And if we want to see consumer spending, which accounts for well over half of GDP, continuing to grow strongly once all the money households saved during the pandemic has been spent, rising real wages are the only thing that will do it.
Trouble is, the (temporary) surges in consumer spending whenever we end a period of lockdown have given the impression the economy is booming, while concealing the truth that, after allowing for inflation, wages have been falling, not rising.
This is also reflected in last week’s news from the national accounts that “non-farm real unit labour costs” – which, by comparing the change in firms’ real labour costs with the change in the productivity of that labour, reflect the division of surplus between labour and profits – have fallen by 3 per cent since the start of the pandemic.
This should not come as a surprise when you remember that, in early 2020, when we feared the battle to control the virus would send us into a deep and lasting recession, most businesses moved immediately to impose a wage freeze.
Worried about whether the deep recession would sweep away their jobs, workers and their unions accepted the necessity of the freeze.
But that’s not the way things turned out. The pandemic wasn’t nearly as bad as epidemiologists first expected it to be, vaccines turned up much earlier than had been hoped, lockdowns were often short and intermittent, and unprecedented fiscal stimulus shifted much of the cost of the lockdowns off private businesses’ profit and loss accounts and onto the public sector’s budgets.
In the main, private sector profits have held up surprisingly well.
So the key issue of whether consumer spending, and thus the wider economy, can continue growing strongly after households have finished the spending repressed during the lockdowns is what happens to wage growth. And that comes down to three questions.
First, will employees get outsized pay rises this year to compensate them for the wage freeze that turned out not to be needed?
Second, will employees also get pay rises big enough to cover all the recent increase in living costs they face – higher petrol prices and the rest – or will employers, public as well as private, ask them to “take one for the team” one more time? If so, real wages will fall further and future consumer spending will be stuffed.
Third, will the econocrats’ strategy of running a super-tight labour market force tight-fisted employers to increase wages, as the only desperation measure able to attract the workers they need?
Or will the labour shortages gradually dissipate now our border’s been reopened to overseas students, backpackers and skilled immigrants on temporary visas?
Meanwhile, the man who should be solving our cost-of-living/weak wages problem will be blustering on about the private sector taking over the running. If the Opposition can’t make this the central focus of the election campaign, it deserves to lose. It, too, would be bad at managing the economy.
Ross Gittins is the Economics Editor