Factors Affecting Wage Growth in Australia

In the face of broad-based low wage growth, there has been considerable analysis undertaken to better understand the causes and consequences. This year, the Reserve Bank of Australia’s annual conference focused on ‘Low Wage Growth’, bringing together leading local and international central bankers, industry professionals and academics. John Simon, Head of Economic Research at the RBA said, “there is clearly not enough evidence to single out one cause ‘beyond reasonable doubt’; even on a ‘balance of probabilities’ standard of proof it would be challenging.” Treasury’s Meghan Quinn also delivered an address in July 2019 considering the factors driving low wages growth in Australia. Several potential contributors have been identified.

One such factor is the timing and significance of recent economic cycles. Since the Global Financial Crisis, internationally there has been a larger level of risk aversion, estimates of the NAIRU (non-accelerating inflation rate of unemployment) have decreased. In Australia, the recent mining boom may have masked the effects of the GFC to some extent. Market dynamism has declined, with implications including low wage growth, low inflation, slow productivity growth, high rates of participation and spare capacity in the labour market.  According to Treasury’s Meghan Quinn, capital deepening has accounted for around three quarters of labour productivity growth over past 30 years, now reaching point of ‘capital shallowing’.

Other contributors to low wage growth include the impact of technological change, particularly increases in the use of artificial intelligence, automation and robotics. This is facilitating the outsourcing of an increasing range of roles to countries with lower wages and is changing the bargaining power of employees who increasingly fear being replaced by robots. On the flipside, the automation of certain process driven components of work may allow more diverse talent into organisations in part time roles.

Weak wage growth is also affected by the changing nature of work. There has been growth in self-employment, temporary employment and highly flexible ‘gig’ work with low barriers to entry and extreme flexibility traded off for high pay. That being said, those in such roles have a lower level of bargaining power and no leave entitlements, leading to declines in job mobility. Employees are less confident about wage bargaining because there is still spare capacity in the labour market and an influx of skilled young workers from overseas. Workers are switching jobs less frequently and there has been a reduction in worker transitions from mature to young firms due to higher costs and risks to workers. This results in less upward pressure on wages.

In the current setting, it is probable that both wage restraint and reward containment will reflect a broadly adopted outcome which is unlikely to motivate an organisation’s leadership to increase its wages cost base.  Equally, the increased application of technology, the embrace of transformation initiatives, the downsizing of the employment base in a number of organisations is unlikely in the near term to lead to a wages increase.

While governments are embracing adjustments to their enterprise agreements and senior management reward arrangements generally in the 2% to 3% range, we also observe that operating in parallel with those initiatives are general demands to reduce wages cost which will lead to reduced levels of employment.

With a knowledge through engagement over many years that the public sector follow not lead the market and are typically rewarding senior staff at or below a general market median, the private sector’s pay alignment with the public sector is likely to continue to reflect the former’s positioning below more demanding commercial rates of reward at many levels of staff.

The containment of incentives in the public sector will also ensure, at senior professional, management and executive level, that government reward levels will not lead the market in the near term though not act as a stimulant to rapid growth in the rate of wages increase at any level in the workforce.