The other day I tweeted this:
This was the front page of our national broadsheet the day after the ALP Government announced a plan to increase the tax on the super contributions of the 128 000 Australians earning over $300 000:
You might remember that in late 2010, we were warned repeatedly that Australia was facing a ‘wages breakout’. The Australian, in the typically calm and measured tones of its editorial page, warned that “the economy, unfortunately, is facing an economically irrational assault on a scale we have not witnessed for a quarter of a century.”
Imagine if Australian prices and wages both went up by five per cent in a year. The cost of living for Australians would be unchanged.
John Howard’s biographer, David Barnett, has a piece in the Drum today arguing against the use of fiscal stimulus in recessions and against Keynesianism in general. Setting aside the philosophical and theoretical arguments he makes, I’d like to examine his empirical claim, namely that fiscal stimulus has not worked, and the somewhat peculiar methodology by which he comes to this conclusion.
“It hasn’t worked…. In Australia, unemployment has just gone up, instead of down. At 5.4 per cent it is more than a percentage point higher than it was when the Howard-Costello government went out of office. That is around another 130,000 people without jobs.”
He knows, or should know, that the appropriate comparison isn’t between what was and what is, but rather between what is and what otherwise would have been. To assess the efficacy of a particular course of action we need to know the counterfactual: what would unemployment be today if the government had not implemented its fiscal stimulus? Economists can and do differ about the answer to that question, but to evade it entirely by making a comparison between 2007 and 2010 and thereby imply that all other things remain equal is disingenuous at best.
Interestingly, though, Barnett seeks to establish a counterfactual of sorts by drawing a comparison with Canada. He praises the Canadian Government, saying “Canada did not stimulate. The Canadian government responded to the GFC by cutting back on its expenditure. Canadian exports rose”. Notice how he shifts the goal posts, using exports rather than unemployment as the metric to evaluate the efficacy of macroeconomic policy.
Nevertheless, his argument about Canada provides us with the opportunity to follow Barnett’s own chosen methodology by comparing 2007 (pre-crisis) unemployment with present unemployment and imputing the difference to a failing of public policy. To be clear, I think this approach is not particularly useful, but Barnett seems to be of the view that it is appropriate, so we will follow it.
If we follow this approach, we see that unemployment increased by a greater amount in Canada than in Australia, off a higher base, both in absolute terms and as a proportion of the labour force.
|Unemployment rate – November 2007||Unemployment rate – October 2010||Number of additional unemployed people|
So, on that measure, it certainly seems odd to suggest that a simple comparison of pre-crisis and post-crisis macroeconomic aggregates in Canada and Australia demonstrates the folly of fiscal stimulus.
But what if we accept Barnett’s suggestion that it is international trade that should be the barometer of policy success or failure? Well, our balance on goods and services (our exports less imports) looks pretty healthy to me:
Whenever interest rates go up, some journalists seem to forget that most Australians don’t have a mortgage. So, here’s a pre-emptive note: most of us either own our homes outright, or we rent. Here’s some Census data:
|Household tenure type||Number of dwellings||Proportion of all households||Number of people||Proportion of all people|
|Owner without a mortgage||2,679,200||33.2%||5,918,700||28.7%|
|Owner with a mortgage||2,835,200||35.1%||8,671,700||42.0%|
35.1% of households are owned by mortgagors. 42% of people live in mortgaged houses. That’s a lot of people, the biggest of any household tenure type, but it tends to be forgotten that nearly six million of us live in rented properties.
Whenever the cash rate creeps up by 25 basis points it’s front page news, portrayed in our more sensationalist media outlets as an economic disaster of near-apocalyptic proportions for our perpetually stretched mortgage belt. I seldom see similar hand-wringing when the vacancy rate plummets and rents soar.
Monetary policy is obviously important to the macroeconomy in many ways other than its direct effect on people with mortgages, and the effect on those people can be quite large. I’m not trying to suggest that it isn’t a story worth writing about, I’m just trying to put the mortgage belt in perspective.
The Financial Review ran an article on its front cover yesterday about the perils of wage inflation (it’s paywalled, so no use linking). Wages are apparently rising at an unsustainable level, threatening the only economic indicator that matters, the overnight cash rate:
The mining boom has triggered a wages blowout that could ignite inflation and tip the Reserve Bank of Australia into raising interest rates more quickly than planned. Labour costs rose by 4 per cent in the year ended August 31, up from 3.7 per cent in July, according to NAB’s monthly survey of business conditions.
Oh no! A 0.3 percentage point increase in year-ended terms!
Note that the entire story hangs off one data source, the NAB business survey. Even then, the crux of the story is a rise in year-on-year wages growth from 3.7% to 4%, hardly the stuff of central bankers’ nightmares.
The evidence of wage pressures comes as the ACTU secretary Jeff Lawrence and president Ged Kearney will have their first meeting today with the Gillard Government.
Oh no! Unionists!
It’s the full scare campaign. News of the apparently unsustainable wages growth is mixed in with news that union officials are meeting with ministers. The clear implication for readers is that the two are connected and there’s cause for concern. The problem for the Fin is that there are hardly any facts to support its strongly-worded warnings.
The available ABS wages data would give the RBA no cause for alarm.
Here’s the quarterly growth in the Wage Price Index for the past three years, with the long term average (1997-2010) as a dotted line. Wage growth dipped below average in January 2009, and still hasn’t recovered. Private sector wage growth has flatlined for the past few months, while public sector wage growth has fallen. There is no evidence here to support the Fin’s claim that wages are spiralling out of control.
If we set aside the fact that the NAB survey results seem like an aberration, what about the article’s suggestion that wage rises necessarily imply unsustainable inflation?
Although the increases aren’t big by historic standards, the survey showed wages are growing faster than prices.
Oh no! Real wage growth!
I had a look at how common it is for wages to grow faster than prices. I compared year-on-year WPI and headline CPI and found that wages have in fact grown faster than prices for 37 of the past 48 quarters. It’s far from unusual for wages to grow in real terms; in fact, it’s the norm. I don’t recall too many hyper-inflationary price spirals over that period.
And yet, we have ANZ Banking Group economist Katie Dean claiming that:
Catch up or not, higher wages are inflationary.
Really, Katie? I would have thought that if there are productivity improvements then real wage growth is justified, even within a neo-classical economic framework.
So, what has happened to productivity? An easy way to measure the relationship between productivity and wages is to look at real unit labour costs. This measures the average cost of labour per unit of output, adjusted for inflation. If real unit labour costs are falling, then it costs employers less, in real terms, to employ people to produce a given quantity of goods or services.
Here’s what has happened to real unit labour costs over the past 25 years:
Inconveniently for a newspaper wanting to run a 1970s-style “unions lead wage breakout” story, real unit labour costs are at their lowest on record. They were roughly stable throughout the 1990s, and fell steadily in the 2000s, with sharp falls in the past year. Productivity is rising, real unit labour costs are falling and the wage price index is stagnant. Not exactly the perilous, overstretched labour market the newspaper depicts.
Let’s instead focus on the Fin’s other claim, that we’re reaching “full employment”. Forget for a moment the theoretical debates about where the full employment level lies, or the ideological debates about whether we should accept the concept. Instead, we’ll just take the Fin’s assumptions as given.
The paper claims that unemployment is “dangerously close to the 5 per cent mark, which economists say is the lowest level the jobless rate can go before tightness in the labour market pushes inflation above the Reserve Bank’s target band”.
There’s good reason to think that 5% unemployment in 2010 does not look like 5% unemployment did in 2008. We have more underemployment (people who are working part time, but want more hours) and we’re working fewer hours, on average. The labour force underutilisation rate, equal to unemployment plus underemployment, is at 12.5%, still well above its pre-financial crisis low (9.9%).
Employees are still working fewer hours, on average, than they were before the downturn.
This doesn’t look to me like a labour market with no spare capacity. The ‘headline’ unemployment rate only tells part of the story.
I don’t quibble with the basic point that things are getting better in the labour market: wages are going up, unemployment is coming down. The RBA might well start increasing rates soon, though the futures market still only sees an increase at the next meeting as a one-in-four chance. We know that the Bank has its eye on the medium-term (ie. a couple of years out), so it’s more concerned about emerging trends than the current state of play. It may well be tilting towards a more hawkish position, and the Fin’s readers would want to know that.
What I take issue with is the Fin’s shallow analysis, based on one survey, that seeks to whip up unjustified consternation about moderate wage rises and imply that unions are somehow behaving irresponsibly. As usual, the real story here is subtle, one of slightly improved conditions in the labour market, with the potential for moderate impacts on inflation over the medium term. The problem is that that doesn’t make for very appealing front-page copy, so instead we get the typical hyperbole.
The ABS released the results of its August Labour Force survey today. Unemployment fell from 5.3% to 5.1% in one month. There were 30 900 more employed Australians in August than in July, with full time employment surging and part time employment falling. There are still problems, to be sure. There are still hundreds of thousands of people unemployed, underemployed or discouraged from seeking work. But virtually every other developed nation would fall over themselves for labour force figures like these.
I would have thought that any competent journalist could write a compelling story about this beautiful set of numbers. There are any number of angles. They could write about the light that these figures cast on the election result: a first-term government struggled to get re-elected with a world’s-best unemployment rate. They could write about the rise of full time employment, as workers whose hours were cut during the downturn have them restored. They could write about the gender split in the numbers, or the breakdown by State. They could write about the sheer alleviation of human misery that these numbers represent: find someone who has found a job after a while out of work, and talk to them about what it means for their family and their self esteem.
What do we get instead?
Instead of stories about the news itself, we get some market economist speculating about the potential implications for the overnight cash rate.
Employment and unemployment don’t matter in themselves, apparently. They’re only evaluated in light of the sole arbiter of economic performance that some journalists seem to understand. Forget the tens of thousands of people who now have jobs, forget the thousands already working who can feel a little bit more secure. No, all that matters is that the increase in employment might make the RBA more likely to increase the overnight cash rate.
For what it’s worth, the futures market is now pricing in a 24% likelihood that rates will increase at the next RBA board meeting, up from only a 7% likelihood yesterday. It seems like a minor aspect of this story to me, but I’m not a journalist.
(I should say that the ABC’s excellent business reporter Michael Janda wrote a balanced piece that covers the detail of the employment numbers themselves, not just the interest rate angle).