Profiting from poverty

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% from FY2013, and that real disposable income growth is likely to be 1.1% per annum, rather than the 2.7% Australia has managed on average over the last 20 years.

Aust Productivity commission report into aging 2013
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 24 x 7 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 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 that Abbott is claiming to address, the Productivity Commission report indicates that in 2012 approximately 14% of Australians are 65+ years old. In 2050, 20% of the population is projected to be 65+.

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 soundbites 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 that “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% 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
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% 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% 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.

McDonalds 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 $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 trickledown 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 aging, 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.

The double bind of sexism

Sexism is a cultural challenge that is entrenched in many Australian businesses. It is completely counterproductive, as many businesses are currently struggling to attract and retain talented people in a very competitive market.

Women outnumber men in Australia and have high workforce participation rates. The Australian Bureau of Statistics regularly calculates the sex ratio – which measures how many males there are per 100 females. In the most recent reporting period, Sydney and Melbourne’s wealthiest urban areas were shown to have some of the country’s highest proportions of women – with 94 men for every 100 women in North Sydney and Melbourne’s inner south.

Sexism can be overt behaviour by individuals, or embedded in the cultural assumptions and work practices of a business. Whether or not you directly spot it occurring in a workplace, you can certainly measure the outcomes it produces.

2012 Australian Census of Women in Leadership
2012 Australian Census of Women in Leadership
Female Executives within ASX 500 companies

The 2012 Australian Census of Women in Leadership report shows that a mere 9.2% of key management executives at ASX500 companies are women. This compares with 14% for US Fortune 500 companies, and 19% for companies in the New Zealand NZSX100. The ASX500 companies with the highest proportions of female executives are in pharmaceuticals, telecommunications, retail, and transport.

The disparity in achievement within the public sector is striking, with women comprising 35% of all directors across government boards at a federal level. 56% of ASX500 companies have no women at all on their board of directors, and 63% of ASX500 companies do not have any women in key executive roles.

It is quite clear that few Australian businesses are seriously addressing the sexism embedded in their workplace cultures.

One of the most interesting recent academic reports into the underlying factors causing the gender “glass ceiling” was published by Terrance Fitzsimmons from the University of Queensland Business School, titled “Do Australia’s top male and female CEOs differ in how they made it to the top?”. Drawing upon the results of a large number of previous academic studies, Fitzsimmons outlines the “double bind”, a core dilemma faced by female leaders who make it to a position of power.

In a nutshell, female leaders are viewed negatively by their direct reports when they are consultative, and also when they are assertive. In contrast, male leaders are perceived as more competent when exhibiting exactly the same behaviours. These perceptions can be seen played out in the daily media reporting of the federal election battle between Julia Gillard and Tony Abbott.

In response to the failure of the business community to improve female participation at leadership levels, some commentators have started openly demanding legally enforceable gender quotas for businesses. While binding targets are not likely to be introduced by any Australian government in the short term, the federal government have introduced several measures to combat workplace sexism and gender discrimination, with the most noticeable being the Workplace Gender Equality Act 2012. The main thrust of this federal legislation is to promote transparency, equal opportunity and equal pay in the workplace.

Workplace culture has a very significant effect on employee productivity, innovation, and retention. The entire organisation can greatly benefit from a culture that is more cohesive, flexible, and diverse. It is also crucial to remember that women are not the only people facing discrimination when applying for promotions within a business. People with disabilities, members of the LGBTI and Indigenous communities, and even older workers face very serious prejudice in recruitment processes.

Workforce recruitment and retention programs within many ASX500 companies are clearly failing. Business leaders need to lead by example, immediately speak out against sexism when it occurs, and take personal steps to ensure they hire, mentor, and promote a diverse range of people within their teams.