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Tuesday, 20 September 1983
Page: 996


Mr BALDWIN(5.12) —This Bill brings to an end one of the key elements in the former Government's belated attempt to introduce an incomes policy-the wage and salary pause. This legislation deals with only one part of this pause, the freeze on wages and salaries of Commonwealth employees. Its main effect is to repeal the Salaries and Wages Pause Act 1982 which froze awards and determinations in this sector. The question of an approach to income is something that is clearly a source of tension within the Opposition. The remnant of the 'dries'-those who managed to survive the wrath of the electorate on 5 March-continue to favour a decentralised market-oriented approach to wages policy. This undoubtedly is the position of the Deputy Leader of the Opposition (Mr Howard). Others, including the Opposition's spokesperson on employment and industrial relations, the honourable member for Balaclava (Mr Macphee), apparently favour some kind of centralised wage fixing system, albeit one that is thoroughly inequitable viewed from the perspective of wage and salary earners . We heard him argue earlier on in this debate that wage movements should be linked solely to productivity movements, which is an utterly untenable suggestion.

The former Government inherited the wage indexation system introduced by the Whitlam Government and then proceeded to destroy it by constant insistence on less than full indexation, a position the trade union movement could not tolerate. After this system collapsed in July 1981 we had a period when wage fixation moved toward the decentralised model, the role of the Australian Conciliation and Arbitration Commission being essentially to ratify agreements reached at the industry level. Then we had the third phase-the wage and salary pause. As I described it at the outset, this was Malcolm Fraser's belated conversion to a version of an incomes policy. The term 'incomes policy' has been taken to refer to various attempts by governments to directly control or influence prices in the labour market. It can mean anything from direct control of wages and salaries, non-wage incomes and prices through a spectrum of measures by governments to influence these, with 'moral suasion' as the softest version. It contrasts with an approach based on allowing market forces to determine income shares with possibly some attempt to have an influence through macro-economic measures, principally fiscal and monetary policy.

Most countries of the Western world, with governments of all ideological persuasions, have tried some kind of incomes policy. But it has become generally accepted that such policies can only possibly operate in other than the very short run given a reasonable element of equity in their construction. This is where the former Government's scheme, which involved a constraint on only one type of income, wages and salaries, was utterly untenable in anything other than the very short run. There was not even a gesture in the direction of controlling non-wage incomes. It is worth noting that even the Nixon administration found it necessary to introduce a wage-price freeze in the early 1970s. Even this arch conservative could not come at a notion as patently inequitable as the Fraser Government's wage pause. The present Government, of course, completely rejects this approach.

Its approach to incomes policy is embodied in the accord negotiated earlier this year between the Australian Labor Party and the Australian Council of Trade Unions. This accord envisages a return to centralised wage fixation within the context of a very broad social agreement encompassing prices, salaries and wages , non-wage incomes, taxation policies, the social wage, together with a range of supportive policies in areas such as industrial relations, industry policy, the introduction of planning mechanisms, occupational health and safety and a range of other things. Needless to say, this corresponds much more more closely with successful overseas attempts to construct a workable incomes policy.

I would like to make a few remarks on the key premise on which the wage pause was based-the link between real wage levels and unemployment. The former Government and Department of the Treasury repeatedly laid our economic woes on the doorstep of excessive real wage growth. The concomitant of this was that reducing real wages was an essential precondition of economic recovery. The rationale for the wage and salary pause was to effect a redistribution away from wages and towards profit. This was held to be a precondition of recovery in private sector investment spending and, hence, of a recovery in employment. Having adopted this logic, it then became possible for members of the former Government to work themselves into a lather of moral indignation about the callous disregard of the unemployed by employed trade unionists on the ground that 'one person's wage rise is another person's job'.

I reject the notion that the high levels of unemployment prevailing since the mid-1970s are a consequence of excessive real wage growth. Furthermore, I do not accept that a real wage reduction is a necessary condition of a sustained economic recovery. The real wage-unemployment link has come to be part of the conventional economic wisdom, to question which is held to fly in the face of common sense. But it is quite untenable to explain the current recession in terms of the wages surge that followed the metal industry agreement in late 1981 . The timing elements are simply wrong. This is spelt out in the INDECS economic survey published in the Australian Financial Review of 14 December 1982:

The notion that it is wages developments that have put us in our present predicament is a myth, sustained only by disregarding the evidence on the timing of developments. The economy was clearly heading downwards well before the metals deal, and even before the transport and storemen and packers arrangements .

Ironically, the editorial position of the Financial Review has stressed the real wage-unemployment link. This same INDECS survey goes on to explain the current downturn in its early phase as the result of a change in the composition of gross national expenditure such as to produce an increased import share. Again I quote from the same INDECS report:

The growth rate in gross national expenditure was the same in the first three quarters of 1981 as it had been in the last three quarters of 1980. The key difference between the two periods was an upsurge in the proportion of this expenditure met by imports.

This increased import component was partly a result of a change in composition of national expenditure, with the first three quarters of 1981 seeing spending on housing construction and public sector demand weaken, while investment spending surged, the latter tending to have a higher import component than the former. There was, it is true, also a decline in international competitiveness, but the INDECS survey attributed this mainly to exchange rate movements-the trade weighted exchange rate appreciated 14 per cent from early 1980 to August 1981. Hence the claim that the current recession was caused by real wage growth is ill-founded.

But there has been a more general debate in the economic literature about the link between real wages and unemployment. Some of this literature has emphasised that the nature of the link between these economic variables varies according to whether one is looking at the downturn, trough or recovery phases of a recession . An analysis that looks at the period from 1974-75 to 1980 on this basis by Donald Whitehead and Sheila Bonnell appears in a volume entitled 'Incomes Policy in Australia' a collection of papers edited by well-known labour market economist, Keith Hancock, in 1980. In large part, this article was a critique of the position expressed by another academic with an interest in this area, Max Corden. Corden's analysis of the link between real wages and employment provides , according to Whitehead and Bonnell:

the most systematic and comprehensive account of the position that underlay the submissions by the former Commonwealth Government to indexation hearings.

It is impossible within the time constraint of this speech, Mr Deputy Speaker, to describe fully the analysis in this paper. But one of the main points is that the effect of real wage costs on capital-labour substitution-which is the main mechanism by which real wage growth is alleged to cause higher unemployment-is ambiguous. Again I quote from the paper by Whitehead and Bonnell:

In other words, a rise in real wages would have an 'income' effect as well as a 'substitution' effect on investment. The 'income' effect-that is, the fall in company income-would tend to reduce the volume of investment and therefore the adoption of more capital-intensive techniques. The 'substitution' effect- the consequence of the rise in the relative price of labour-would tend to make the investment which did take place more capital-intensive.

This is the key sentence:

There is no a priori reason for supposing that the second effect would outweigh the first.

The conclusion of the paper, in contrast to the view of the former Government, is:

In our view, a different interpretation of the downturn and subsequent recession better fits the available evidence. This alternative interpretation places much less emphasis on the rise in the relative price of labour as a cause of unemployment and does not point to the need to reduce real wages as a precondition of recovery.

I hope that the aforementioned at least makes clear that there exists a significant academic controversy about the economic rationale for the former Government's wage pause policy. In other words, the glib aphorism that 'one person's wage rise costs someone else's job' is ill-founded.

To implement a further real wage cut in present circumstances would be utterly counter-productive. This becomes clear from an examination of the Budget Papers which indicate that, in the previous financial year, the only private component of gross domestic product that held up against the recession was consumption expenditure. Confirmation of this point can be found in Budget Paper No. 10, Table 2. Unless real wages are maintained there is a real danger that this, too, will slump, with obvious adverse consequences.

I conclude by commenting on the document presented to the National Economic Summit Conference titled 'Projections of the Australian Economy to 1985-86'. This is the document that outlined the famous three scenarios for the Australian economy, based on different real wage growth outcomes. Taken at face value, these scenarios appear to support the contention that there is a trade-off between real wages and unemployment. It is regrettable and surprising that this document was not subject to much closer scrutiny. It has already set the terms of the debate about the economic options available at the Summit Conference and since. At the time, I found the lack of debate surprising, as I had some awareness that the predictions of any given economic model reflect the assumptions about economic relationships built into the model structure. Hence Keynesian models tend to produce Keynesian predictions of the result of, say, a fiscal stimulus; likewise, monetarist models produce monetarist results.

With this in mind, I asked the Parliamentary Library to write a critical appraisal of the Summit projections, and some surprisingly obvious deficiencies in the model framework came to light. Those deficiencies would certainly diminish the supposed advantage in terms of output and employment enjoyed by the low wage growth scenario, and if corrected for, would possibly vary the rankings between the scenarios. It is not possible to go into every point made in the paper that the Parliamentary Library wrote on the projections document. But the most significant single weakness in the model is that the poor output- employment result of the high wage growth scenario is mainly the result of reduced fiscal stimulus consequent on people moving into higher tax brackets and paying a larger proportion of their incomes in tax. That is, the real, as opposed to nominal, tax rates are higher with high wage growth-a case of 'fiscal drag'. The net result is that real household disposable incomes are actually lower under the high wage growth scenario, with the obvious implications for aggregate demand.

I seek leave, Mr Deputy Speaker, to have incorporated in Hansard a table showing real wages, salaries and supplements, cash benefits, household income, personal taxes, disposable household income, and consumption, under the three scenarios. The table is derived from Tables 1.6A, 1.6B, and 1.6C of the projections paper.


Mr DEPUTY SPEAKER (Mr Drummond) -Is leave granted?


Mr Hodgman —Yes.


Mr DEPUTY SPEAKER —Has the table been shown to Mr Speaker or to the Deputy Speaker?


Mr BALDWIN —No, Mr Deputy Speaker.


Mr DEPUTY SPEAKER —If it falls within the guidelines that Mr Speaker has laid down regarding incorporations it may be incorporated. It is usual to clear it with the Opposition and with the Speaker before incorporation in Hansard.

The table read as follows-

EC1183/54409

THE SUMMIT PROJECTIONS

Growth Rates (%) 1983-84

Pro- Pro- Pro-

jection A jection B jection C

Real Wages Salaries and Supplements -0.4 4.2 -1.9 Real Cash Benefits 9.5 3.7 10.0 Real Household Income 2.8 3.7 2.3 Real Personal Taxes 1.8 11.7 -0.8 Real Disposable Household Income 2.2 1.2 2.3 Real Consumption 1.1 0.5 1.3

Source: Derived from Tables 1.6A, 1.6B, 1.6C, Projections Paper.


Mr BALDWIN —The model supposedly presumes a neutral fiscal policy stance in the three scenarios. Yet it can be argued that the failure to offset the fiscal drag by an adjustment of the tax scale is itself a discretionary, not neutral, policy stance. This failure is justified in the projections document by the claim that the compensating fiscal stimulus 'would undoubtedly not translate into commensurately higher real activity, while it would add further to inflation'. This remains a highly contentious claim in economics. This kind of summary dismissal of a potential policy option is a serious deficiency in the projections paper. Along with a number of other deficiencies, it calls into question the real wage-unemployment trade-off that the three outcomes seem to imply. This Bill is a welcome move away from the thoroughly inequitable approach to income determination of the former Government and I commend the Bill to the House.