

That’s the main point of a new paper I’ve written for the ACTU. Here’s the central chart, showing that labour productivity and hourly wages rose at the same pace in the 1990s, before decoupling in the 2000s.

When hourly wages and productivity grow at the same pace, the share of national income that goes to labour will remain more or less steady. That’s what happened in the 1990s. Since then, decoupling means that the labour share has fallen, and fallen quite dramatically.

There’s a lot more analysis and description in the full paper. It addresses the question of whether this is all about mining (no), or all about the terms of trade (sort of but not really). It also compares the trend in Australia’s labour share to those of some other OECD countries.

Note: In this post I’ve referred to “wages” as shorthand. What I really mean is ‘labour income’, which includes wages and salaries, employers’ super contributions, and the labour income of the self-employed.

Yet the proposition that higher income earners should pay more tax on their super contributions seems to be accepted wisdom, at least in certain quarters. Wayne Swan was accused of ‘class warfare‘ when he announced that we’d move from having a completely flat structure of tax on super contributions to one that’s flat between $37000 and $300000, and then has an increased rate at the very top.

Before July last year, the way we taxed super contributions didn’t make much sense at all. The lowest paid workers were paying 15% on their super contributions, even though they didn’t pay any income tax on their ordinary earnings. Not only were they not getting a tax concession on their super contributions, they were effectively being penalised. A low-paid full time worker wasn’t penalised, but they weren’t benefiting either, with super and ordinary income taxed at the same rate. To fix up this glaring inequity, the government introduced a new ‘offset’ that effectively cancelled the tax that people on less than $37 000 paid on their super contributions. So far, so good.

A typical full-time worker faces a marginal tax rate of 32.5%, but pays 15% on super contributions. That’s a tax concession of 17.5%. If you’re a higher income earner, you get a bigger concession – if you’re on the 37% tax rate, your concession is 22%, while those on over $80 000 get a 30% concession. Where Wayne Swan went too far in the eyes of some was to scale this back, just a little bit, so that people on over $300 000 now pay 30% on their super contributions, for a tax concession of 15% – pretty close to the 17.5% that ordinary workers receive. If you’re in the $180 000-$300 000 bracket, you still get the 30% concession.

Tax rates

Tax concession (marginal rate minus the rate on super contributions) – percentage points

The 2012 changes were a step in the right direction, but we still have only a very mildly progressive system of tax on super contributions. I’d like the country to move towards a system in which everyone received the same ‘concession’ for super contributions. Let’s say the concession is 17.5 percentage points. That means, if you earn between $37 000 and $80 000, nothing changes – you still face a 32.5% marginal tax rate on your income, and 15% on super. If you’re in the next bracket, you’ll pay 19.5% instead of 15% on your super; high income earners would pay 27.5%.

Tax rates on super contributions with an equal concession

With a change like that, everyone still gets a concession on their super, but they’re not skewed to high income earners as they (still) are now. This isn’t a radical proposal – it’s pretty much what’s in the Henry Review, although the Review proposed a flatter personal tax structure and an equal 20 percentage point concession for everyone who earns above $25 000. Now, can someone explain to me why a system like this would be a bad idea? Preferably without using the phrase ‘class warfare’.

Note: I’ve ignored the Medicare Levy in my charts, for simplicity’s sake. I

In case anyone is interested in how the Australian minimum wage[fn1] stacks up against other advanced economies, I thought I’d post a few charts. As at February 2012, the National Minimum Wage is $15.96 per hour, which works out to $606.40 per week for full-timers. The rate is higher if you’re a casual employee (and therefore don’t accrue paid annual leave and sick leave). To find the minimum wage that applies in a particular circumstance, try the Fair Work Ombudsman.

Here’s the real minimum wage over time:

A common way to compare minimum wages over time and across jurisdictions is by expressing them as a proportion of the median or meanwage of a full-time worker. I tend to use the median. During the 1980s and 90s, the ratio of the minimum to the median in Australia was the highest of the OECD advanced economies. We’re now falling back towards the middle of the pack.

In 2011, our minimum wage was worth 53.6% of the median. That was the seventh highest of the 23 OECD countries for which OECD Stat has data.

Here’s how our minimum/median ratio compared to America’s. Note that for us, real median wages have grown in recent decades, and so have real minimum wages. In the US, both have been pretty much stagnant.

Another way to compare minimum wages across countries is by converting them to a common currency, by using ‘purchasing power parity’. This expresses each one in terms of the quantity of goods and services it can buy. In 2011 the minimum wage was $AU15.50 – the OECD thinks this would’ve bought you goods and services equivalent to what an American could buy with $US9.50.

Finally, I’ll just note that there are countries that have relatively high minimum wages and low unemployment (The Netherlands, Luxembourg, Australia), some that have high minimum wages and high unemployment (Ireland, France), and some that have a low minimum and high unemployment (Spain, Greece). By presenting this chart, I’m not trying to suggest that a higher minimum wage lowers unemployment, nor am I trying to pretend that this simple scatterplot controls for all differences between countries. I’m just pointing out that there isn’t much of a relationship across countries between the level of the minimum wage in a country and its unemployment rate.

[fn1] Australia has a National Minimum Wage, plus a range of minima that apply in awards based on your skill, experience, industry, etc. In this post, references to “the minimum wage” are to the NMW and its equivalent, the C14 rate in awards.

In the past couple of years, participation has started to fall. From a peak of 65.9% in late 2010, the participation rate slid down to 65.1% in December 2012. If we’d kept a stable participation rate, we’d have around 150 000 extra people in the workforce at the moment.

What’s causing the participation rate to fall? Is it that jobs growth has been weak, so people are giving up and stopping looking for work? Or is it that the demographic tide is turning, and baby boomers are starting to retire? Another way of posing this question is to ask: to what extent is the decline in participation ‘cyclical’, and to what extent is it ‘structural’? If it’s mostly cyclical, then you’d expect to see the participation rate within particular age groups falling. If it’s mostly structural, then the participation rates of particular groups could remain the same, but older age groups (that participate at a lower rate, on average) would account for a higher proportion of the population.

The answer, as you’ve probably guessed, is that it’s a bit of both.

Over the past couple of years, the workforce participation rate of young people, aged 15-24, has fallen quite a bit (-1.2 percentage points); the rate for prime-aged workers, aged 25-54 has also fallen (-0.4 ppts). The rate for older workers has been more or less steady, rising by only 0.1 points in the two year period.

Since 2010, the population has aged: the proportion of the adult population that is aged over 55 has risen from 30.9% to 31.7%. The population shares of both young and prime-aged people has fallen commensurately (by 0.5 and 0.3 percentage points, respectively).

By putting all these facts together, we can calculate how much of the fall in the overall participation rate is due to the ageing population, and how much is due to people within each age bracket becoming less likely to participate.

The overall participation rate is just the average of the participation rates of each age group, weighted by the population share of each age group. So the total labour force participation rate (LFPR) at time t is:

where p is the population share of each demographic group (i).

Using this formula we can separate out the change in the total participation rate into its two components. The change in the participation rate between time t-1  and time t is:

In other words, the total change in the participation rate is equal to the change in the participation rate of each demographic group, holding population shares constant, plus the change in population shares, holding the participation rate of each group constant.

The participation rate fell 0.7 percentage points between late 2010 and late 2012, from 65.9% to 65.2%. [fn1] Using the formulae above, I find that, 0.4 points of the 0.7 percentage point fall is due to a fall in the participation rate of particular groups, and 0.3 is due to the ageing of the population.

Here’s my calculation of what the participation rate would’ve looked like without demographic change. In other words, the greenish line shows what the participation rate would’ve been if the population share of each age group had remained unchanged from December 2010, while the black line is the actual participation rate.[fn2]

If the demographic structure of the country had stayed intact over the past couple of years, the participation rate would be higher than it is now, but still lower than it was in late 2010.

[fn1] Here I’m using the average for October, November, and December of the original, non-seasonally adjusted data.

[fn2] The chart is based on a more granular decomposition of demographic effects, using eight age groups rather than the three broad groups alluded to above. The basic method is the same. Note that these calculations are based on non-seasonally adjusted data. I’ve smoothed them in a fairly crude way.

What we’d find is that high-income earners, and/or people who really value quality potatoes, would buy up all the kipflers. Low income earners would be left to the regular potatoes.

What would happen if some kind of bug struck the supply of kipflers, halving it overnight? Well, I’d guess, there would be fewer kipflers for sale, and the price of the remaining kipflers would rise. Some of the high income and/or potato-loving people who would’ve bought the lost kipflers would instead turn to desirees. This increase in demand for desirees would drive up their price; some middle income earners who would’ve bought desirees would instead settle for regular potatoes, which in turn would make them more expensive. Some low income earners would be squeezed out by the process, unable to afford potatoes at the new, higher price. Even though nothing has happened to the supply of cheap or mid-priced potatoes, a reduction in the supply of expensive potatoes has cascaded its way down and harmed the poor.

Now imagine that we reversed the scenario. Through some stroke of agricultural luck, there’s a glut of desirable kipflers on the market. The price of kipflers falls. All of a sudden, desiree-eating middle-income earners who had looked on enviously as the well-to-do devoured kipflers are able to get in on the action. A number of them make the switch from desirees to kipflers, which causes the price of desirees to fall as well. A few low-income earners now find desirees within their reach, and they upgrade from regular potatoes. Even though the supply of desirees and regular potatoes hasn’t changed, they’re suddenly more affordable for everyone.

This all seems pretty straightforward. Why, then, is this logic so hard to comprehend when the good in question is not potatoes, but housing? We all need to live somewhere. If the supply of fancy, expensive apartments is restricted, the people who would’ve lived there don’t just disappear. Some of them instead settle for something a little bit less fancy and expensive. In doing so, they push up the price of these slightly-less-fancy dwellings, and take up spots that slightly-lower income households otherwise would’ve taken. This cascades its way down, so that a reduction in supply at the top end ends up meaning that prices are higher for all sorts of housing, just as with potatoes.

I had a lengthy back-and-forth on Twitter with Catherine Cashmore on this topic. She didn’t seem to accept my argument, instead suggesting that increasing supply at the top-end does nothing to make affordable housing available. I think it’s a fallacy to imagine that the housing market is parcelled off into discrete segments that have nothing to do with one another. It’s all connected, as David Simon would say.

I’ve made this point before, when I was enraged by an Adam Bandt pamphlet that seemed to promise greater restrictions on the construction of new dwellings, while also promising more affordable housing. As I said then, I don’t see how you can reconcile a desire to have:

• consistent population growth;
• affordable housing;
• an urban growth boundary that restricts sprawl; and
• strict restrictions on new development in existing areas.

If you want to say no to developments in your backyard, restricting a rise in density in established areas, then you need to compromise on one of the other points. If you want to have consistent population growth, restrictions on sprawl, and a tight lid on density, then you have to accept that your preferences will result in less affordable housing. If you want to have the NIMBYist restrictions, but keep housing affordable, then you’ll need to either reduce population growth or permit endless sprawl. Pick three of the four dot points above; you can’t have them all.

Beyond the exasperation and incredulity, though, there’s a serious point to be made. Designing welfare policy involves a range of unavoidable trade-offs between worthy principles. Three central principles in the Australian welfare system are:

• Payments should be sufficient to protect people from poverty.
• Payments should be means tested and targeted to people on low incomes.
• ‘Poverty traps’ should be avoided. It should be financially worthwhile for people to take a job, or to increase their hours of work.

These three principles are actually discussed in the editorial that I excerpted. The Australian implicitly acknowledges that Newstart is too low to protect people from poverty (“lifting the unemployment benefit, which is low by international standards, may be part of any comprehensive reform package”). It also calls for stricter means testing (“the old principle that welfare should exist only for those who genuinely need it appears no longer to hold”) and for policymakers to avoid creating poverty traps (“welfare reform must not reduce the incentive to work”). The problem is that the editorial writer makes the common mistake of believing that these three principles can all be rolled together in some tension-free way. They can’t.

Pretend, for a moment, that we have a system in which the full-time minimum wage is $600 per week, and the unemployment benefit is $250 per week. If you earn a dollar from working, then you lose 50c of your benefit. This means that the payment is phased out entirely by the time your earnings reach $500 a week. We’ll call that scenario A.

Suppose that policymakers then increase the unemployment benefit from $250 to $300 per week. $250, it’s believed, is not sufficient to achieve the bedrock goal of protecting people from poverty. As a result of the $50 increase, a whole new range of people will now be eligible for the payment. The benefit is still phased out at the rate of 50c in the dollar, but the higher benefit means that your earnings have to be a bit higher before you lose the payment entirely. The unemployment benefit would now phase out at $600 per week, so you’d have to be working full time before you ceased to be eligible for the payment. Call this scenario B.

Some people might not like scenario B, because it brings a whole lot more people into the welfare system. It might be seen to violate what The Australian called “the old principle that welfare should exist only for those who genuinely need it”. To avoid that eventuality, you could increase the payment by $50, but also increase the rate at which the payment is withdrawn as a person’s earnings rise. Rather than losing 50c of unemployment benefit for every dollar of earnings, you could take away the benefit at the rate of 60c in the dollar. This would mean that the payment would still cut out completely when earnings reach $500 a week, so it would make sure that eligibility for the payment doesn’t extend further up the income scale. This is scenario C. Here’s what they look like:

Do you see the problem here? Scenario A involves an inadequate payment; it violates the ‘protection from poverty’ principle. Scenario B includes an adequate payment, but the payment is less tightly targeted to those who need it most. Scenario C tries to fix this by withdrawing the payment a bit more rapidly as your earnings rise. The problem with this is that it means that people get to keep a smaller proportion of each additional dollar that they earn – their ‘effective marginal tax rate’ rises, which can discourage work and can make it harder to make ends meet.

There is no choice facing policymakers that makes the payment ‘better’ as far as one of the principles is concerned, like improving its adequacy, that doesn’t also make it ‘worse’ in terms of another principle, like targeting the payment only to the lowest income earners. This doesn’t mean that no change should be made to our payments system. Personally, I’d favour something like scenario B, because I put less weight on the ‘targeted’ principle than I do on improving adequacy and having low EMTRs. The point is that that’s a judgement based on my own preferences regarding the relative weight of the three principles; I don’t pretend that there’s a proposal on the table that would magically improve policy along all three of these dimensions.

If you want to argue that our welfare system, which already has less ‘middle class welfare’ than any other in the OECD, should be even more tightly targeted to low income earners then that’s fine. Just don’t pretend that by doing so you can also call for an adequate payment and one with low barriers to work. Pick any two out of three; you can’t have it all.

NOTE: My example scenarios are obviously simplified and stylised – there’s no income tax, the benefit is withdrawn from the first dollar of labour earnings at a constant rate, etc. The point is just to illustrate the trade-offs between the three principles, not to produce numbers that reflect current or proposed policy settings. Check out figure 29 and figure 30 in this submission if you’re interested something closer to reality.

Australia’s welfare system is crying out for comprehensive reform… Is it fair that a couple with one child and a household income of $160,000 a year receives a family tax benefit, or that a young couple buying, for their first home, a $700,000 apartment in Toorak are paid the first-home owners grant? The old principle that welfare should exist only for those who genuinely need it appears no longer to hold.

But what happened when the Government made moves to reduce transfer payments to families that earn over $150000 per year?

The Australian ran stories including this one: “The Allardyces both work full-time and together earn about $200,000 a year. That makes the Dutch-born working mum rich according the federal government. She doesn’t feel that way.”

The Daily Telegraph: “THE Grays are the quintessential so-called rich Australian family squarely in the crosshairs of the Gillard Government.

Victims of Labor’s war on middle-class welfare, the Castle Hill family of three is one of millions of hard-working, double-income McMansion households mercilessly assaulted by the Federal Budget - families deemed too wealthy to need any government rebates or to escape additional taxes.

The problem is, Rob and Kerrie Gray certainly don’t feel very rich – despite the family earning more than $150,000 a year in combined wages.”

The Coalition agreed that reducing family benefits for high-income families was unfair. Tony Abbott: “These are class-war cuts that the government is inflicting on people.”

How did the Australian respond to the modest measures in the 2012 budget?

When it became obvious that wages growth was ticking along at a more-or-less average pace, the focus shifted to the issue of productivity. Our rate of productivity growth, you see, has slowed since the 1990s. If you ignore the fact that the slowdown started over a decade ago, and that the slowest rate of growth in the past couple of decades happened to occur during the Work Choices period, and that it’s widely thought by economists that a big part of the slowdown is a temporary phenomenon associated with the mining boom… well, if you ignore all those things then you just might be able to pin the blame for the slowdown on the Fair Work Act, the industrial relations legislation that came into effect in July 2009.

That’s certainly the tack that our national newspapers took. When the national accounts for March 2011 showed that productivity had fallen, the Financial Review ran a front page article that lamented the “nation’s worst productivity performance in almost six years.” The Australian said that the figures showed “we need ongoing economic reform”. By March this year, the Financial Review had even taken to running articles with a little badge on them marked “HIGH-COST, LOW-PRODUCTIVITY NATION”.

This week, the ABS released the quarterly national accounts, showing that productivity had grown at a pretty solid pace in the September quarter – in fact, the rate of growth over the past year has been around its highest in a decade. In what must be an oversight, neither newspaper chose to highlight this fact. When I search on the AFR’s website, I can find six articles in yesterday’s paper that mention productivity – not one of them mentions the new figures. Laura Tingle noted the pick-up in productivity growth in her column today, but unless I’ve missed something that remains the only reference. At The Australian, I can find two relevant articles – one a piece from the AAP, one a piece from Dow Jones Newswires. I’m not sure if either ran in the actual newspaper.

So, for the benefit of anyone who might have missed them, here are the latest productivity numbers from the quarterly national accounts. In the year to September, real GDP per hour worked rose by 3.3%, compared to an average over the past ten years of 1.1% annual growth. That’s the fastest since 2002. In the market sector, output per hour was up 2.5% over the year, well above the 10-year average of 1.5%.

If you can look at these graphs and spot the deleterious impact of the post-2009 IR regime on our productivity performance then you have very good eyesight.

Of course, productivity jumps around a fair bit. It’s ‘cyclical’ – the rate of growth goes up and down, quarter to quarter, and those short-term squiggles on the graph don’t necessarily mean much. However, the legitimate reasons for caution in interpreting the quarterly numbers didn’t get in the way of our media outlets jumping up and down when the figures were falling.

The recent pick-up in productivity growth might well have nothing at all to do with the Fair Work Act, one way or the other – but, again, the Australian and the AFR were eager to point the finger at the Act when the figures were moving in the opposite direction.

Both newspapers employ a number of smart, diligent journalists for whom I have great respect. Nevertheless, it appears as if news about the Australian economy will only be prominently featured (or even noted at all) in the papers’ pages if it suits the campaign being waged by the editors. We are all the poorer for it.