Great article by Rory Gregg at Grant Thornton
Productivity Commission has released important research into the impact of ageing on the Australian economy and workforce. The Productivity Commission is projecting labour productivity growth is likely to average 1.5% from FY2013, and real disposable income growth is likely to be 1.1% per annum, rather than the 2.7% Australian average of last 20 years.
Reasons are related to population demographics, and while Australia’s population is growing due to our current high immigration levels, it is not growing anywhere near fast enough to slow down the rapid ageing of our population. Health and welfare cost increases are being projected to require an additional 6% of GDP over the next 50 years, purely as a result of this demographic shift.
At the recent annual dinner of the Australian Chamber of Commerce and Industry, Tony Abbott outlined his government’s immediate business priorities, describing his paid maternity leave initiative and 24-7 private childcare as key reforms for improving workplace productivity and overcoming the shrinking workforce.
His economic vision, was: “You cannot have strong communities without strong economies to sustain them and you can’t have a strong economy without profitable private businesses.” He later claimed that: “Almost everything this government does is directed towards making doing business easier – because that leads to more jobs, higher wages and greater prosperity.”
In terms of the scale of the workforce supply challenge, the Productivity Commission report indicates in 2012 approximately 14% of Australians are 65+ years old. In 2050, 20% of the population is projected to be 65+.
ABS employment figures for August 2013, the average number of hours worked each week by Australians was 40 hours for males and 31 hours for females. These hours are almost identical to the figures from 1990, and have been steady every year in between. It is worth remembering that modern formal childcare arrangements and funding were introduced in 2000, and appear to have had no noticeable effect on hours worked for either females or males.
Japan has faced many years of deflation and economic stagnation while dealing with the social problems caused by a rapidly ageing workforce. Japan is already experiencing the dire economic scenarios projected by the Productivity Commission for a rapidly ageing Australia.
According to OECD research, the average GDP produced per hour worked in 2012 was US$40 for Japan, US$53 for Australia, and US$62 for America. To put that into context, Germany achieved US$58 and France US$60.
The economic pain in Japan has finally generated a willingness to address structural economic issues, returning ultra-conservative Shinzo Abe as prime minister to carry out sweeping economic reforms. Those reforms have included large rises in the minimum wage, arm-twisting businesses to pay their employees much higher wages instead of hoarding profits, and using quantitative easing and other measures to achieve a huge devaluation of the Yen.
Abe expressed the ‘conservative’ shift in economic policy quite bluntly, saying: “I don’t buy the concept of corporations against individuals. Many people work at companies to make a living. If revenues rise at corporations, they can share it by raising wages.”
The fundamental premise behind Japan’s conservative government policies is simple. Japanese businesses will not hire people or invest when consumer demand is not high enough to generate a return. Higher levels of consumer spending create higher revenues for businesses, and generate more tax revenue to pay down debt and fund government services.
Japan’s situation is particularly interesting because their highly educated workforce has lived with an incredibly low minimum wage for decades, equivalent to roughly AU$8 per hour. Earlier in 2013, even Thailand increased their minimum wage to roughly AU$10.50 per hour. The Japanese minimum wage is so low that citizens can earn significantly more than the minimum wage by simply not working.
While workforce poverty is nothing new, it is starting to become embarrassing for a number of G20 nations. It is now becoming quite clear that low US minimum wages have led to sharply increased demand for US government welfare, and that many of the largest US corporations are the direct beneficiaries of that welfare expense.
In a recent Berkeley University research study, it was estimated that roughly 73% of American welfare recipients are members of ‘working families’ whose household income is simply not high enough to cover their basic life needs.
Berkeley University estimates that the US government provides $7 billion each year in welfare assistance to families of workers in the US fast-food industry, because their wages are too low to meet their most basic needs. This is effectively an industry wide wage subsidy to the highly profitable fast-food sector, as more than half the families of US fast-food industry workers (working 40+ hours per week) currently receive direct government welfare to provide for their most basic needs.
The health impacts of US food stamp programs have also been dramatic, with cheap junk food often the most affordable option for welfare recipients, which has been linked to dramatic increases in obesity and diabetes rates among working families on the minimum wage.
A number of the largest junk and processed food manufacturers are also aggressive lobbyists for the expansion of the US food stamp program. Kraft has acknowledged that roughly 12% of their revenue comes from US food stamps. Yum! Brands, who operate KFC and Pizza Hut, have unsuccessfully lobbied for many years to be approved outlets for food stamp spending.
The net effect of these long-running US policies has been a shift in costs, from private sector wages to direct government welfare programs, and ultimately to government health programs. Despite the well established nature of these arrangements, they are now starting to generate highly negative social media coverage, and impact on the image of some major US corporations.
Walmart is estimated to receive 18% of all US food stamp spending, which equates to roughly $14 billion per year, with the average Walmart employee estimated to earn $18,000 per year – a little more than the US poverty line. One Walmart store recently attracted negative publicity when it was discovered that their employees earn so little that they were unable to afford food for Thanksgiving, and were begging for charity food donations from their colleagues and customers.
McDonald’s also recently faced social media ridicule when their HR department advised an employee struggling to pay bills to enrol in government welfare programs and find a second full-time job.
Consumer spending makes up roughly 66% of US GDP, and is currently growing at an anaemic 1.5% per annum. Perhaps it shouldn’t be terribly surprising that the US federal government is attempting to lift the minimum US wage to US$10 per hour, justifying the move based on projected welfare savings and increased consumer spending.
If anything, the last 20 years of government policy in Japan and the US have been the golden years for trickledown economics among political parties and business lobbyists, and have enabled the economic analysis of the effect of low minimum wages on national economic performance
Australian business leaders should be focusing on improving business productivity, rather than simply measuring wages. Our workforce is rapidly ageing, and retention and retraining of employees should be a critical priority for many businesses. The lessons from the decades of low minimum wage experience in Japan and the US are only now becoming clear, with corporate dependence on welfare spending emerging as a very serious political issue. ” This article appears here
Rory Gregg is a partner at Grant Thornton, leading its Business Transformation consulting practice in Sydney. His specialties are business strategy, performance improvement, and transformational change. Follow him on Twitter @rory_gregg.