Wage Growth in the Current Economic Setting

Over the past quarter there has been considerable comment on modest wages growth across Australia.  Comment has come from the Governor of the Reserve Bank, numerous economists, the Treasurer, the ACTU and the Fair Work Commission, in varying capacities addressing in many contexts a wider array of economic indicators. The most recent aggregate data reveals that Australia’s population is rapidly approaching 25 million. The Consumer Price Index rose by 1.8% in the year to the end of September. The most recent average weekly earnings data to the end of May stood at $1,543.80 with the unemployment rate declining at the end of November to 5.4%.

In the 12 months to the end of the September quarter 2017, wages and salaries seasonally adjusted increased over the year by 2.0% with the trend estimate for wages and salaries being 1.2% for the September quarter. In the 12 months to May 2017, full-time adult average weekly earnings increased by 2.1% compared to the average earnings of 1.8%, whereas all employees’ average weekly earnings increased by 1.6% over the 12-month period.  In the private sector, full-time adult average weekly earnings increased by 1.4% compared to all employees at 0.8% for the 12-month period.  In the public sector, the increase in adult average weekly earnings for the 12 months stood at 2.8%, full-time adult average weekly earnings increased by 2.9% and the all employees average weekly earnings increased by 4%.

In MYEFO, released by the Treasurer in mid-December, the 2018 forecast wages growth was downgraded from 2.5% to 2.25% and in the 2019 Financial Year from 3.00% to 2.75%, with the jobless rate expected to fall to 5.25% in the 2018 calendar year. Further, economic growth for the current Financial Year has been downgraded from 2.75% to 2.5% though returning to 3.0% over the 2019, 2020 and 2021 Financial Years.

While there have been modest wage increases in recent years, though a more aggressive adjustment to minimum wages compared to the Consumer Price Index, concern in some industrial settings is emerging where employees, potentially subject to an Enterprise Agreement or Enterprise Bargaining, or salaried employees who are exempt from the above, are not being paid overtime. More modest wage growth is also clearly influenced by the small business sector, particularly given the improving company profits of listed companies and larger corporate entities.

An alternate perspective in our employment environment, not universally represented in all western economies though clearly in some, is that employers may reasonably expect the job to be done “by the end of the day” and if the job is not done, employees would contribute to the completion of an expected day’s work without additional pay.  Employers may not be unreasonable in holding this expectation in an employment environment where the full-time workforce have rights under legislation and regulation to 12 days’ carer’s leave, are often not required to work on public holidays and additionally benefit from 20 days’ annual leave.

Nominally, in this context, a year’s annual salary is being offered to full-time employees who have the benefit of legislated leave entitlements and public holidays, but who only attend work 44 or 45 weeks of the year.  In this context, if wages or salaries are deemed to be weekly or monthly stipends for a focused, full-time employee to undertake and accept the accountabilities defined in their role, it is fair to assert that employees are being paid a premium of 15% or thereabouts given that between six and eight weeks of the year they are on leave of one form or another.  Of course, these entitlements are generally pro-rated to employees who work fewer hours than their full-time counterparts.

Over a 52-week year, full-time employees are nominally being paid for 300 hours when they are not at work.  Is it unreasonable, then, for an employer to expect an employee to work an extra hour per day or two hours on, say, a couple of days a week to ensure work is completed and deadlines met?  In the most simplistic terms, the benefit to the employer is the increase in the employer’s capacity to remain competitive, the benefit to the employee is to increase job security, and the benefit to the community is to increase both productivity and employment.

In exploring the potential for improved prosperity of the average worker, the Government have drawn upon observations from the Productivity Commission in their recent 5 yearly review.   The review highlights some of the challenges to labour force productivity improvement.  Many economists also share the Commission’s observations of the challenges facing the nation in a period where profits are being challenged in a number of sectors, debt levels are increasing for many modest income earners, mortgage stress is on the rise in a number of areas, and employment is variable by industry sector.

Egan Associates recently commented on research outlining the productivity challenges facing many employees, including the impact of commuting time.  Productivity may also be impacted on by the distraction of social media and access during periods of employment to mobile phones and other streaming of information and messages unrelated to the world of work.

Recent comment on modest wage increases reveals that a proportion of employment growth is not full-time (ABS Employment Statistics) and that the cost of living for many individuals and households is not adequately reflected in some Government statistics.  This relates in particular to recent hikes in commuting costs, fuel cost, energy costs and employer expectations for extra ffort often without recognition of the least well-paid through overtime payments.

The response to wages costs and profitability is observable to varying degrees and in varying sectors where organisations being required to pay penalty rates on weekends are choosing to either close their businesses or reduce their opening hours to those which are most profitable and which draw the highest customer traffic.

These broader economic and workforce challenges are being addressed in parallel with the detection and correction of gender pay inequality where it exists.

In a recent article in the Australian Financial Review, Dr Peter Johnson stated that slow wages growth was a global issue.  He further went on to comment that new workers entering the labour markets in China, India and Southeast Asia and other developing nations, were bringing competitive pressure on developed nations with these initiatives, leading to a decline in local manufacturing, engagement in infrastructure projects and construction.

Dr Johnson went on to state that as Australia and other nations have recovered from the Global Financial Crisis, new jobs are in industries and sectors with sluggish growth.  Dr Johnson claims this leads to a core challenge where labour growth is associated with low productivity growth.  He goes on to indicate that developed nations’ measures of employment growth and underemployment are not reliable measures of employment, as an increasing proportion of those employed are, in fact, underemployed.

While Government and employers are seeking to be part of a more prosperous and expanding economy, in managing the expectations of a multitude of stakeholders while also containing risk in the pursuit of opportunity both domestically and globally, current evidence across the entire footprint of the economy would suggest that wages growth nationally is likely to be subdued until Australia can increase the level of full-time employment.

Productivity arising from a fully committed and focused workforce may lead to rewards arising from a new wages paradigm.  Such a paradigm would see a committed workforce look forward to sharing in their company’s prosperity by having a unitised or other share of profit growth rather than relying upon a wage increase above the CPI.

While this may lead to a smaller proportion of profit growth being allocated to management, it should not reduce management’s total reward with increasing profits. In a national setting where the size of the productivity improvement pool is significantly greater due to strong leadership, effective deployment of investment funds, minimal public sector wastage, and competitive individual and corporate tax rates, the entire workforce should be better off.  Or is this Nirvana and a gap too wide to contemplate?

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