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.

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