Will taking wage cuts save jobs?

As unemployment edges upwards, the myth that cutting wages can save jobs is being promoted once again. Accepting this would be a huge mistake that will hurt our living standards and make the recession worse.Mark Davis recently wrote in the Sydney Morning Herald that “economic modellers had concluded that 1 per cent cut in the rate of growth of wages will boost employment growth by half a percent.”
“One person’s wage rise is another person’s job” was an idea pushed in the 70s by Left Labour Minister Clyde Cameron as the Whitlam government faced recession on the one hand and on the other, a union movement willing to fight to maintain wages.
But the suggestion that wage rises cost jobs was wrong then and it is wrong now.
Yet, the Prime Minister Kevin Rudd is now leading the charge calling for wage restraint.
Unfortunately, the ACTU is going along with the call and tragically it is being accepted by some workers.
In late January, despite warnings from their union, the AMWU, workers at Alcoa in Western Australia voted to defer a wage rise in the hope that this would protect jobs.
Thankfully, the Alcoa deal has included an opt-out clause that allows the deal to be cancelled and their wage increase to be paid in full, if the job “guarantee” (described as weak by AMWU officials) doesn’t stick.
History and basic economics shows that not only is there no correlation between unemployment and wage rises.
In fact cutting wages actually risks making recession even worse.
In 1931, the middle of the Great Depression, the Scullin Labor government cut wages and pensions by 10 per cent (to repay debts actually).
Yet unemployment went from 20.1 per cent in 1931 to 23 per cent in 1932 and 21 per cent in 1933. In 1934, the wage cut was reversed by the Arbitration Commission. Unemployment fell to 17.9 per cent in 1934 and to 15.5 per cent just before the Second World War.
Under Labor’s Accord with the unions in the 1980s, profits were boosted and real unit labour costs fell. Yet unemployment went from around 10 per cent in 1983, to 6 per cent in 1989, but to almost 12 per cent in 1992.

One concern—profit
Even in economic good times, bosses don’t use their profits to maintain jobs.The Howard years saw a massive boost to profits that went along with increasing levels of casualisation and part-time work—leaving a high degree of hidden unemployment that is still a feature of the economy. According to Roy Morgan’s research the unemployment rate is more like 6.4 per cent.
The example of the Commonwealth Bank is also instructive. While making multi-billion dollar profits in recent years, it cut over 20,000 jobs.
The bank’s half-yearly profit up has risen to $2.57 billion and ANZ’s to $1.96 billion. Yet the big four banks are expected to cut up to 10,000 jobs over the next year —3,500 in ANZ alone.
Neither will the banks guarantee to pass on future interest rate cuts. Their profits will be kept up but jobs will be cut.
In the past year, the retail sector estimates that 50,000 jobs have been lost while manufacturing has lost 38,000 jobs. No-one argued then that wages were too high. In fact, retail workers are among the lowest paid. Even Howard’s misnamed Fair Pay Commission accepted that increases in the minimum wage had no significant effect on job levels.
Capitalism is committed to creating profits, not creating jobs. In the mining industry for example, labour costs are only around 12 per cent of total costs.
Yet as soon as profits looked like declining, workers were sacked even though it is their labour that created billions of dollars for the mining companies in the boom years
For any individual capitalist, cutting wages might give a short term increase to their profits. But their profits are just as likely to go into paying shareholders, paying off debts or even buying labour saving machinery so they can cut even more jobs.
So taking a wage cut for an individual capitalist makes no sense. It makes even less sense when you look at the economy as whole.
If wages are reduced, workers have less money to spend. Less spending means less demand for goods and services. The result? The downwards spiral of the economy is driven even further down.
Despite the arguments from Rudd and the bosses, we are not all in the same boat on stormy economic seas.
The bosses are more than willing to throw workers overboard to ensure their profits stay afloat. We should demand no short time, no wage cuts and a guarantee for jobs. It’s the bosses’ crisis—they should pay.

By Ian Rintoul


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