Today’s wage price index (WPI) results shows wages growth in the year to September at just 2.0%, (and 1.9% for private sector workers), with growth seemingly stuck at 0.5% per quarter. When are Australian workers we likely to see sustained, strong wages growth again, or even just 3% growth, last seen when Julia Gillard was prime minister? Are the government and the Reserve Bank right that it’s just a matter of time, or are policy changes needed? Economists and other experts weigh in (edited).
Adam Carr, director of economics and industry policy, Australian Chamber of Commerce and Industry
At the moment the tea leaves point to an accelerating global economy – an accelerating domestic economy, rising profitability and productivity. We’ve already seen a bit of a pick-up and employment growth has been strong as a result. What you normally see in that environment is wage growth picking up – it happens with a lag of course, wage growth is normally slower to respond in an economic upswing, and that’s what we’ve seen in the past. There’s no reason to think that we won’t see that this time around as well.
So we don’t buy into the line that wage growth is going to be structurally weaker from now on – some sectors will have stronger growth than others of course, especially as some industries are in transition, but that’s not unusual. Strong growth in wages is unlikely until some of the spare capacity in the labour market is used up – e.g. high rates of underutilisation. Again, we think it will be used up as the economy continues to strengthen and the scars from the GFC fade. The good thing about the Australian economy is that it is much more flexible than what it has been in the past.
Saul Eslake, independent economist and vice-chancellor’s fellow at the University of Tasmania
I think it’s a reasonable – though by no means indisputable – surmise that wages growth is “bottoming”, in the major advanced economies (where, at least as far as the four largest are concerned, unemployment is now clearly below what have traditionally been regarded as “full employment” levels) … However while [there] may be encouraging evidence that wages growth is now picking up in the US, it also suggests that the labour market has to get tighter than it used to in order for wages growth to be headed in an upward trajectory. Given that the Australian labour market isn’t nearly as tight as the US labour market (now) is, it may well be that unemployment has to fall below 5% (with commensurate falls in broader measures of “labour market slack”) before wages growth starts to pick up here. If that’s right, then while it’s still reasonable to expect that wages growth will pick up eventually, it may be premature to expect that pick up to be evident during the 2017-18 financial year.
There may be some scope for the government … to give a “nudge” to wages growth, for example by arguing for a larger increase in the minimum wage (which would then flow on to workers on other awards, and may also have a salutary impact on wage expectations) – or, perhaps, in the approach it takes to wage negotiations with its own employees.
Jim Stanford, economist and director of the Centre for Future Work at the Australia Institute
The hope of Treasury and the RBA that “normal supply and demand” forces will suddenly lift wage growth is far-fetched, and deliberately ignores the important role of structural and institutional changes in explaining Australia’s wage stagnation. After all, we are only one-half percentage point from what is still the official Treasury definition of “full employment” (i.e. the NAIRU), which they peg at 5%. If real labour compensation is falling when we are almost at “full employment,” clearly there has been a big shift in the underlying patterns of income distribution in Australia’s economy. The fragile nature of recent Australian GDP growth (heavily dependent on construction and finance, both of which are likely to turn down) is further reason to doubt the imminence of wage increases.
David Peetz, professor of employment relations at Griffith University
Workers have access to two types of power: associational (using collective bargaining to band together to negotiate higher wages than they could if they were individuals) or their individual labour market power, meaning employers can’t afford to lose them. If unemployment goes down, then in some occupations (but not all) labour will become scarcer and so those workers will be in a better position to ask for a raise or threaten to leave… But it would have to be a pretty big reduction in unemployment to lead to any sizeable improvement in wages growth.
So do I see a return to strong wages without changes in industrial relations laws or a sustained lift in economic growth? No. Faster economic growth would push inflation up a bit, within the RBA target range, and that would probably also push up nominal wages growth, but the effect on real wages growth would be quite a lot smaller anyway, unless there are more structural changes to the balance of power between labour and capital … employers have found ways to use the IR laws (particularly on terminating agreements) that they were reluctant or unable to use before, and that affects the psychology of bargaining more than would be suggested by the numbers (eg of terminations themselves). So, even absent legislative change, the way the law operates has shifted in employers’ favour. It’s hard to see a sustained increase in real wages growth without a sustained change in the laws that underpin the labour market.
Peter Strong, CEO of Council of Small Business Australia
I expect that wages growth will strengthen for three main reasons: the SDA agreements have now been scuppered; the unions seem to becoming more militant; and the costs of energy and power bills will create an inflationary impact that will force up costs of goods and wages … I’m unsure what the level of impact Amazon will be on the market and therefore on wages … They will no doubt cause job losses for some retailers. That will likely create downward pressure on local wages or wages in particular industry areas.
To read the first instalment of this edited two-part series, click here.
Most ‘productivity’ improvements (lower unit costs, higher production from a given amount of inputs) derive from increased use of technology and changed processes. Both are introduced and paid for by shareholders and management. As a result, it is shareholders and management (and outsourced foreign workers) that have grabbed the financial reward from such productivity improvements. Not much has fallen to ordinary Australian-based employees…
The government’s response to all this pinko claptrap is very clear: if wages are stagnating then we obviously need to cut corporate taxes. If wages were rising then you’d be a fool not to cut corporate taxes but if wages were actually falling then clearly we would need to cut corporate taxes. (It’s very handy when all the arrows in your decision-making flowchart end up in the same box.)
Yeah, odd that. The only economist worth reading is Ross Gittins who was previously an accountant before taking up the dismal science so he has some experience in the real world, unlike most of the B/S Econ. artists.
I like Alan Kohler on ABC.
His delivery seems to me to indicate a wry attitude to the Pseudo Science of econobabble.