Low wages growth has been a spectre hanging around the Australian economy for some time. In our series What We Earn we unpick the causes for this and why some workers might be feeling it more than others.
Within the political class there is a low level moral panic about low wages growth. The irony is that those lamenting this situation are simply witnessing the ultimate outcome of policies they have long advocated.
While Australia still has systems like Industrial Tribunals and Awards - given how they interact with market forces today, these institutions now work to entrench wage inequality rather than reduce it.
Wage rates and movements are determined by a combination of market and institutional forces. Technology, human capital, levels of labour supply and the profitability of companies in laggard and leading set the lower and upper bounds for sustainable wage levels.
As economist and philosopher Adam Smith noted, the income workers require to survive sets what’s called a “market floor” for wages - the lowest acceptable limit. Rates of profit in the best performing firms set the upper limit, as Australia’s executive class has shown very clearly for over three decades now. What rates actually prevail within these very broad limits are determined by institutional forces – in Australia, the award system of minimum wages and unions collective bargaining rights.
Historically Australia has had the great benefit of having institutional arrangements that balanced these forces well. The key elements of this were a network of industrial tribunals that regularly assessed the overall economic and social situation and determined what rates and movements in pay were sustainable.
These rates were not set unilaterally, but in coordination with what employers and organised workers indicated was possible, in industry level collective agreements.
The defacto rule was that wage movements should equate to movements in productivity plus the cost of living. The standards set in the leading profitable sectors then spread to the entire workforce through the maintenance of award relativities (ie standard comparative rates of pay set by reference to benchmark occupations like metal fitter, carpenter and truck driver). During this time awards rates approximated pretty closely to going rates of pay.
These underlying principles were not unique to Australia. In the era following the second world war it meant that in most countries workers shared in productivity growth and wages tracked pretty closely with it.
Since the mid 1970s and especially since the 1980s all this has changed.
Australia has not seen anything like full employment since the early 1970s. While unemployment has been cyclical, it has usually been 5% or more since that time. More importantly, underemployment has been on the rise.
This has not been cyclical. It has racketed up after each recession.
And that is just in terms of hours worked. If we took into account workers with skills not being used, levels of labour underutilisation are much higher. Estimates of underutilisation of this nature vary as being between 15 and 25%.
High levels of indebtedness also weaken workers bargaining power. Today few can hold out for long bargaining periods – either individually or collectively. This gives employers a huge advantage in setting wages.
In the 1970s and 1980s Australia’s wage setting institutions worked well to protect wage rates against the full force of these downward pressures. Since the early 1990s, however, those institutions have been transformed.
The key issue here has not just been the weakening of unions and their bargaining power. Just as significant has been the uncoupling of wage rates set by wage leaders, from the wages of the weak. Workers in benchmark setting sectors like construction used to establish wage norms. These were recognised by industrial tribunals as a community standard which they then passed on to workers in weaker sectors like retail through generalised award wage base rises. In this way the wages of the strong supported movement in the wages of the weak.