Wages to Fall

FIGHT BACK

Last year workers were losing out while companies profited reached a peak when company profits grew by 22% – the second fastest annual growth in the past 30 years, while total wages and salaries grew by just 1.4% – the slowest growth outside of a recession. In March last year, nominal GDP grew by 6.8%, off the back of soaring profits from the mining sector and booming iron ore and coal prices – the fastest annual growth for four years.

At the same time the annual growth of wages and salaries dropped to 1.7% in trend terms – the worst growth ever recorded outside of six months during the nine months during the 1991 recession.

For the past four years workers across Australia have for the first time outside of a recession seen their living standards stagnate. Where once it was taken for granted that you would be better off now than you were in the past, the average Australian household has less disposable income in real terms since 2013. And the major reason is persistent low wages growth. Workers’ wages have grown at record low levels. Because there has also been a shift towards more part-time employment over the past four years, which invariably pays less than full-time work, combined with low wage growth, the average real earnings of Australian workers has actually fallen in the past four years. The four years of low wages growth has had a damaging effect on household standard of living. Data from the quarterly GDP national accounts, shows that in real terms, household disposable incomes are now lower than they were in 2011. In effect, the amount the average household has to spend will now buy less than it did nearly seven years ago.

 Previously, wages policy has been relatively straightforward. The formula was simple and time honoured. All you needed to do was have the economy grow sufficiently so that unemployment would fall and then wages growth would increase. If the economy slowed and unemployment rose, then wages growth would slow down. It saw wages in Australia grow from 1998 through to the end of 2012 – a period encompassing both the mining boom and the global financial crisis – at an average of around 3.5% each year.

 Then in the middle of 2012 something unexpected happened. June 2012 was the last time the annual growth of private sector wages would rise for five years. The next time is rose, in June 2017, it went up from 1.8% to 1.9%. It means we have now not seen that former average wages growth of 3.5% since September 2012 – and worse, no one thinks we will see it for a very long time yet. The IMF predicts that wages in Australia will not grow above 2.9% until beyond 2023.

 The Phillips curve (after New Zealand economist, William Phillips) operates on the assumption that when the unemployment falls it means employers are fighting over fewer available workers and thus they offer better wages to either entice people to work for them, or to stop their current employees from leaving. Conversely when unemployment rises it means that more people are fighting over fewer jobs and thus employers do not have to offer better wages to attract workers, and similarly, workers are not so eager to fight for higher wages as they are just happy to have work. So when the unemployment rate falls, wage rises should increase (and vice versa).  But what happened next really sent things into a spin, because the unemployment rate started to fall ... and so did wages growth.  The link between wages growth and unemployment had been fractured for nearly two years. What the split did do, however, was send wages growth downwards even while unemployment itself improved.

Wages have long been linked with productivity. In essence productivity growth means workers are producing more in the same amount of time, and as a result they should be rewarded for such improvements. And yet the evidence shows that falls in productivity are not to blame for the slowdown in wages growth – indeed since  productivity has grown well ahead of real wages.  the treasury’s own analysis notes that “weaker labour productivity growth seems unlikely to be a cause of the current period of slow wage growth” because “over the past five years, labour productivity in Australia has grown at around its 30-year average annual growth rate”. And for workers, talk of the need for productivity improvements doesn’t lead to higher wages. For many workers, productivity improvements are code for loss of working hours

The governor of the Reserve Bank, Phillip Lowe, last year suggested workers were more concerned about the security of their job than getting a pay rise. “With a greater premium on security”, he suggested, “it’s plausible that workers are less inclined to take a risk by seeking larger wage increases”.  The fear that you could be replaced by a robot is causing workers around the world not to ask for too big of a wage rise even if that fear is not yet likely to be realised. When you read articles about robots making hamburgers, the sense of what jobs could be replaced by new technology starts to widen considerably.

Even the bosses' Business Council of Australia complained. Its treasurer observed, “while the recent jobs growth has been great for those 800,000 Australians and their families, for eleven and a half million other Australian workers it has been a long time since most of them have had a decent pay rise”.

 The IMF noted “sizeable common global factors” are behind the slowdown in wage growth. That is, weak wages growth in one country is having a spill-over effect in other countries, notably trading partners as workers feel the pressure of losing their job to a worker overseas. Workers feel there is more competition out there, sometimes from workers overseas and sometimes because of advances in technology”. And whereas in the past that fear was mostly limited to the manufacturing sector, it now includes services as well.

Globalisation is not going away, and neither is automation. Yes, the unemployment rate, or productivity, or underemployment or profits might all improve, but wages growth will not return to where it once was. Globalisation is not going away, and neither is automation. So while the economy might pick up that might not lead to wages growing like they used to. Yes, the unemployment rate, or productivity, or underemployment or profits might all improve, but wages growth will not return to where it once was.

https://www.theguardian.com/australia-news/2018/mar/01/whatever-happened-to-wage-rises-in-australia