Opinion

Andrew Leigh
Unions key to workers’ wage growth

For much of human history, economic growth puttered along slowly – so slowly, in fact, that shops would sometimes carve prices into their stone walls. Then, in the late 1700s, one of the most dramatic transformations in world economic history took place. Starting in Britain, the Industrial Revolution saw production move from hand work to mechanisation. Steam-powered factories massively increased the output of textiles. Output per worker began to surge.

However, for the first half-century after the Industrial Revolution began, most of the benefits did not flow to workers. Productivity rose – as workers used the new technology to produce more output – but real wages barely budged.

There are various theories as to why this changed, but it is difficult to escape the conclusion that it had something to do with collective action. In 1833, six agricultural labourers in Dorset swore an oath to stand together against attempts to cut their pay from seven shillings a week to six. The Tolpuddle Martyrs were arrested, convicted of swearing a secret oath and transported to Australia. After a mass public outcry, they were pardoned. From the factory to the farm, workers kept pushing for the right to organise and strike. Eventually, they began to get a fair share of the productivity gains, and the Industrial Revolution became a major driver of better living standards across the world.

In 2017, 184 years after the Tolpuddle Martyrs swore their oath, Margaret Peacock and her fellow workers went on strike in Preston, just outside Melbourne. Margaret worked at Australian Paper, the nation’s largest envelope manufacturing plant. She earned $21 an hour. Her union, the Australian Manufacturing Workers Union, had gone to the Fair Work Commission three times, asking for a pay rise of 2.5 per cent a year over three years – what works out to be zero real wage growth. The company was offering a deal that averaged 1.6 per cent – a real pay cut. Only after an eight-week strike did Australian Paper agree to the workers’ pay claim.

During the past six years, real wage growth has all but ground to a halt in Australia. Just as in the first 50 years of the Industrial Revolution, productivity is growing at a solid rate. But employees’ share of the national pie has been shrinking.

Part of the explanation lies in the fact that just 13 per cent of Australian workers are in unions, down from half the workforce in the early 1980s. Trade union membership is lowest among private-sector workers (9 per cent), 20-somethings (9 per cent), recent migrants (5 per cent) and people who have been working for less than a year (5 per cent).

Researching my book, Battlers and Billionaires, the evidence I found suggests we have to go back to 1904 to find a time when the union membership rate in Australia was lower than it is today. In the past few decades, the share of Australians who say unions have too much power has fallen from 82 per cent in 1979 to 47 per cent in 2016. At the same time, the proportion who are concerned about the power of big business has risen.

We tend to think of the United States as having a famously low union membership rate. But in 2017, the US union membership rate was 11 per cent, only 2 percentage points below ours. Twelve US states have a higher union membership rate than Australia. In California, New York, Connecticut or Hawaii, you’re more likely to bump into a union member than you are in Australia.

What caused union membership to fall? Part of the answer lies in changing laws: the abolition of closed shop laws in the early 1990s, the anti-union WorkChoices legislation of 2006 and myriad small tweaks by conservative governments that made it harder for unions to organise. The structure of the economy has also tilted the scales against organised labour. Union membership is typically higher among full-time workers, in manufacturing and in the public sector. Analysis by Griffith University’s David Peetz suggests changes in the economy explain a significant portion of the drop in union membership, especially during the early period of the decline. There is also a feedback loop problem – workers appear less inclined to join a union in highly unequal workplaces.

To see why this matters for Australia, it’s worth reviewing the achievements of the union movement. Sick leave in the 1920s. Annual leave in the 1930s. The eight-hour day in the 1940s. Unfair dismissal protection in the 1970s. Banning asbestos in the 1980s. The weekend. Paid public holidays. Long-service leave. Unions have often found themselves on the right side of history. Maritime unions refused to load “pig iron” onto Japanese ships in the late 1930s because they foresaw the risk that it would come back in bombs. If you’ve ever enjoyed Centennial Park and Sydney’s Royal Botanic Garden, then you might thank the union members who stopped them being destroyed in the 1970s.

And that’s before we get to inequality.

From 1975 to 2016, real wages rose by 74 per cent for the top tenth of earners, but just 24 per cent for the bottom tenth. If low wage earners had enjoyed the same percentage gains as those at the top, they would be $16,000 a year better off. Since the early 1980s, household income inequality, wealth inequality and top income inequality measures have all risen. The number of billionaires on the Australian Financial Review’s Rich List grew from 60 to 76 last year, and the combined wealth of the top 200 rose by a whopping 21 per cent.

Across the world, unions are one of the most powerful forces for boosting equality. Unions have a long history of lending their strongest voice to their lowest-paid members; identifying those most in need and making their case. We can think of raising earnings of the lowest-paid as “flow-up” economics – a theory that has a good deal more empirical support than the discredited notion of “trickle-down”.

Today, we take for granted that employers should not be legally allowed to pay people less because of their race or gender. But it took unions to fight for that change. Unions filed claims in the mid 1960s to remove racially discriminatory clauses from the pastoral industry and station hands’ awards. It was the Australian Council of Trade Union’s equal pay cases of 1969 and 1972 that led to the removal of institutionalised gender pay discrimination from industrial agreements.

Today, wage stagnation is hurting the economy. As the Reserve Bank’s most recent Statement on Monetary Policy observes, “Weak growth in household income has posed a risk to the consumption outlook for some time. Consumption could be particularly sensitive to unexpected weakness in income given the context of high household debt.”

Short-sighted businesses want low-paid workers and high-paid customers. Far-sighted businesses recognise that workers and customers are the same people. If you want to boost retail sales, putting cash in the hands of the lowest-paid workers is the best strategy.

You don’t need to march under the Eureka flag to see there’s a problem. The Bank of England’s chief economist, Andy Haldane, has noted that Britain has seen a growth in self-employment, temporary work, zero-hours contracts and non-union jobs. Haldane argues that this makes work more “divisible” than in the past and has reduced workers’ bargaining power.

One recent study found that unions increase wages by 5 to 10 per cent. That suggests that if Australia today had the same union membership rate as in the early 1980s, average wages could be up to 4 per cent higher.

Economist Saul Eslake contrasts the situation now with the economic circumstances Australia faced in the late 1970s. Back then, real wages were accelerating faster than productivity. Economists dubbed the situation the “real-wage overhang”. The solution was the Accord: an agreement that promised wage moderation in exchange for improvements in the social wage.

Now, the problem is reversed. Australia is experiencing a “real wage underhang”. Workers have failed to get their share of productivity growth. If unions are relegated to the margins, and the safety net is eroded, then not only will low-paid workers suffer, but so too will our economy as a whole.

Part of the answer to boosting wages must lie in improving our industrial laws. Collective action has been behind many of the significant improvements in pay and conditions for Australian workers. Today, there are straightforward measures we can follow. Reversing the cut to Sunday penalty rates for 700,000 workers. Tackling sham contracting and dodgy phoenixing. Ending the oxymoron of “permanent casuals”. Preventing labour hire being used to erode earnings by legislating the simple principle: same job, same pay.

Recognising that firms serve society as a whole isn’t just more equitable, it’s more sustainable. And in the long run, it’s likely to leave us less vulnerable to the boom-and-bust cycle. Stronger unions, better wage growth and fairer firms are the recipe for a more prosperous society.

This article draws on a speech delivered at Per Capita, Melbourne.

This article was first published in the print edition of The Saturday Paper on Nov 3, 2018 as "Pay slips and the fate of the unions". Subscribe here.

Andrew Leigh
is the federal shadow assistant treasurer, and a former professor of economics at the Australian National University.