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The truth about wages

Sep 5, 2019 • 15m43s

The reality of the wage debate in Australia is that companies are geared to pay dividends rather than to invest in growth – and the treasurer’s intervention does nothing to change that.

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The truth about wages

73 • Sep 5, 2019

The truth about wages

[Theme music]

ELIZABETH:

From Schwartz Media, I’m Elizabeth Kulas. This is 7am. Josh Frydenberg’s recent appeal for companies to address wage stagnation underscores the government’s lack of policy in this area. It also highlights how the Australian market preferences dividends over innovation. Mike Seccombe on the distorting realities in the pay debate.

[Theme ends]

Archival tape — Josh Frydenberg:

“Productivity growth has started to slow and is not where we would like it to be. My message to business is; back yourself to grow. Invest in research and development. Invest in capital deepening. Invest in the expansion of your business.”

ELIZABETH:

All right. Mike, Josh Frydenberg gave a speech to the Business Council of Australia last week. I was wondering; if you were translating for him, what would he be saying?

MIKE:

If we were translating brutally, we would be saying that the Treasurer is very worried about wage stagnation. And that Australian owners of capital, you know, corporates and those who invest in them, are essentially responsible because they've become lazy and greedy and shortsighted and risk averse.

ELIZABETH:

[Laughs] Tell us what you really thought he said, Mike.

MIKE:

[Laughs] Well, I mean that that's the clear take out. I mean, obviously, he was speaking to part of his government's core constituency, so he put it more tactfully than that. But that was the essential message...

ELIZABETH:

Mike Seccombe is The Saturday Paper’s national correspondent.

MIKE:

...that, you know, wages won't grow unless productivity grows. Productivity won't grow unless business starts investing more in new ventures, new assets, new capital equipment and R&D, and that's not what they're doing.

ELIZABETH:

So where are the profits going from Australian businesses?

MIKE:

This was where Frydenberg had a pretty killer statistic…

Archival tape — Josh Frydenberg:

“Business has seen share buybacks and special dividends increase quite substantially. Over the last 12 months, they’ve totalled $29 billion, compared to the average over the last four years which has been around $12 billion.”

MIKE:

That's a 140 percent increase. So they're giving their profits out is dividends to shareholders rather than to either wages or to reinvestment.

ELIZABETH:

And how did the people in the room, as you say was his core constituency, how did the people in the room respond to what he was saying?

MIKE:

There were a variety of responses, some business chiefs came out and quite bluntly said, invited him to butt out, said that they didn't need to be told how to run their companies. The chief executive of the BCA, Jennifer Westacott, was rather more diplomatic. She said that Frydenberg was quote “spot on to highlight Australia's Productivity Challenge”. But she didn't really engage in what he was saying. She made no mention of wage stagnation. She made no mention of dividends or buybacks. And then, you know, a couple of other chief executives came out and said similar things, that Frydenberg was absolutely right to point out what the problem was. But then they didn't really mention the problem and they certainly didn't suggest that they would be doing anything to try and solve it.

ELIZABETH:

So how does the payment of dividends in Australia compare to other countries?

MIKE:

What Frydenberg spoke of, special dividends and buybacks, is a fairly recent phenomenon. But underlying that is a very long-term symptom, I guess you would say, of the Australian corporate sector, which is that we give back unusually generous amount to our shareholders in the terms of dividends. In this country, they're around 4.5 per cent on average. And globally, that's about 2.5 per cent. So we're nearly twice as generous in what we give back to shareholders compared with what we reinvest in this country.

ELIZABETH:

And in real terms, that's billions of dollars that's paid to shareholders in the form of dividends more than they would be, say, if they were based in another country.

MIKE:

That's right. That's many, many billions. And I might add, you know, if you look at the companies that are really growing fast, you know, the Amazons, or the tech companies of Silicon Valley for example, they pay nothing, or almost nothing in dividends and they remain popular with shareholders because the shareholders are looking for capital gain which comes from the innovation of those companies. In Australia, companies would rather compete by way of the size of the dividend rather than by reinvesting in something that might make them more productive.

ELIZABETH:

And therefore drive up a share price...

MIKE:

Yes, that's right, that's right. And there's a couple of reasons why Australian companies tend to pay higher dividends. One is that we have this unique dividend imputation system by which when the company has paid tax, the shareholder gets credited with that and therefore has that taken off their tax bill. So that encourages shareholders to go looking for yield rather than capital growth. And the other is that we have a very large superannuation pool and that also encourages investment in shares that have high reliable yields, conservative, established, long term investments rather than trying to pick companies that might have prospects of capital growth because that tends to be a riskier sort of an exercise.

The other problem here, and I spoke to Andrew Leigh about this who is now a Labor MP, but before that was a very well credentialed professor of economics at the Australian National University, has recently done some work looking at market concentration in Australia, and what he found was that half of Australian industry is controlled by four firms or fewer. So when he looked at it, department stores, newspapers, banking, health insurance, supermarkets, domestic airlines, internet service providers, baby food, beer... a whole range of things where the market is very concentrated and therefore, you have to suspect that competition is maybe not what it might be.

That encourages complacency. They can price signal to one another, they can be fairly reliably counted upon to produce a decent dividend. And so that's the way they compete. They compete by dividends because that attracts people to invest rather than by them, you know, encouraging new investment in technology, new ventures, training their staff better, paying their workers better. That sort of thing.

ELIZABETH:

We'll be right back.

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ELIZABETH:

Mike, Josh Frydenberg has made an intervention on this question of wage stagnation, or at least he's given this speech asking businesses to pass on profits, is it going to work?

MIKE:

Well, on the basis of the response of business, you would have to say no. For a start, the Treasurer is not really proposing to do anything about it. I mean, he's not proposing to in any way constrain share buybacks, which I note some politicians in America are now talking about, and at one stage in the United States there were very strict restrictions on share buybacks. It was considered to be a form of share price manipulation.

And, as Nicki Hutley of Deloitte Access Economics put it to me, you know, to think that companies will turn around and say; ‘Oh, the Treasurer says we should do something so we'd better do it’, was naive at best, was the way she described it.

And the second point, of course, is that the government appears to be very late in recognising that there is a problem, that problem being that long before the current outbreak of share buybacks, there was this problem of very high dividends being paid out. And that's a long term factor in Australian corporate life.

ELIZABETH:

Are there any proposals that have been put to the Treasurer that you think could work?

MIKE:

Oh, there are a lot of them.

As he did his media rounds after the speech, he went on Sunrise where David Koch suggested that the government should look at tax concessions for investment, to which Frydenberg replied that he would.

Archival tape — Josh Frydenberg:

“Obviously, we will look at various options and I'm in discussions with the business community about how we can boost investment....”

MIKE:

He went on RN breakfast on the ABC where Hamish McDonald pointed out that the government had cut four billion dollars from funding for research and development, and Macdonald suggested that maybe they would consider restoring that. Frydenberg said the government would look at that too...

Archival tape — Hamish McDonald:

“So, you’ll be returning more money in that direction, towards investment in R&D?”

Archival tape — Josh Frydenberg:

“Well, we've got some reforms on the table, and we continue to talk to all the key stakeholders...”

MIKE:

Andrew Leigh, he suggests that essentially we need to spend more on education, we need to spend more on infrastructure by which he doesn't just mean new roads. He means things like, you know, new technologies. And he also suggested structural reforms to increase competition, for example, making it easier for foreign firms to come in and compete with the domestic oligopolies essentially.

And there's also a broader consensus an almost universal consensus, I might say, outside politics, that there are things that the government could do very quickly. For example, increasing welfare payments. Every man and his dog out there, including the BCA I might add, has suggested that we should be increasing the Newstart allowance. Other people say we should bring forward the low income tax cuts that are scheduled to kick in in a couple of years, and that we should further accelerate spending on infrastructure. So essentially the countercyclical thing whereby a government kicks in a lot of money to offset the fact that the private sector isn't spending big.

ELIZABETH:

I mean, this is related to a push to increase the Newstart payment, but what about direct intervention in wages, what's the possibility there for government?

MIKE:

There's definitely a possibility there for government. I mean, Labor at the last election had a couple of policies, one of which was quite good. And one of which was not very good at all, in my view and in the view of various people I spoke to. The one that wasn't very good was the idea that they would just unilaterally whack up the wages of childcare workers, you know, via subsidies to childcare providers that would be passed on. That's not a very good idea for a couple of reasons.

First problem is that choosing just one group, i.e. child carers, overlooks that there are a lot of other people in similar positions. There are, you know, aged carers, there are all sorts of other people in very similar jobs who were not in the frame to get this unilateral pay rise. The second question is whether it would be paid through to workers or whether these subsidies would somehow skimmed off by their employers, which is always a risk. And the third problem is that if you give a pay rise to just one group you're likely to shift supply. So, you know, if you're working in aged care and you suddenly see that people working in childcare are getting a whole bunch more money than you are, you're you're quite likely to look for a job somewhere else. And so that has a sort of supply problems within the market.

So that's the bad policy. The good policy was that what the childcare announcement related to was the fact that female-dominated jobs tend to have significantly lower pay than male jobs. And that's been a long term problem. And the way legislation works in this country at the moment, it's very hard to mount an equal pay case. So the other part of the Labor policy that was good was that they were going to adjust the legislation such that it would be easier to make such equal pay cases. And that generally seems to be a much better idea.

ELIZABETH:

And then, of course, there's the last thing which is the government could actually just increase the pay of the people that work for them, I guess.

MIKE:

Well, exactly. I mean, they're out there lamenting the fact that pay isn't rising, but they have these wage caps in place. Not only the federal government, I might add. At almost all the states as well. So we have something like I think almost 2 million government employees in Australia, roughly a quarter of a million employed by the federal government. Another 1.6 by the states and then, you know, a few hundred thousand by local government authorities, and the feds and almost all the states now have caps of between 2 and 2.5 per cen. And Philip Lowe of the Reserve Bank, the Reserve Bank governor, says that three point five per cent is the sort of wage growth we should be looking for. So it's a matter of the government, you know, saying; ‘do as I say, not as I do’. If they want to set some kind of benchmark for the market, it would seem that a logical place to start would be to pay their own people more.

ELIZABETH:

But then of course, the elephant in the room... there's a surplus to consider.

MIKE:

The elephant in the room is the surplus, which the government fixated on in a time where the economy seemed to be going gangbusters. There was a meeting of central bankers including our own Philip Lowe in Jackson Hole in Wyoming the weekend before last, where all the central bankers essentially agreed that there was very little scope to stimulate through monetary policy anymore because interest rates are at or near zero now. So there's not much scope to cut them and stimulate activity that way.

And so they were essentially pleading with governments around the world, including our own, to start picking up a bit of the slack themselves. Philip Lowe has been suggesting things like that the federal government should increase the wages of its own workers, that it should increase the Newstart allowance, that it should put more emphasis on infrastructure building.

Every economist in the world agrees that you have to govern according to the economic cycle and in times that are good you try and pay down your debt, and you try to have a surplus budget. But the point is we're not in those times anymore. The world economy is going very bad very rapidly, and yet they maintain this ideological commitment to a budget surplus and the slow paying down of debt. They're focusing on entirely the wrong thing, that they've got sort of a prescription for austerity in austere times and that it's exactly the wrong fiscal tool to be using.

And, to date as far as we can see, Frydenberg and the government would rather stand up in a room full of CEOs and say, ‘Well, it's your fault, it's not us’ and be content with that. Well it's incumbent upon them to do something about it, not merely on the private sector.

ELIZABETH:

Mike, thanks for speaking to us.

MIKE:

Okay mate. Thanks.

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Elsewhere in the news:

A Tamil family trying to remain in Australia was granted a further two-day reprieve early on Wednesday, which protects them from government deportation until 4 o’clock on Friday afternoon. This came shortly after Immigration Minister David Coleman chose not to exercise discretionary powers that would have allowed the family to apply for protection visas. Earlier this week, the family's lawyer said that case now depends on the government having "a change of heart”. They are currently detained on Christmas Island.

And in Canberra, on Wednesday the AFP raided a home owned by Cameron Gill, a senior advisor in the Defence Department. A police representative said that the raid did not relate to "any current or impending threat to the Australian community." It comes after two earlier AFP raids occurred on both the ABC's headquarters in Sydney and the home of a Newscorp journalist, Annika Smethhurst, in June.

This is 7am. I’m Elizabeth Kulas. See you Friday.

Josh Frydenberg’s appeal for companies to address wage stagnation underscores the lack of government policy in the area. It also highlights how the Australian market preferences dividends over innovation. Mike Seccombe on the distorting realities in the pay debate.

Guest: National correspondent for The Saturday Paper Mike Seccombe.

Background reading:

Stalemate on stagnant wage growth in The Saturday Paper
The Saturday Paper
The Monthly

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7am is hosted by Elizabeth Kulas. The show is produced by Emile Klein, Ruby Schwartz and Atticus Bastow. Our editor is Erik Jensen. Our theme music is by Ned Beckley and Josh Hogan of Envelope Audio.

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73: The truth about wages