The link between higher profit and higher wages is being tested | Greg Jericho

The key question for any government is whether or not voters are better off now than they were at the last election – or, in the case of a multi-term government – when there was a change of government. Given next year is likely to see election talk heat up as a simultaneous House of Representative and half-Senate election can be held anytime from 4 August next year, it’s a question that is going to be asked with more urgency.

And right now the answer is no.

Yes, the government can point to very good employment growth – especially in this past year in full-time work. Full-time employment for prime-aged workers aged 25-64 grew 3.2% in the past 12 months – the best result since 2010. That’s a big tick.

Business investment as well is beginning to rise – but a good portion of that is due to public sector infrastructure work. In the 12 months to June (the latest figures we have), private sector engineering construction fell 14% while such work for the public sector rose 15%.

And there is nothing wrong with that – that is in fact one of the purposes of public infrastructure. Not only can it improve productivity if done properly, it also provides work for the private sector (something that those in the government, who still try to suggest that GFC stimulus spending achieved nothing, would do well to remember).

But this week’s GDP figures only served to highlight that while jobs, investment and overall economic growth are ranging from a solid to very good, you would be hard pressed to say the mood in households is within that scope.

The big story of the national accounts was that households had stopped spending in the September quarter. Household consumption grew just 0.1% in real terms – the worst quarterly growth since the GFC in 2008.

A good guide for how households are feeling is the spending on non-essentials such as recreation and culture, hotels and restaurants, and household furnishings. In the past year our spending on such items grew just 0.2% – a level of growth more normally associated with a recession.

And the reasons are obvious – the economy might be growing at a decent (if still below-average) pace, and business investment might be going great, but household income growth is putrid.

The record low wages growth has fully filtered through to households, where even despite the strong employment growth, household disposable income has fallen in the past year in real terms.

What we have to spend not only buys us less than it did at the time of the 2016 election, but less than it did at the 2013 election. And given the recent surge in the price of electricity, it’s little wonder that we’re not feeling flush enough to dine out or go on a holiday.

The government for its part is fully aware of this dilemma – the prime minister and treasurer rarely talk of the economy without stressing their concerns for households’ cost of living.

The issue of course is whether or not the situation will improve – and whether it will improve before the next election.

The government is essentially betting its political life that the path to improved household living standards is through better business conditions (i.e. lower tax and regulation) which will lead to increased investment and then in turn greater demand for workers and thus higher wages.

It’s a logical approach to take. If all you care about is economic growth, making life good for business is an easy way to go – after all, company profits are income that all goes into the GDP mix. And history does suggest that, eventually, higher profit growth is associated with higher wage growth.

But that link is being tested.

The concern is that what worked in the past no longer will. Not the least because we are experiencing wages growth lower than anything we have experienced in history. In the past, when profits rose and wages followed, they were not coming off record lows.

Wages used to grow on average by around 3.5% each year. The last time workers experienced such wage growth was five years ago in September 2012. And even under the best outlook, no one thinks we’ll get back to those levels before the end of this decade. Even the budget, with its generous estimates for wage growth that helps bolster the income tax revenue, sees wage growth only returning to that level in June 2020.

And yet, if that were to occur it would be eight years since we would have seen that level of growth – more than enough to suggest a change of mindset would have occurred.

In the past, improved investment and profits led to better wages growth because both sides played along – you didn’t have businesses seeking to terminate agreements, and unions had much more power to undertake industrial action – a power that was limited again this week by a decision in the high court against the AWU that now sees unions being prevented from taking protected industrial action during bargaining if they breach any order from the Fair Work Commission.

It was a decision which the dissenting judge, Justice Gageler, argued, could see unions and their members become “an industrial cripple and an industrial outlaw.”

And in the past, 3.5% growth was considered fair in a climate in which inflation was growing around 2.9% each year – a pace it hasn’t grown at consistently since 2011.

The government, business groups and the Reserve Bank will talk of strong wages growth, but once unions start achieving such growth, expect to hear talk of declining competitiveness, and the need for restraint. Expect, as well, in the intervening years – should the Liberal government win re-election – that the industrial relations system will continue to be weighted in favour of employers.

In effect, the system may have once favoured a nice link between profits and wages and thus household incomes, but that relationship is rather strained right now. Private investment is growing well in the non-mining sector, but a large proportion of that is due to public infrastructure projects being undertaken by the private sector.

And the longer workers go without what were once considered average wage increases, expect a strengthening resistance from businesses to give them.