11/08/2014 - 13:44

Wages squeeze the new trickle-down

11/08/2014 - 13:44

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There are work opportunities available for those able to relocate, as a shift to supply-side economic reforms gains traction.

Wages squeeze the new trickle-down
SLOG: As low interest rates cease to be the tool for economic stimulation, wages and conditions will have a role in stimulating growth.

There are work opportunities available for those able to relocate, as a shift to supply-side economic reforms gains traction.

Contrary to what you might have read about his opening speech at the Diggers & Dealers forum, former Bank of England governor Mervyn King was not the most interesting person in Kalgoorlie last week.

Nor was the recently appointed life peer, a member of the House of Lords, the man best able to demonstrate what’s coming next for Australia.

Two boilermakers from Wangaratta, a small Victorian city not far from the border with NSW, know a lot more than the forum’s keynote speaker about the current economic buzz words – productivity and austerity.

A few hours after Lord King, the Baron King of Lothbury, spoke to a packed house in the Goldfields Arts Centre, I bumped into the boilermakers as we waited to check in baggage at the Qantas counter at Kalgoorlie airport.

The contrast between the 66-year-old semi-retired English banker and the 50-something boilermakers could not have been more stark, though the story they told was a dead-ringer for what the Diggers’ audience had just been told – tough times have not only arrived, they’re here to stay for a while.

Delegates at the forum, who struggled to understand what one of the world’s most highly-qualified banker/economists had to say about the global economy, would have quickly grasped what the boilermakers had to say because their plight was a reminder about why I live in Perth.

Lord King’s message was that ultra-low interest rates have done all they can to stimulate economic activity, and are starting to do more harm than good.

What’s needed now is to focus on supply-side reforms, a vague concept the banker did not explain in detail because it is the nasty side of running an economy and invariably means an increase in capital and labour productivity, encouraging capital investment in business, and an increase in the mobility of labour.

A reasonable interpretation of Lord King’s prescription for a future that includes a return to sustainable, and real, economic growth is ‘more work for less pay’.

The Wangaratta boilermakers have an intimate understanding of what that means because two weeks ago they lost their jobs after several years with the same firm, which did what an alarming number of other manufacturing businesses in eastern Australia are doing – collapsing into receivership.

Not only did they lose their jobs, the receiver found that there was no money in the bank to pay their last final wages.

What came next was straight from Lord King’s playbook – labour mobility, and increased productivity.

Rather than moan about their tough luck, the boilermakers bought a cheap ticket on the midnight horror from Melbourne to Perth, and then the cheapest ticket possible up to Kalgoorlie. They knocked on the doors of Goldfields metalwork shops in a hunt for work, and think they’re found jobs for 18 months, at least.

The work will take them to a mothballed mine and processing plant about 150 kilometres north of Kalgoorlie, which is being revitalised.

The boilermakers said they were not sure of the name of the mine, only that the new boss would pay them, and feed them. So they’re on their way home to collect their tools and clothes before driving back, possibly with two more unemployed Victoria boilermakers (because the Kalgoorlie employer needs four).

History has a funny way of repeating, because in the 1890s Victoria plunged into a deep depression after the collapse of a property boom. Unemployment soared to 20 per cent and a period of mass immigration started to the goldfields of WA, with my great grandfather included among this human tide (he found work with a hardware merchant in Kalgoorlie).

The Wangaratta boilermakers who refuse to consider going on the dole, but know that they have car payments and mortgages to services, are travelling the same route as their countrymen of more than a century ago.

They are examples of what Lord King sees as the essential supply-side changes needed to replace interest rates as the preferred economic tool governments must now use to complete the rescue effort that followed the 2008 GFC.

Better than nothing

OTHER examples of supply-side economics at work can be found across Western Australia today as workers seek jobs at whatever pay rates they can negotiate, and contractors confront the reality of reduced wages, or no work.

An example is that of a world-class engineering consultancy that was asked by a resources company client to help with budgeting problems by agreeing to a 25 per cent cut in payments.

Initially, the contractor refused and was told that, sadly, the contract would be terminated.

A few days later, reality dawned when the contractor recognised that 75 per cent of something was infinitely better than 100 per cent of nothing.

That’s a situation being repeated across WA today as the boom deflates and reality returns.

Mac on target

HOPES that the mining industry might get a boost from a fall in the exchange rate appear to have been dashed by that amusing, but alarmingly accurate, measure of international currency values, the Big Mac index.

According to the latest test of the price of a McDonald’s hamburger in 16 countries, the Australian dollar is almost perfectly priced.

The measure uses an economics tool known as purchasing power parity, which assumes that, over time, a basket of similar goods and services ought to cost the same as exchange rates adjust. The most common item linking countries such as Indonesia, Japan, Canada, Brazil and Australia is the Big Mac.

The latest measurements show that Norway has the world’s most overvalued currency, with a Big Mac costing $US7.76. Ukraine has the most undervalued currency (no surprise there) with a burger costing $US1.63.

In Australia, the average Big Mac price is $US4.81 almost the same as in its homeland where a Big Mac today costs $US4.80 – which implies that today’s exchange rate is precisely where it should be.

Now the really bad news

MORE bad news for readers with a sweet tooth can be found in two locations. Firstly, the price of chocolate is going up because cocoa prices are rising, secondly the price of California almonds are rising because of a water shortage to irrigate almond plantations.

Given that California produces 80 per cent of the world’s almonds that can only mean chocolate-coated almonds could soon become a luxury item.

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