It is hard for the benefits of a company tax cut to “trickle down” to workers when employer groups insist on building dams to capture the gains for themselves, writes Richard Denniss.

First published on The Drum – here.

The Turnbull Government’s claim that a company tax cut will trickle down to benefit workers rests on a rather heroic chain of assumptions.

It assumes the benefits of any productivity growth associated with increased investment will be passed on to workers in the form of higher wages, rather than retained by employers as higher profits.

While history and international experience clearly shows such thinking is conveniently optimistic (real wage growth is often much lower than productivity growth), what matters more in the current debate is the future conduct of big business in Australia.

Put simply, if the Turnbull Government’s corporate tax cuts go ahead, will business groups in Australia support linking the minimum wage to average wage growth?

In the last five years all of the major employer groups have opposed all of the proposals to lift the minimum wage in line with economy-wide productivity growth.

That is, in the last five years not only has the minimum wage failed to grow in line with economy-wide productivity growth, one of the reasons that it failed to do so is that the major employer groups have systematically argued to the Fair Work Commission that such wage growth would be “irresponsible”.

In the last 10 years the minimum wage has grown by about 3 per cent while average wages have grown by about 4.1 per cent in the context of an increase in the profit share. It is hard for the benefits of investment and productivity growth to “trickle down” when employer groups insist on building dams to capture the gains for themselves.

To be clear, the same employer groups who are endorsing modelling by Treasury and Chris Murphy that is based on the assumption that wage growth and productivity growth go hand-in-hand have argued for the past 10 years that such wage growth is “unaffordable” and “harmful” to the economy. Indeed, theGovernment’s own submission to the Fair Work Commission’s 2016 wage review argued against lifting the minimum wage in line with productivity growth.

The hypocrisy of this situation is as staggering as the solution is simple.

The Government should index the minimum wage rate to average weekly earnings growth. And rather than fight every attempt to lift the minimum wage in line with economy-wide wage growth, the employer groups that are currently arguing that future productivity growth will automatically lead to future wage growth should agree to support the creation of such a link.

Put another way, employers should put their money where their mouth is and commit to supporting the kind of wage growth that their preferred economic modellers assume we already have.

The gap between those with the most and those with the least has been growing in Australia and around the world for the past two decades. In the US the minimum wage has fallen from 45 per cent of the average hourly wage in 1995 to just 34 per cent today. In Australia the situation is not a severe, but the trend has been the same.

The economic models used by Treasury and Chris Murphy ignore the distribution of income. They ignore the difference in bargaining power that skilled and unskilled workers have. And they ignore the gender pay gap.

The kind of models being used to argue that a tax cut for business is a good way to help low-paid workers are built on what is called a “representative household” that is in no way “representative” of the lived experience of Australian households.

The “representative household” assumes away the differences in unemployment between Sydney’s eastern suburbs and north Queensland’s regional towns. It assumes away the findings of the Human Rights Commission that show a continuing gender pay gap for men and women doing the same work.

The latest figures show women earn 17.4 per cent less than men comparing average adult full-time ordinary earnings. The “representative household” also assumes that there is no discrimination against Indigenous or other population groups. Needless to say it assumes away the existence of the minimum wage.

The last five years of submissions from employer groups to the Fair Work Commission make clear what a cruel hoax the assumption that a cut in the corporate tax rate will lead to higher wages for the lowest paid workers in Australia really is.

The much vaunted economic models being deployed in defence of a $50 billion windfall to existing businesses for existing investments does not “conclude” that the wages of low-paid workers will grow, it assumes it. And the assumption sits in stark contrast to the behaviour of those who are endorsing it.

Supporters of the company tax cuts have already been forced to admit that the benefits to the macroeconomy will be small and that most of the benefits will flow overseas.

Unless employer groups commit to linking the minimum wage to average wage growth in Australia then an even larger proportion of the benefits will flow offshore.

For employer groups to simultaneously assume that the benefits of their tax cut will “trickle down” to low-paid workers while knowing that they will fight against any such flow is obscene.

Richard Denniss is the chief economist for The Australia Institute. Follow him on Twitter @RDNS_TAI