Governments were predictably unmoved by Reserve Bank governor Philip Lowe’s view that caps on public sector pay rises are a factor in low wage growth for everyone, but he caused a stir in the media and perhaps that’s all he wanted to achieve.
The RBA would like to see wage growth across the economy of more than 3% one day. Its strategy to push in this direction is to keep interest rates extremely low hoping that in time, employers will have to compete harder for workers. Secondly, Lowe hopes that just “talking publicly about the benefits of stronger wage growth” might help the situation.
“For the central bank governor, it’s controversial to say wage growth should be stronger, so that’s got quite a lot of news, so I hope that helps lift wage expectations,” he told the House of Representatives economics committee on Friday.
Lowe caused much frothier commentary and got even more news coverage by calling out the public sector wage restraint “right across the country” as one factor in low wage growth, along with the prospect of a buyer’s market for labour remaining in place into the medium term.
This mainly served to stir the pot and perhaps that’s all Lowe wanted to achieve. Governments aren’t showing any signs of Damascene conversions.
Public sector unions rejoiced, while business lobbyists and conservative commentators wailed that more money going into government would drive the country to ruin. Most reactions consisted of pre-existing views on the economic effects of public sector spending.
Lowe’s comments were not that radical — the economic effect he is talking about would mainly come from more money in the pockets of masses of people employed by states and territories to provide healthcare, education, transport, emergency services, correctional services, law enforcement, regulation, and so on.
Most governments have capped public sector pay rises at about 2% or 2.5%, although Western Australia has offered less, with flat $1000-a-year increases, he noted. “And I can understand why governments are doing that, because it’s important that we have budget discipline, and wages account for around 70% of most state governments’ budgets, so I can understand why the state governments want to do this.”
“On the other hand, the wage caps in the public sector are cementing low wage norms across the country, because the norm is now 2% to 2.5%, and partly that’s coming from the decisions that are taken by the state governments.”
The Commonwealth collects and distributes a massive amount of money but its direct employment costs are nowhere near as significant within either the federal budget or the national labour market. Its own wage restraint has helped set the tone, however.
“So, I’m hopeful that at some point the budget positions will improve sufficiently that state governments, or even the federal government, will be able to lift their wage caps,” the RBA chief added.
Some commentators raged that Lowe was out of his mind, arguing that higher public sector salaries create little or no value and cannot possibly have a positive effect on the economy. In an earlier round of the wage-growth debate, Victorian Liberal Senator James Paterson compared the idea to standing in a bucket and trying to pick oneself up by the handles.
The governor’s comments were heresy to businessman Tony Shepherd, who told The Australian governments had previously been too generous to those in their employ.
“The public sector … doesn’t generate any wealth; it takes our wealth,” said Shepherd, who ran the Coalition’s 2014 Commission of Audit and burnt up taxpayers’ money himself for 15 years in the Australian Public Service earlier in his career.
While the majority of Australia’s public sector might not directly generate wealth, it certainly enables a huge amount of wealth generation and government spending generally has a net positive effect; that’s the whole point. Shepherd called for productivity gains in the public sector — which are notoriously hard to quantify — but the spectre of backroom bureaucrats wasting money is beside the point.
The idea, as Lowe explained in the hearing, is that by generally capping their own pay rises at about the same level as general wage growth, governments are doing nothing to increase competition in the general labour market. Some commentators reacted as though he threw down the gauntlet and demanded higher pay, but his comments were actually fairly equivocal.
Governments, and by extension the citizens they represent, are choosing to “entrench low wage norms” so they can deliver what they see as “responsible, balanced budgets” in his view. “Whether it’s the right trade-off, I’m not going to comment on that,” he told first-term Labor MP Alicia Payne, the Member for Canberra.
The RBA only thinks the “the public sector wage norm” is influencing the private sector “to some degree” given about a third of Australians are, directly or indirectly, paid from public funds. He also knows government budgets are not easy to balance.
“So I think it is an issue but, on the other side of the ledger here, it is important that state governments manage their budgets prudently. I have spoken to a number of state treasurers. They say, ‘We’d like to do more here but we’ve got a tough budget situation.’ So there is a balancing act to be completed here. But I hope that, over time, that balance could shift in a way that would allow wage increases, right across the Australian community, of three point something.”
APS helps set the tone
When Lowe speaks of the public sector he means it in the broadest sense — as the term is used by the Australian Bureau of Statistics, which covers not only members of public service but everyone whose salary is ultimately publicly funded.
Some public sector pay rises are set by independent tribunals or commissions and others through bargaining directly with independent publicly funded bodies like universities. But governments collectively assert either direct control or considerable influence over the vast majority of the sector which employs around a third of the labour force.
The Commonwealth’s high-profile enterprise bargaining policy has outsized influence on wage norms in the economy despite covering a relatively small fraction of the whole public sector. It applies not only to the APS — those employed under the Public Service Act — but all other federal government entities and the offices of MPs.
The Defence Force is exempt but even the Reserve Bank and self-funding government business enterprises like Australia Post don’t escape its reaches entirely. They must “apply the policy to the extent practicable” in their unique “commercial and competitive circumstances” and respect its austere intent and the authority of the elected government to set the agenda.
“Before commencing negotiations, these entities are to consult their portfolio Minister and inform the Australian Public Service Commissioner about the rationale for their proposed bargaining approach. “
Most governments say community expectations dictate that public sector workers should roughly get the same sort of sluggish wage growth as everyone else, or even tighten their belts in the name of budget repair. But as Lowe suggests, it’s not a actually a zero-sum equation.
The federal policy has set a 2% cap on average yearly pay rises for several years and calls on agencies to “broadly identify” productivity gains to pay for them (details not required).
But actual pay for everyone below senior executive level grew by less than 1% over three years in the Commonwealth, due to a very long period of industrial strife that followed the introduction of the policy and a ban on retroactive pay increases.
The Australian Public Service Commission estimated staff in five big agencies accounting for well over half of the APS — Human Services, Defence, Agriculture, Home Affairs and the Tax Office — could have collectively earned over $343.4 million extra had they accepted the first offer.
The most recent APS remuneration report shows the end of the bitter dispute brought base-salary growth back to 2% for most staff and 3.8% for the senior executive service although the figures were reversed for total remuneration: 1.3% for the SES compared to 1.5% for non-SES staff.
The APS Commission says the apparent growth in SES base salaries is skewed upwards because a lot of vehicle-related allowances are being converted into base salary in renegotiated contracts.
Gender pay gaps are almost non-existent within specific classification grades and an overall 7.8% gender pay gap reflects the fact there are roughly equal numbers of men and women at higher levels and more women at lower levels. “All the trend lines are where you want them to be going” for gender equality, in the view of commissioner Peter Woolcott.