Workers asked to pay for economy's success
It makes you wonder whether our business people are knaves or fools: are they knowingly talking nonsense or are they simply economically illiterate?
I'm genuinely not sure. I realised long ago it's possible to be a highly successful business person and yet not know enough to pass a high school economics exam. I could name names, but I won't.
Of course, business people would be perfectly justified in arguing the reverse: it's possible to be the most learned economist in the country yet be a total dud as a manager.
All this proves is that, contrary to popular impression, economics and business management are separate skills. The macro economy is not just a company writ large.
Chief offenders among the big business people saying stupid things about wage rates are the miners. In seeking to explain why the fall in coal and iron ore prices from sky-high to merely unusually high has prompted them to start cancelling projects for new mines, they complain that Australia has become a "high-cost" place to do business.
In part this is an unjustified whinge about the mining tax; in part it's a complaint about the continuing high dollar. The miners are justified in reminding us that all export and import-competing industries are adversely affected by a high exchange rate, including them.
For the most part, however, it's a complaint about the way wage rates for mine and construction workers have shot up in recent years. Remember, the West Australian miners were in the vanguard of those using John Howard's WorkChoices to force their workers on to individual contracts and get rid of (admittedly, often unreasonable) unions.
It's been the miners leading the campaign by business and the national dailies to reverse the direction of Fair Work and bring back individual contracts. So, the miners want us to believe it's the Fair Work Australia changes and the power they put back into the hands of the unions that explain the rapid rate at which the miners' wage bill has been growing.
If you believe that, you know nothing about economics, starting with the laws of supply and demand. What we've had in Western Australia - and Queensland - is a host of miners, big and small, desperate to expand their existing mines and build new ones and get the projects finished while world prices stay high.
So, you've got a sudden surge in demand for labour in remote and inhospitable parts of the country where few workers live, coming from companies that have never put much effort into training their own young workers.
Demand for labour has shot way ahead of supply as miners race their competitors to get their projects under way. What happens in any market when demand runs ahead of supply? The price goes up. One of the things the higher price does is attract resources from other parts of the economy.
If there are unions present, they will use their improved bargaining power to extract big pay rises from employers anxious just to get on with it. If there are no unions present, much the same thing happens as employers try to outbid their local rivals and also suck in labour from other states.
Only an economic ignoramus could imagine wages wouldn't have risen in the absence of unions.
But there's nothing new about the tactic of trying to make Australian workers believe there's something illegitimate about the high wages they're paid. In the protectionist era it was a favourite tactic of manufacturers demanding higher tariffs on imports.
Their argument was that, if workers in Asian sweatshops were getting $2 an hour and ours were getting $15, ours were being overpaid by $13 an hour. If that makes sense to you, go to the bottom of the economics class. The first point is that the cost of labour is just part of the total cost of any product, though it's true that labour costs are the biggest element in the prices of simple, labour-intensive items such as textiles, clothing and footwear.
Countries such as Germany and Sweden have very high hourly wage costs, yet manage to hold their own in international markets for sophisticated manufactures. How? By compensating for high wage costs by having much better-trained workers, better capital equipment, longer production runs, smarter managers, higher quality, better service or other non-price selling points.
More fundamentally, it's possible but not common for the general level of a country's wages to be too high because the union movement has too much power. A rich country's wage rates are very high - way higher than a poor country's rates - because a country's wage rates invariably reflect that country's material standard of living (income per person).
And, as a general rule, what determines a country's standard of living is the level of (as opposed to the annual rate of improvement in) its labour productivity.
How does a country achieve the high level of productivity that eminently justifies the high incomes its people are paid? By investing in good infrastructure, in the education and training of its workers and in the latest capital equipment, then ensuring its business and political leaders are highly capable.
One test of its political leaders is whether they let lazy business people and self-centred unions con them into making the country's consumers or taxpayers subsidise the continued existence of businesses unable to find a way to compete on the international market.
Twitter: @1RossGittins
Frequently Asked Questions about this Article…
Miners argue that recent sharp increases in wage rates for mine and construction workers, combined with a high Australian dollar (and in some cases mining taxes), have raised operating costs. The article explains this partly reflects a surge in demand for labour as miners raced to expand projects while world commodity prices were high, pushing up wages in remote areas and making some new projects less viable.
No — the article says blaming Fair Work Australia or unions alone ignores basic supply and demand. The rapid rise in wages in Western Australia and Queensland was largely driven by an urgent, large increase in labour demand for remote mining projects. Even without unions, employers often outbid each other for scarce workers, so wages rise when demand outstrips supply.
A high exchange rate makes exports and import-competing industries less competitive by reducing returns in the domestic currency. The article notes miners are justified in pointing out that all export industries — including mining — are adversely affected when the Australian dollar is strong.
No. The piece explains that high wages often reflect a country's higher standard of living and are sustainable if matched by high labour productivity. Countries like Germany and Sweden have high hourly wage costs yet compete internationally by using better-trained workers, superior capital equipment, smarter management and other non-price advantages.
According to the article, the general level of wages reflects the country's material standard of living, which in turn depends on the level of labour productivity. Improving productivity requires investment in infrastructure, education and training, modern capital equipment, and capable business and political leadership.
Investors should monitor commodity price trends, the Australian exchange rate, reports of wage-cost pressures or rising wage bills, and announcements of project delays or cancellations. These factors — especially sudden surges in labour demand or falling commodity prices — directly affect project economics and company costs.
The article criticises that argument as misleading. Comparing nominal wages across countries ignores differences in productivity, capital intensity and quality. Labour cost is only one component of total product cost; higher wages can be offset by better training, equipment and management to remain competitive.
The article argues political leaders should be tested on whether they allow lazy businesses or self‑interested unions to persuade taxpayers or consumers to subsidise firms that can't compete internationally. The preferred approach is to focus on productivity-enhancing investments rather than propping up uncompetitive businesses.
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