Why Are Australian Wages Lagging and What Can Be Done About It?

• Date: 01 June 2018
• Author: Joe Isaac
• Published date: 01 June 2018
• DOI: http://doi.org/10.1111/1467-8462.12270

Why Are Australian Wages Lagging and What Can Be Done

About It?

Joe Isaac*

Abstract

Wages in Australia have lagged behind the

growth in labour productivity in recent years.

This has been associated with a signif‌icant

change in the distribution of income in favour

of high-income earners. Although a number of

factors appear to have been involved in this

development, an important explanation is also

to be found in the change in the balance of

power in favour of employers and against

workers and unions. As changes in industrial

relations laws have contributed substantially

to this imbalance, a return to the earlier laws

may be necessary to restore the institutional

mechanism for wages growth.

1. Introduction

The slow growth of wages is a new phenome-

non that, for various reasons—revenue intake,

income distribution, consumption expenditure

—is causing wide concern (Jacobs and Rush

2015). This phenomenon has been associated

with a signif‌icant change in the distribution of

income in favour of higher income earners. In

its latest Australian survey, the OECD (2017a,

p. 4) reports:

... inclusiveness has been eroded. The Gini coeff‌icient

has been drifting up and households in upper income

brackets have benef‌ited disproportionally from Aus-

tralia’s long period of economic growth. Real incomes

for the top quintile of households grew by more than

40%between 2004 and 2014 while those for the lowest

quintile only grew by about 25%.

Since 1983, both real average weekly

earnings and real average weekly ordinary

time earnings have risen well short of labour

productivity increases (Figure 1) This contrasts

with the period from 1965 to 1980 when real

earnings exceeded productivity (Hancock 2012,

Figure 3). After 1980, the divergence went the

opposite way. Part of this opposite divergence

resulted from a correction for excessive real

wage increases as part of the wage restraint under

the Accord. Although the degree of divergence

since the 1990s varied from year to year, what is

of special interest is the overall picture ref‌lected

in Figure 1 of wages lagging behind productiv-

ity.

1

This is mirrored in the decline of real unit

labour cost over the period (Figure 2).

What has brought about these developments,

which the ‘free’market has been unable to

correct?

2

This article will argue that, although a

number of factors may be involved, an

important explanation is to be found in the

change in the balance of power in the labour

* Emeritus Professor, Monash University. I am indebted to

the Hon Justice Iain Ross AO, Linton Duff‌in and the

research team at the Fair Work Commission for assistance

with statistical material and relevant references. I am also

grateful to Jeff Borland, Keith Hancock, Ian Mcdonald,

Sue Richardson and Joel Cutcher-Gershenfeld for helpful

comments. I am solely responsible for what appears in this

article.

The Australian Economic Review, vol. 51, no. 2, pp. 175–90

°

C2018 The University of Melbourne, Melbourne Institute of Applied Economic and Social Research

Published by John Wiley & Sons Australia, Ltd

market in favour of employers and against

workers and unions. This is partly ref‌lected in

Figure 3, which shows the number of working

days lost due to industrial disputes at a

historical low in recent years. Structural

changes, driven by the competitive force of

globalisation and technology displacing less

skilled jobs, have played a part in this

imbalance. However, in addition, the institu-

tions that have in the past driven wages to take up

Figure 1 Real Average Weekly Earnings, Real Average Weekly Ordinary Time Earnings and Labour Productivity

Note: Productivity is def‌ined as GDP per hour worked. The increase in part-time employment over the period has slowed

down the growth of RAWE.

Source: ABS (2017a, 2017b).

Figure 2 Real Unit Labour Cost

Source: ABS (2017c).

176 The Australian Economic Review June 2018

°

C2018 The University of Melbourne, Melbourne Institute of Applied Economic and Social Research