This article first appeared on the Business Insider web site at this link: https://www.businessinsider.com.au/minimum-wage-increase-stephen-koukoulas-2018-6
Australia's opponents of the minimum wage increase ignore this truth: higher pay means more people working
The 3.5 per cent increase in the minimum wage announced by the Fair Work Commissionwas slammed in some quarters, with Australian Industry Group Chief Executive Innes Willox saying it would “be a major disincentive to employment”. Not to be outdone, Russell Zimmerman, the Executive Director of the Australian Retailers Association said the wage rise would “delay staff employment and potentially lead to job losses”.
These views are commonplace amongst the bulk of economists and policy makers, but it reflects a lop-sided view of the economics of labour markets.
There is an overwhelming bias that looks at low wages as the fundamentally important way to achieve higher employment and a lower unemployment rate, with high wages growth hurting employment as Willox and Zimmerman suggest. As the core of this view is one part of the basic economic theory of supply, demand and prices.
The view is that if wages (the price of labour) are held lower, demand for workers (from employers) would increase and as a result, the level of employment will rise and the unemployment rate will fall. This approach to labour market economics ignores the supply side which in this instance is a workers’ willingness to supply their labour for a given wage.
If wages are too low the worker will not supply their labour. Wages being “too low” includes leaving the worker a sufficient surplus of cash after covering the cost of transport to and from work, making alternative plans in their household when the worker is at work and the give up of leisure time, among other things.
This article first appeared on the Yahoo7 Finance website at this link: https://au.finance.yahoo.com/news/aussie-economy-rocks-050403466.html
Is the Aussie economy on the rocks?
I often wonder why people who analyse and comment on the economy don’t keep up to date with unfolding events.
Economics is a wonderful thing. It is vibrant, it changes every week, every month and every quarter as fresh news on inflation, employment, consumer spending, housing, business investment and a whole host of other variables are released. The reason this is important is that the recent, up to date information on the Australian economy is, all of a sudden, disconcerting.
While 2017 did see the strongest growth in employment on record, with an average increase in employment of 34,600 a month, in the three months to April 2018, the averAge monthly increase WAs just 4,800. This has seen the unemployment rate rise from what was a 5 year low of 5.4 per cent to 5.6 per cent.
The labour market has moved on from 2017.
What’s more, the ANZ job advertisement series, which provides a good guide to future trends in the labour market, has fallen for the last three months.
I was one of the panel members of this podcast which was on ABC Radio National. 25 minutes of interesting discussion.
Politics Panel: Australia's intergenerational gap
With the federal budget handed down and the battle lines emerging for the next election, Australia's intergenerational gap is shaping up as a major political issue.
The Coalition is promising a host of sweeteners for retired voters while Labor is promising to pump more money into education and get housing prices down.
If you're a voter, there's a good chance your view of those promises will be informed by the year you were born.
This article first appeared on the Yahoo7 Finance web site at this link: https://au.finance.yahoo.com/news/need-worried-australias-economic-outlook-060611703.html
Do we need to be worried about Australia's economic outlook?
The Reserve Bank of Australia reckons that the next move in official interest rates is more likely to be up than down. RBA Governor has said so in recent weeks as he talks up the prospects for the economy over the next year or two.
This is disconcerting news for everyone out there with a mortgage or a small business loan, especially in a climate where the business sector is doing it tough and when wages growth is floundering near record lows. The good news is that the RBA is likely to be wrong and the next move in interest rates could be down, such is the run of recent news on the economy. Failing an interest rate cut, the hard economic facts suggest that any interest rate rises are a long way into the future and if they do come, there will not be all that many.
At this point, it is important to bring together the issues that would need to unfold to see the RBA pull the lever to hike interest rates. At the simplest level, the start of an interest rate hiking cycle would need to see annual GDP growth above 3.25 per cent, the unemployment rate falling to 5 per cent and less, wages growth lifting towards 3 per cent and more and underlying inflation increasing to 2.5 per cent.
This is where the RBA expectation for higher interest rates is on very thin ice.
This article first appeared on the FIIG website at this link: https://thewire.fiig.com.au/article/2018/05/14/.Wv932WJ7Bn8.linkedin
An investor’s perspective of the budget
As some of the dust settles from Treasurer Scott Morrison’s budget, the clean air reveals the biggest issues boil down to significant cuts in income tax; an earlier return to surplus; and a path to lower government debt.
The government announced this seemingly incongruous policy mix – lower taxes and yet lower government debt – because revenue has been flowing into the Treasury coffers at a pace significantly above the level assumed in the mid year Economic and Fiscal Outlook update in December last year.
Lower tax and lower government debt are, at face value, good news. Most individuals would prefer paying less tax, while economic prudence and sound policy should see government debt levels reduced when the economy is growing at a decent pace.
But the good news on tax and debt is based on a number of premises that are open to debate.
The surplus forecast needs the economy to remain strong
Important to the analysis of the budget are the following assumptions from Treasury:
• The economy picks up steam and grows consistently by 3 per cent
• The unemployment edges down to 5 per cent
• Annual wages growth accelerates from 3.25 to 3.5 per cent
These favourable economic conditions are essential for the revenue inflow to remain strong enough to fund the tax cuts, see the budget return to surplus in 2019-20 and debt levels decline.
This article first appeared n the Yahoo7 Finance web page at this link: https://au.finance.yahoo.com/news/cant-get-job-want-2-055935412.html
The Turnbull government is kidding itself when it claims the labour market is strong.
The latest data show the unemployment rate at 5.5 per cent, which is little changed from when it took office in September 2013. And while employment was impressively strong during 2017, it has weakened in the last two months to register no net increase since January.
Indeed, in the March quarter of 2018, employment rose by just 36,000, the second weakest March quarter increase in employment since 2009 which was when the economy was dealing with the global recession.
What’s more, the bulk of the rise in employment over the prior 18 months or so merely reflects population growth, mainly from net immigration, and little more.
More evidence of the problems in the labour market is evident in the near record high level of underemployment – that is, the number of people who have a job but would prefer to work more hours. In February 2018, the underemployment rate was 8.3 per cent, little changed from the level of recent years. The 1.1 million people who are underemployed reflect a weak labour market from the perspective of their employers being unable to offer them more hours because their business (the economy) is simply not strong enough.
When looking at economic facts, context is important.
The underemployment rate has been above 8 per cent since August 2014. At the depths of the global financial crisis in 2008 to 2010, the underemployment rate peaked at 7.8 per cent, lower where it is today, and never before in history has the underemployment rate been above that level.
This article first appeared on The Guardian web site at this link: https://www.theguardian.com/australia-news/2018/may/09/australia-budget-2018-whats-the-point-of-scott-morrisons-policy-speed-limit
What’s the point of Scott Morrison’s ‘policy speed limit’?
The budget confirmed a deluge of tax revenue for the government that will see the tax-to-GDP ratio rise over the next few years to a peak of 23.9% in 2021-22.
The treasurer, Scott Morrison, has decided to use that peak as a self-imposed “policy speed limit”: in other words, he will put a cap on the tax-to-GDP ratio at this arbitrary level to 2028-29. This cap is effectively how the income tax cuts have been funded, as excess tax revenue is recycled back into lower tax rates.
It is an odd speed limit for a treasurer to embrace and it means there is either an economic timebomb in the budget for a future government or Morrison has no intention of sticking to the cap.
It is important to note, in this context, that the budget is framed on a series of realistic and reasonably conservative economic forecasts for economic growth, wages and company profits, while it makes the usual technical assumption of broadly flat or even lower commodity prices than recently seen.
This article first appeared on the Yahoo7 Finance website at this link: https://au.finance.yahoo.com/news/governments-budget-surplus-just-pure-luck-003443629.html
Is the Government's Budget surplus just pure luck?
The Treasurer Scott Morrison was all smiles on budget night, when he announced a budget surplus in 2019-20, a year earlier than previously forecast.
As it stands, it will be the first budget surplus since 2007-08 and if it is delivered, it will mark the start of the long process of reducing gross government debt which is still on track to hit a record high around $600 billion in 2020-21 before it starts to fall. According to the budget documents, net debt is on track to decline from next year and if all goes well in the economy, it will keep falling through to at least 2028-29.
In looking at how this about turn on the budget and government debt occurred, it is important to understand that it had nothing to the policy finesse of the government.
Indeed, the return to surplus is wholly the result of Treasury forecasting errors which as recently as December last year, were projecting a deficit of $2.6 billion for 2019-20, and that was before the extra spending and tax give-aways that Mr Morrison was also delighted to announce. Amid the thousands of pages of budget documents, there is a table in Budget Paper 1, Statement 3 which shows how the budget deficit 0f 2019-20 morphed into a surplus in five short months.
This article first appeared on the Yahoo7 Finance website at this link: https://au.finance.yahoo.com/news/revealed-chinas-role-upcoming-federal-budget-023756522.html
Revealed: China's role in the upcoming Federal Budget
Next week’s budget will deliver income tax cuts, reiterate cuts to company tax, it will confirm the abandonment of the previously proposed hike in the Medicare levy and will still have a forecast for the budget returning to surplus in 2020-21. How can there be such a cargo cult give-way of goodies, yet not change in the path of returning the budget to surplus?
The answer, it appears, is in a mix of China, upbeat economic forecasts and a pay back from the pea and thimble budget trickery that former Treasurer Joe Hockey engineered shortly after the 2013 election when he sneakily and quite unnecessarily gave a stunning $8.8 billion to the Reserve Bank of Australia, ostensibly to firm up its financial position.
Each of those issues has fuelled a lift in revenue relative to forecast, that the government seems keen to give away as is strives to woo the electorate ahead of the upcoming Federal election.
Chinese demand for Australian goods and services has underscored a lift in export earnings through a combination of greater export volumes and higher commodity prices.
The following is an extract from my opening remarks to the Senate Committee on the Audit Commission in February 2014.
The full document is at this link: https://thekouk.com/blog/the-kouk-s-opening-remarks-to-the-senate-committee-on-the-audit-commission.html
It is somewhat alarming to see the increasingly popular view that budget deficits are bad and surpluses are good. Alarming because it may encourage policy makers to take the wrong decisions when managing fiscal settings without paying attention to the business cycle. There was a risk of this with the previous government with its commitment to return to budget surplus in 2012-13. It was a worthy objective but thankfully it did not stick to that strategy when it became apparent that the decline in the terms of trade and high value for the Australian dollar had impacted negatively on national income growth and therefore government revenue.
Had it cut spending to meet its surplus goal, the economy would have weakened appreciably and the unemployment rate would inevitably be higher than it is now.
The government and the economics profession needs to work hard to change the misconception that surpluses are always good and deficits always bad.
There should be no value judgement that suggests budget deficits are good or bad without context being placed around the economic and fiscal position.
I have used the analogy elsewhere, but I think it makes the point – is a warm and sunny day good or bad?
Most obviously, it depends.
For a holiday maker at the beach, a warm sunny day is clearly good. But for a farmer on marginal land in the midst of a drought, another warm and sunny day is clearly bad.
A similar judgment should be applied to budget deficits and surpluses.
It would be an economic policy failure, in the extreme, for any government to be aiming to run a budget surplus if the economy was in recession and the unemployment rate was rising. Here a budget surplus is unquestionably bad, while a deficit would be good, even if it was merely the result of the government allowing the automatic stabilisers on revenue and expenditure to kick in.
Similarly, if the economy was in a well established period of above trend growth, with very low unemployment and inflation pressures evident, a budget surplus would be good and a deficit bad.
When I look at the business cycle in Australia over the last four decades, I see quite clearly that this approach has been in place, more or less, from both sides of politics. I note the Howard government running a budget deficit in 2001-02 as the economy slowed markedly, if only temporarily, in the wake of the ‘tech wreck’ in the US and aftermath of the terrorist attacks on the US in September 2001.
This was appropriate.