LOW WAGE GROWTH BASED ON SOLID ECONOMIC REASONS
The causes include high company tax rates, immigration and poor productivity growth
Low wage growth has become as much a political issue as it is an economic fact. For this reason, economists need to give compelling explanations of low wage growth lest irresponsible — nay, witless — politicians dream up “solutions”.
Let’s consider the figures. Looking at the wage price index, we see that wage growth began to slide from 2012. To be sure, there had been a fall in wage growth during the global financial crisis but this was short-lived.
The most recent annual growth figures have been around or just below 2 per cent. Note, however, that inflation (and inflationary expectations) has also been very low during the same period.
Low wage growth is not a phenomenon confined to Australia. It has been a characteristic of many developed economies, including the US. One hypothesis is that new technological developments, most notably in artificial intelligence, are creating threats for non-manual workers. In the past, technological change was mainly brawn-replacing rather than brain-replacing.
For workers undertaking repetitive cognitive work, the claim is that new technologies are creating a lid on wages driven by the fear that some of these workers will be replaced by machines.
The shift to the services sector may also be contributing to low wage growth as workers typically work with much less capital than workers in manufacturing and mining, say. Capital investment is a major source of productivity growth, which leads to real wage growth. The higher proportion of workers in services, where there is less scope for productivity improvement, may be part of the explanation for low wage growth.
There has also been an associated rise in the incidence of underemployment — employed workers who would prefer to work more hours. In the past, the rate of underemployment was closely correlated with the rate of unemployment. But recently we have seen the rate of unemployment fall while underemployment has remained relatively steady.
The point is that the rate of unemployment as an indicator of the degree of tightness in the labour market has lost some of its predictive power. The relationship between wage growth and unemployment has seemingly broken down. Lower unemployment does not necessarily lead to stronger wage growth.
It is important also to make the distinction between the real consumption wage and the real product wage. (In the former case, the wage is adjusted for the price index for household consumption, whereas the real product wage also takes into account the ratio of export to import prices.) For work- ers, it is the real consumption wage that matters but for firms, it is the real product wage that determines capacity to pay.
Over the long haul, there isn’t a divergence between these two wages but differences can persist for some years. In Australia, the terms of trade shot up from the early 2000s and remained high until 2013, notwithstanding the blip associated with the GFC.
During most of that time, real wages grew more strongly than labour productivity, something you don’t hear the ACTU mention. Wages were bid up in the mining sector and the forces of competition in the labour market then spread some of these rises to other workers.
By contrast, over the past several years there has been an effective chipping away of this real wage overhang, real wages growing in excess of productivity. The corollary of this process has been extremely strong job growth: more than 400,000 new jobs were created last year, three-quarters of them full-time.
When the ACTU and Labor opportunistically cherry-pick data, company profits up by 20 per cent while wages grew by 2 per cent to the year ending in the December quarter of 2017, they fail to mention that overall real wage growth since 2004 has outstripped productivity growth (there is still some overhang) and labour’s share of national income has been basically steady apart from the years of very high terms of trade.
The recent surge in company profits also follows several years of negative growth. It also has a lot to do with the recent lift in the terms of trade that has improved the profitability of a number of our resource companies.
Company profits have not been rising across the board, just ask many small businesses.
One of the interesting features of wage movements in recent years has been the relative absence of pay deals with annual wage increases of 4 per cent or more. The Reserve Bank has noted: “The share of jobs that experienced a wage change of over 4 per cent has fallen from over one-third in the late 2000s to less than 10 per cent of jobs in 2016.” With the end of the mining investment boom, the degree of dispersion of wage growth has declined markedly.
There are other explanations of low wage growth in Australia including the high rate of immigration, especially of skilled workers, as well as the rapid rise in the number of university graduates. This latter trend has been associated with a declining wage premium attached to having a university degree, at least for new graduates.
The real issue now is when wage growth will pick up. The evidence from the US is that tighter labour market conditions will eventually lead to higher pay rates.
In Australia’s case, a reduction in the underemployment rate is likely to be a necessary condition for the wage price index to show rates of growth much above 2 per cent.
The idea that the Fair Work Commission should award increases in the national minimum wage well above 2 per cent is highly contentious.
In fact, the Fair Work Commission chose to adjust the NMW by 3.3 per cent last July.
But increasing minimum wages without taking into account the capacity of businesses to pay is a highway to higher unemployment and underemployment.
In other words, such action is likely to be self-defeating.
The key now is probably patience plus a measured response in relation to the immigration intake and pressing on with company tax cuts.
Bill Shorten and ACTU secretary Sally McManus may care to disregard the evidence on company tax cuts but that evidence clearly indicates that at least one half of company tax cuts end up as real wage gains. A recent German study shows the major beneficiaries of those real wage gains are low-skilled and female workers.
The reality is that wages are still subject to the forces of supply and demand; they are just a bit more complicated to analyse than other prices.