Gerard Jackson
BrookesNews.Com
Monday 24 November 2003

Well what do you know, Colebatch, economics editor of The Age, has come to realise that excessive labour costs do have some bearing on unemployment (Memo Treasurer: how to tackle unemployment, 18/11). Unfortunately, he still has a long way to go. (A few years ago he was blaming rising productivity for our level of unemployment).

Colebatch quoted the Australian Bureau of Statistics' estimate that "13 per cent of willing workers were 'underutilised', just slightly down from 15 per cent seven years earlier", a figure I'm perfectly prepared to accept.

After much wasted ink and space, he made the sensible observation that solving "unemployment means tackling wage growth, or non-wage costs, or both." However, he then argued that a second approach would be to cut non-wage costs like the payroll tax and then raise the GST by 25 per cent to compensate for loss of government revenue while simultaneously reducing employers' super payments to 6 per cent of wages.

Colebatch has failed to observe, as have so many other economic commentators, that payroll taxes, superannuation, etc, are really part of the gross wage. In a genuinely free labour market these additional costs would lower net wages. But in severely hampered labour markets these costs are largely factored into unemployment and underemployment.

Every time the subject of widespread persistent unemployment is raised it ought to be emphasised, but rarely is, that in a free market labour will tend to get the full value of its marginal product. Anything in excess of this will cause unemployment. (This, by the way, is what free market economists mean by wages rates being too high). The greater the excess the higher the unemployment rate.

It therefore follows that labour oncosts, regardless of their nature, are part of the wage rate. So in a free labour market mandated oncosts, regardless of the intention, must result in a lower take home pay. It still baffles me why anyone trained in economics could believe otherwise.

I still recall with some pain an incident that occurred a number of years ago in which an economist told me in all seriousness that payroll taxes could not influence the demand for labour because government spent the money! He just would not accept the fact that payroll taxes are part of the gross wage.

Whether Colebatch realises it or not he has conceded that free market economists are right about labour costs and unemployment. Unfortunately, I fear his instincts are too far to the left to allow him consistency on this matter.

Gerard Jackson is Brookes'' economics editor