Tomorrow’s wage price index (WPI) data for the September quarter is expected to show the first rise in the rate of wages growth since mid-2016, to above 2% per annum, propelled by the Fair Work Commission’s June annual wage review. What’s driven the long period of low wages growth across Australia and other Western economies in recent years? We asked a number of economists and sector representatives what they saw as the common factors. Their (edited) thoughts:

Saul Eslake, independent economist and vice-chancellor’s fellow at the University of Tasmania

The “common factors” are:

  • The effects of persistently low inflation on the expectations that both employees and employers bring to the wage bargaining process;
  • The effects of significantly slower productivity growth since about 2005 (i.e. since before the onset of the Global Financial Crisis) on what sort of wage increases might be “justified” in economic-theory terms;
  • The effects of changes in the composition of employment (the ongoing shifts from goods-producing to services-producing jobs, from full-time to part-time work, from permanent to “casual” work, and the increase in the proportion of employees who are women);
  • The short- and longer-term effects of the GFC on unemployment;
  • The effects of technological change (computerisation, automation, etc) and of globalisation (competition from goods and, increasingly, services, produced by “cheaper” workers in emerging and developing economies, “offshoring”, etc) on workers’ bargaining power (in advanced economies);
  • The effects of changes in labour market regulations (legal protections for trade unions, and of various forms of industrial action), industrial relations systems, etc. on the “balance of bargaining power” as between employers and employees.

You could summarise some of the above by saying that workers in “advanced” economies face, or fear that they face, increased competition from unemployed people in their own countries, from people in other countries (especially developing countries), and from computers, robots etc, to a greater extent than, say, in the 1960s, 1970s, and 1980s – all of which make them less likely to push for wage increases than in those earlier decades – but that doesn’t cover all of the points above.

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David Peetz, professor of employment relations at Griffith University

The main driver of low wages growth is the low power of labour relative to capital … In practice, what that means is declining union power. The most obvious indicator of declining union power is declining union density, which has happened in the majority of OECD countries. Union density isn’t a perfect measure either between countries (unions in France are more powerful than their very low density suggests, because of structural features in French unionism and the ability of French unions to organise non-union members) or between industries (in Australia, higher density in retailing than in some industries does not really tell you much about the power of labour in retailing … ), but declining density over time in the same industry or country does tell you something.

Adam Carr, director of economics and industry policy, Australian Chamber of Commerce and Industry

The common factors can be found in one acronym: the GFC. Prior to that, wage growth was accelerating nearly everywhere on the back of some very low unemployment rates — tight labour markets generally — and strong profit growth.

The GFC hits, profits dropped, unemployment soared and wage growth slumped. I think most people, certainly in Europe, would have been very happy just to have a job. Don’t forget that in countries like Spain and Greece, unemployment rates were up over 25%. 

Now in Australia, things were a little different … we didn’t have a recession. That said, business profits did drop quite a lot – dried up in some cases — and I think the main reason why this didn’t result in a much higher unemployment rate is because wage growth was flexible enough to absorb a lot of the hit … in the Australian context it was less the case that we experienced widespread job shedding, and more the case that job creation ceased — which again, is why wage growth slowed as we saw elsewhere, but it meant that the unemployment rate didn’t spike. Under the circumstances, that is actually a good outcome and better than most expected.

Peter Strong, CEO of Council of Small Business Australia

Wage growth often occurs when businesses invest — generally done when the fundamentals for growth are good (i.e. low cost of capital, GDP growth and stable politics). Relative to most other economies we have done well on the first two but have not had stable national leadership since 2011. This has led, in my view, to patchy decision making and consequent economic risks that have dampened business sentiment (the latest being high energy prices) … All three fundamentals mentioned above need to be lined up and, at the moment two are pretty good, our economy is being let down by a lack of cohesive and consistent national policy leadership. This leads to higher uncertainty which is not justified by the cost of capital and good GDP growth compared with other developed economies. 

The other factor is the agreements done by the SDA and big businesses that has basically cut wages for retail employees when compared to what the award would have provided. This has stifled wages growth.

The Reserve Bank — Statement on Monetary Policy, November 2017

Spare capacity in the labour market continues to contribute to low wage growth. The unemployment rate remains somewhat above the Bank’s estimate of the rate consistent with full employment and a considerable fraction of employees would like to work more hours. A number of other factors are potentially associated with the low level of wage growth, including a lower level of job mobility, concerns around job security, changes in relative bargaining power, trends in labour productivity and structural change in the economy associated with technological change and increased competitive pressures from the internationalisation of services trade. 

TOMORROW: What will drive a return to higher wages growth and when will we see it?

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Peter Fray
Peter Fray
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