A lesson in economic lunacy

Resources Minister Josh Frydenberg declared on Sunday the government needed to examine cutting Sunday penalty rates because doing so could spur economic growth.

There are some simple economic dynamics that Minister Frydenberg needs to understand.

 Like his colleague Scott Morrison, Josh Frydenberg is off to a pretty flabby start
Like his colleague Scott Morrison, Josh Frydenberg is off to a pretty flabby start

The first is that economic growth, particularly economic growth that is generated locally, is based on demand for goods and services. Increasing this  local demand requires an increase in the discretionary spending power of local consumers. The technical term for this is wages growth which has been declining in Australia since 2011 and the rate of decline accelerated under the Abbott government.

 Wages growth has declined in both public and private sectors since 2011
Wages growth has declined in both public and private sectors since 2011

This means that people have less to spend. Given that people will pay their mortgages and grocery bills before they go out to restaurants and cafes, the sector that feels this decline most will be the hospitality industry which is where changes to penalty rates would hit hardest.

The simple facts of the matter are that you can’t increase economic growth by cutting people’s wages. All happen if wages are cut is that discretionary spending power will be transferred away from workers to employers who will not be paying so much for labour.

It’s simply a matter of shifting spending power from one group of people to another.

To suggest cutting wages will increase economic activity is nonsense.  The pie hasn’t grown any bigger, the pieces have just been distributed differently.

If we want to see economic growth, we need to make the pie bigger.

There will be an unintended consequence of cutting penalty rates.

Many people who work in the hospitality industry do so because of their opportunities to access higher rates of pay with penalty rates over the weekend. In many cases, this probably keeps many people working in the hospitality industry.

Removing or reducing penalty rates may remove some of the incentive to work in the industry and may actually decrease  the supply of labour into the sector.

Frydenberg studied law and economics at Monash University so he probably knows better which means that this is yet another example of the current Liberal government deciding policy on ideology rather than rational economic sense.

Frydenberg’s  problem is that he looks as if he’s trying to solve a major economic problem  using the same tactics as the 2014 budget. Attack the least well paid and most vulnerable in this case those in the labour market: part-time hospitality workers.

It is bad economics and is probably not even good politics because he’s going to bring a shit storm down on his head.

There will be accusations that this new Turnbull government is no different from the old Abbott government.

But the wider scare campaign leading into the next election will be that a led by Malcolm Turnbull will launch a full-on assault on penalty rates.

With many Australian wage earners relying on penalty rates to survive  this will frighten a lot of middle-Australian voters.

And today Josh gets slapped down

 (Scott Morrison) appeared to take aim at Mr Frydenberg for floating such a politically sensitive topic that was not a cabinet policy.

“We’re in a low-wage-growth environment at the moment, and I think the thing that is principally undermining the performance of our economy currently is largely about how the tax system interfaces, and it’s also how the benefits work with the tax systems,” the Treasurer told Melbourne radio station 3AW.

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