Critical.
Authoritative.
Strategic.
Subscribe to CIO Magazine »

Profiting from poverty

Rory Gregg
Rory is a Partner at Grant Thornton, leading their Business Transformation consulting practice in Sydney. His specialties are business strategy, performance improvement, and transformational change. Follow him on Twitter @rory_gregg

The new federal government has been remarkably silent on the state of the economy since winning office. I suspect most Australian business leaders are now simply relieved that the relentless media reports of “economic crisis” have ceased, and are thankful that the quotes are now being turned back, both economically and nautically.

In this void of economic discussion, the Productivity Commission has released important research into the impact of ageing on the Australian economy and workforce. The Productivity Commission is projecting that labour productivity growth is likely to average 1.5 per cent from FY2013, and that real disposable income growth is likely to be 1.1 per cent per annum, rather than the 2.7 per cent Australia has managed on average over the last 20 years.


Australian Productivity Commission report into aging 2013

The reasons are related to population demographics, and the fact that 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 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 24x7 private childcare as key reforms for improving workplace productivity and overcoming the shrinking workforce.

Tony Abbott opened his speech with his economic vision, saying that “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, “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 that Abbott is claiming to address, the Productivity Commission report indicates that in 2012 approximately 14 per cent of Australians are 65 plus years old. In 2050, 20 per cent of the population is projected to be 65 plus.

According to 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 child care arrangements and funding were introduced in 2000, and appear to have had no noticeable effect on hours worked for either females or males.

While the new federal government’s economic policy trajectory is now starting to move beyond three word sound bites and marketing fluff, it is becoming clearer that deflation and economic stagnation are starting to seriously undermine the economic policy foundations of “small government” trickledown economics in other countries.

Japan has faced many years of deflation and economic stagnation while dealing with the social problems caused by a rapidly aging workforce. In many ways, Japan is already experiencing the dire economic scenarios projected by the productivity commission for a rapidly aging Australia.

According to OECD research, the average GDP produced per hour worked in 2012 was $40 USD for Japan, $53 USD for Australia, and $62 USD for the US. To put that into context, Germany achieved $58 USD and France $60 USD.

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 $8 AUD per hour. Earlier in 2013, even Thailand increased their minimum wage to roughly $10.50 AUD 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 per cent 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 $7b 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 amongst working families on the minimum wage.


Bloomberg – US Food Stamp enrollments

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 per cent of their revenue comes from US “food stamps”. Yum foods, 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 per cent of all US food stamp spending, which equates to roughly $14b per year, with the average Walmart employee estimated to earn $18k 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 per cent of US GDP, and is currently growing at an anaemic 1.5 per cent per annum. Perhaps it shouldn’t be terribly surprising that the US federal government is attempting to lift the minimum US wage to $10 USD 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 trickle down economics amongst 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 wages in Japan and the US are only now becoming clear, with corporate dependence on welfare spending emerging as a very serious political issue.

Tags: profits, social-economic

Comments

Post new comment

Users posting comments agree to the CIO comments policy.

Login or register to link comments to your user profile, or you may also post a comment without being logged in.

rhs_login_lockGet exclusive access to Invitation only events CIO, reports & analysis.
Salary Calculator

Supplied by

View the full Peoplebank ICT Salary & Employment Index

Recent comments

Computerworld
ARN
Techworld
CMO