Wages growth lowest since WWII
The federal election may be a couple of months away yet, but the principal field of combat was delineated this week by the challenger, Bill Shorten, who declared it would be fought as a “referendum on wages”.
Shorten came prepared with a raft of depressing statistics about the stagnation of workers’ pay in Australia over recent years, a quiver of new policy proposals to address it and pithy slogans about how the cost of everything seems to be going up, except wages.
And Scott Morrison? The prime minister has scary rhetoric, suggesting Labor’s plans to push wages up would tank the economy and take Australia back “to the dark ages of workplace relations”.
If his lines sound familiar, it may be because they are essentially the same as those used five years ago, about the time of the last change of government, just as Australia was sliding into its long period of flat wages.
Back then Tony Abbott’s chosen employment spokesman, Eric Abetz, led the scare campaign, doing his very best to talk up the threat of an economy-wrecking wages breakout. He was never clearer than on January 28, 2014, four months after the Coalition won, in a speech to the right-wing Sydney Institute, where he specifically demanded that employers suppress wages.
Abetz spoke of how frustrating he found it, in opposition and now in government, to watch “weak-kneed employers caving in to unreasonable union demands”. He told employers to “just say no” to wage rises.
If they didn’t, he said, Australia risked “something akin to the wages explosion of the pre-Accord [that is, pre-Hawke government] era, when unsustainable wage growth simply pushed thousands of Australians out of work”.
Abetz’s warning was widely derided at the time, given that wage growth over the previous 12 months had been an anaemic 2.6 per cent, while the consumer price index – inflation – was running at 3 per cent. Wages were not exploding. Quite the reverse.
But conservative ideology would not admit the reality that low wage growth could pose a threat to the economy, and so the government continued to preach wage suppression in the private sector and practise it in the public sector, vigorously opposing wage rises for its own workers.
“In retrospect,” says Jim Stanford, director of the Centre for Future Work at The Australia Institute, recalling the Abetz scare campaign, “it only becomes more obvious how inappropriately they responded to what was happening in the labour market.
“We were in a cooling situation in terms of wage growth and they threw a bucket of ice on it.”
And even five years of stagnant wages later, with the national economy rapidly slowing, with business and consumer confidence and spending falling fast, with national living standards in decline and even the Reserve Bank calling for higher wages, with only corporate profits and executive pay notably on the up, the government remains reluctant to admit any problem.
Of late, Finance Minister Mathias Cormann has been warning of the danger posed by any move to push wages higher.
It was, he said last week, “important to ensure that wages can adjust in the context of economic conditions … to avoid massive spikes in unemployment, which are incredibly disruptive. That is a deliberate design feature of our economic architecture.”
A few days later, Linda Reynolds, recently elevated to cabinet in the wake of Christopher Pyne’s departure, had Cormann’s views put to her in a TV interview, only to mistake them for the words of Opposition Leader Bill Shorten.
“For Bill Shorten to even suggest that, I think, shows a fundamental lack of understanding about economics,” Reynolds began, before her interviewer pointed out that the quote in fact belonged to Cormann.
“He’s absolutely right,” she said, back-pedalling.
In one sense, Cormann was right. It is important that wages adjust in the context of broader economic conditions. The problem is that since 2013 wages have not grown in line with the broader economy. They have been left behind.
“There’s no doubt that the period since the Coalition was elected has been the worst period for wages since the end of the Second World War,” says Jim Stanford.
“There are lots of different ways you can measure that, but they all come to the same conclusion – wages have performed uniquely poorly.”
It’s not all the Coalition government’s fault, Stanford says. Low wages growth is a problem in many developed economies and was becoming apparent in this country even before the 2013 election.
“And there were lots of other things happening in 2013,” says Stanford, “like the downturn in the resources sector, for example.
“But there’s no doubt their policies made things worse. They were very focused on suppressing wage increases in both the public and private sector and on reducing what small power unions have left.”
Experts differ in their theories about what caused Australia’s sudden wage stagnation, and on the degree of government culpability, but there is no disputing that it has coincided very unfortunately with the Coalition’s time in power.
“We can date the current stagnation pretty precisely. It started in 2013 in Australia,” says Professor Andrew Stewart, a specialist in employment law and workplace relations at the University of Adelaide.
“There’s been stagnation in other countries, too. In the case of the US it goes back decades. But here the change has been particularly dramatic. We’ve had this long uninterrupted period of growth in the economy, getting on for 30 years, and over most of that period you saw wages tracking other macroeconomic indicators, particularly employment.
“Until you get to 2013, when all of a sudden everything else about the economy continues on, looking generally good, but wage increases drop off sharply.
“For most of the past three decades, they generally went up around 3 to 4 per cent per year. They have been averaging about 2 per cent over the past six years,” says Stewart.
While that may not sound like it reflects a significant change, the difference of a couple of per cent can mean the difference between real improvement in living standards and falling behind inflation. And it compounds over time.
“Over the long term,” says Ben Phillips, associate professor of social research and methods at the Australian National University, “living standards in Australia have increased very substantially.
“The great majority of that growth occurred in the decade between 1998 and 2008, when living standards shot up 41 per cent.
“For the past decade we’ve been basically treading water,” Phillips says. “Living standards have not grown at all since the June quarter of 2017, and over the past 12 months they have gone backwards, by 0.3 per cent.”
This decline comes at a time when big corporations are seeing near-record profits – by one calculation, cited this week by Shorten, corporate profits are up 43 per cent since mid-2016, about five times the rise in wages. Dividends to shareholders went up 9.5 per cent last year alone, again about five times wages. Meanwhile, the average punters have seen their wealth evaporate as house prices fall and the cost of living rise while their wages stagnate.
Those punters don’t have to be across the arcane debates over statistics and definitions – whether it is valid to talk of a “per capita recession” or the “real net national disposable income per capita” as a better measure. The simple evidence of their pay packets backs up the belief that things are getting harder and less fair.
“The wages issue seems to have become a lightning rod for all sorts of concerns about the state of the economy. It’s taken on a life of its own and is affecting people’s confidence,” says Professor Jeff Borland, an economist at the University of Melbourne.
And that’s a big problem for the government, for several reasons. First, there is the fact that people are inclined to direct their anger when things are bad at whomever is in power. As the saying goes, elections are a democratic means by which we determine who will get the blame.
Second, economic management is traditionally seen as the strong suit of the Coalition, and by many key indicators, the economy is running poorly. Third, the prime reason it is running poorly – as attested by virtually all the experts up to and including the Reserve Bank – is weak wages. This plays to the strength of Labor, which has been able to maintain the impression that it’s the party of workers.
While Shorten’s election strategy is clear, much less clear is what a Labor government might do about the problem of wage stagnation.
As David Crowe noted in the Nine newspapers this week, “Bill Shorten is not the first politician to want the best of both worlds by complaining about a problem without revealing a solution”.
Labor has given only hints – talk of the need to increase the minimum wage, such that it becomes a “living wage”. But there’s been no detail on how much a Shorten government would want the minimum to increase, or exactly which mechanism might be used to achieve this, given the minimum wage is set by the Fair Work Commission, an independent tribunal. The suggestion is Labor may change the guidelines that the commission uses in determining wage rises for the lowest-paid.
In 1980, the national minimum wage was 60 per cent of the average, and the Australian Council of Trade Unions is pushing to have it restored to that level. It seems unlikely Labor would go that far and, in any case, there are real questions about whether simply raising the minimum wage is the most effective way to help those who really are struggling.
Says Borland: “I question the idea of trying to address distributional issues through the wage system. If your concern is that people are earning a wage that isn’t sufficient to allow them what is regarded as an acceptable standard of living, then I think the way to address that is more through the tax/transfer system.
“When you look at who’s on the national minimum wage, you find people are spread throughout the income distribution range. If you look at it in terms of households – the usual way to do it – you find some people on the minimum wage in low-income households, but also some in middle-income households and some in higher-income households.”
So, while a substantial increase would benefit some truly disadvantaged workers, it also would benefit a substantial number of other people, including “a lot of kids, 15–24” from middle-income or affluent households, working cheap for a few years, on their way to an advantaged future.
There have been hints from Labor, too, at some strengthening of the capacity of workers to bargain collectively, allowing for multi-employer and/or industry-wide pay deals. But the details are yet to come.
And again, some labour market experts question how effective such a move would be.
“I’m sceptical about whether there is really any scope for reinvigorating collective bargaining when union membership is down to around 15 per cent of the workforce, and only 11 per cent or so in the private sector,” says Andrew Stewart.
“I’m not convinced the answer there lies in anything other than more effective recruiting by unions.”
Other Labor proposals have been more widely accepted.
“They’ve talked about regulating labour hire companies and other forms of contingent work and sham contracting [where employees are redesignated as contractors, thus absolving employers from responsibility for various normal conditions of employment, such as the payment of superannuation or overtime]. And they’ve talked about a very ambitious approach to pay equity,” says Stanford.
“These are good things.”
Both Labor and the government have talked about putting more resources into enforcement of minimum wage obligations. Migrant workers and international students are particularly vulnerable, and there is growing evidence of widespread wage theft.
Another positive development for wage security would be for Labor to move to prevent employers from so easily terminating enterprise agreements, so driving workers’ pay down.
“Since 2015,” says Stewart, “the Fair Work Commission has reinterpreted the Fair Work Act and shown a great willingness to terminate agreements while negotiations are ongoing towards a new agreement.
“In sectors where there is a gap between negotiated wages and the minimum rates set by awards – in areas like manufacturing, higher education, mining and so on – employers now quite routinely threaten to terminate existing agreements and drop workers back to the award wages.”
Yet we still lack a lot of detail. And many of those changes, if made, would still take a long time to yield results.
“Still,” says Borland, “Labor deserve some credit for putting the problems of labour market on the policy agenda. They deserve credit for noticing what’s happening and realising what the social and economic implications are.”
The government continues to argue the system is working as designed.
It is expected to respond to the current economic problem by offering tax cuts in the budget, even though multiple opinion polls show the electorate would rather have better wages and better services.
But there is reason to view tax cuts as the economic equivalent of an analgesic, an attempt to dull the pain without treating the underlying illness. The growing suspicion is that the current weakness in wages, growth and productivity might not be a short-term, cyclical condition, but structural change.
In a journal article published this week, Jim Stanford argues that the balance of power between employers and employees has been shifting for a long time, but only recently became apparent.
“In conventional economic theory, the labour market should automatically reward workers for improved efficiency and productivity in the form of higher real wages,” Stanford writes. “In practice, real wages have tended to lag behind productivity growth for decades; with real wages now actually declining, the gap between wages and productivity is doubly widened.”
Stanford marshalls a wide variety of indicators, notable among them the long-term shift in the proportion of Australian GDP that goes to wages. In 2017 and 2018, the share paid out in labour compensation fell to just 46.2 per cent – the lowest since the 1950s, and down by 11 percentage points since peaking in the mid-1970s.
Stanford points to other statistics, too: the rise of insecure work; the high levels of “underutilisation” of labour which, he calculates, now sees some 15 per cent of the potential labour force either unemployed, underemployed, or simply having given up on finding work; the growth of household indebtedness (now equal to about 200 per cent of disposable income); and the doubling since 1980 of the income share of the top 1 per cent of income earners.
Ben Phillips, too, suggests a structural change is happening, but that it was not as obvious in this country as in many other developed nations, such as the United States, because “we had the advantage of proximity to the strongest economy in the world, that being China”.
As to what is driving it, “that’s not clear,” says Phillips. “I don’t think anyone has really nailed it.”
Stewart also says it’s complicated.
“But one obvious answer is a general increase in employer bargaining power.”
Falling union membership is part of the explanation, as is the rapid growth of businesses using models of indirect employment “through franchises, the use of labour hire companies, and other forms of subcontracting.
“And,” Stewart says, “another really important aspect has been deliberate wage suppression by governments. And I’m talking every level of government, whichever party is in power.
“It’s not just holding down increases in the public service, but also holding down funding for outsourced services.”
Both Stewart and Stanford agree the government could start stimulating wages in those areas where it has power to do it. Not only for public servants but also by increasing funding for the services the voters want – transportation, utilities, healthcare, childcare and education facilities, affordable housing, environmental projects, et cetera.
“Just having a government trying to talk up wages, rather than actively working to hold them down, just to have a government saying it would be good to see wages growth with a 3 in front of it rather than a 1 or a 2 will make a difference,” says Stewart.
On Wednesday, Ryan Park, Labor’s shadow treasurer in NSW, promised that if Labor wins next week’s state election, it will seek to lift wages for state government workers. This plan would include lifting the 2 per cent wages cap imposed by the Coalition government eight years ago. Park said he wanted to see public sector wage growth “with a 3 in front of it”.
Premier Gladys Berejiklian called it “economic vandalism”.
“This policy scares the heck out of me,” she said.
But the economic evidence suggests it’s stagnant wages that should be keeping policymakers awake at night.
This article was first published in the print edition of The Saturday Paper on Mar 16, 2019 as "Wages growth lowest since WWII". Subscribe here.