Market forces, weakened institutions, are crushing wages growth

Cross-posted from The Conversation:

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.

The legacy of labour market ‘reform’

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.

This was a key “reform” of the Keating government, introduced with the active support of the ACTU. It was explicitly designed to let wages of the strong grow faster than the wages of the weak to maintain macroeconomic balance as the wages system decentralised.

The Howard governments’ labour law changes – first the Workplace Relations Act (1996) and then Workchoices (2006) – merely extended the logic of this reform trajectory. The current Fair Work Act merely codifies this trajectory as the law of the land today.

Today Austraila’s minimum wages remain among the highest in the world. The difference is they operate in relative isolation from the rest of the workforce.

Until the 1990s they were part of an interconnected system that ensured wages gains of the strong were widely shared. Today they provide the ultimate safety for those with the weakest levels of bargaining power – currently about 15% of the workforce directly and a further 15% indirectly.

We should also not forget the new found role of Treasury departments. Immediately after its election, the O’Farrell government in NSW legislated to cap wage rises in the NSW public sector to no more than 2.5% per annum.

Pubic sector teachers and nurses, especially in NSW, were emerging at the new wage leaders. This meant that their wages were now capped and this Treasury edict – and not collective bargaining and arbitration – set community wage norms.

Today our wages system has a different logic. The recent cut in penalty rates is a case of the wages of the weak putting pressure on the wages of the strong. While the Fair Work Commission quarantined the rest of the workforce from this cut by limiting its recent decision to low paid service workers – the precedent is there. Future movement in wage standards for anti-social hours will be down and not up.

Over the course of the twentieth century Australia devised a remarkable set of institutions to manage the complex problem of wages and labour standards. It’s time we built on what little remains of that legacy to remedy low wage growth.

Building on these institutions doesn’t mean restoring what was. New policies need to engage with new realities. Even former enthusiastic supporters for reducing labour standards and wages such as the IMF now recognise growth needs to be inclusive if it is to sustainable.

It’s much easier to destroy institutions that deliver fair pay than build them. Australia found ways of achieving fair pay over the course of the twentieth century – it can to so again.

Article by John Buchanan, Head of the Discipline of Business Analytics, University of Sydney Business School, University of Sydney

Comments

  1. Pubic sector teachers and nurses, especially in NSW, were emerging at the new wage leaders.
    I say! What schools and hospitals does one go when in NSW? 🙂

    Has Reusa finally managed to open his famed School for Pubic Relations? Hung Lo as Provost?

  2. Should be read by every ALP rep & member!

    a) because we initiated the whole farce
    b) needs to be bloody reversed at all cost

  3. Any thought on the idea that the minimum wage in Canberra should be $30 an hour?

    Ditto inner Sydney.

    One of the most idiotic things Howard and Rudd did was to have the same minimum wage across AUS!

    A guy working in Tasmania with relatively cheap housing and electricity should be paid the same as a guy working in a Harvey Norman outlet in the Sydney CBD? What a joke.

    • You are creating a feedback loop. Sydney and Melbourne are what they are because they have distorted the economy and parasitized it. You are asking the rest of Aus to up the ante and provide even more privilege to Sydney and Melbourne.

      • What feedback loop? Aussie home buyers are competing against foreign millionaires. Inequality is soaring – something should be done about it.

        The rest of AUS is not forced to go shopping at the retail outlets in the Sydney CBD. Heck, before 2002, I think there was no supermarket in the Melbourne CBD.

        Should the staff working in the Shangri-La hotel in the Sydney CBD be paid less than $30/hour?

        If you look at the price of gold in 2008, when the minimum wage was $16 an hour, the minimum wage today should be $30 an hour.

      • Jacob – I think you live in Dubbo?
        I live in Regional Oz and am on a pretty good wicket.
        However, I need it.
        Yes, house is cheaper but (and this is a life choice, just as living in the city is)
        – need 2 cars : 12km from nearest town, we have a 2.5yo, wife runs a small biz, impossible without 2 cars – work out the reg etc. No trains. I can ride to work but not every day (60km return , 1000m of climbing, 2 hrs on road)
        – power
        – cost of services just as high, if not higher (less competition), especially true of trades (100/hr for tractor mechanic omg)

        etc

    • Stoking demand via a wage rise for Sydney residents is not the answer – rather we need a land tax to recoup some of the unearned gains that landowners have enjoyed without any commensurate effort towards that gain. That policy change should increase supply and take some heat out of values. Current strategy is not working.

  4. So what does John offer as the solution to the problems he’s identified? There’s a global workforce of say 5 billion but maybe 2.5B full time jobs that automation is increasingly encroaching in.

    How do we stop capitalism destroying itself?

  5. ceteris paribusMEMBER

    What a wonderfully lucid article. Notice how pay cuts can come under the deceptively dry term of “deregulation”. As well as, of course, environmental destruction, decreases in health and safety, ponzi finacialised economies, loss of consumer and other legal rights etc.etc.
    And I thought “deregulation” just meant chucking out a bit of superfluous “red tape”. Stupid me!

  6. reusachtigeMEMBER

    No one strikes anymore. Hardcore strike action (and bashing the sh1t out of scab labour) will fix thing! Or, just buy investment properties.

  7. The only issue here is Education or more specifically the huge differential that existed between Western education and global education 40 years ago.
    Over the last 40 years China, and Asia in general, has reversed this education imbalance and is as a consequence reaping the benefits of having a better educated workforce, westerns on the other hand have allowed our educational standards to slip and as a consequence are also experiences the cost’s associated with this failure.
    IF we could regain our education advantage I’m certain that the opportunities that this created would restore our purchasing power and put western workers back in the drivers seat especially when it came to wage negotiations. Everything else as they say is a secondary concern (kind of like our present day education system)

    • So true fisho. But we are not going to regain our education advantage. With a globalised education and labour market our workers wages will continue to be eroded. At the same time a globalised asset market puts upward pressures on house prices in Australia. Not a cause for optimism unless we can all become Reusa’s.

  8. “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.”

    Means they are realizing they might have a problem getting elected in the next election.
    Libs are going to crash and burn at the next election.

    • The electoral cycle means the Government has increasingly hard task to be elected for each future election until it ultimately loses. However voters are in a box and getting squeezed. School and Health costs keep going up and mortgage costs arent falling anymore. Cheaper non essentials like electricals where replacement can be deferred does not make up the difference. When mortgage costs start rising while incomes stay flat to falling the pain will be quick and loud and any government politicians will wear it in their vote. So if Turnbull is in when that happens he cooked. Ditto Shorten if the can gets kicked down the road a few years.

  9. “Market forces, weakened institutions, are crushing wages growth'” (And pushing up profits and bonuses).

    Mission accomplished.

  10. 457 guys have been a very large contributor, our company over the last decade has changed dramatically, and no longer pays bonuses, wage rises etc.

  11. Cue calls for a higher minimum wage to ‘solve’ the problem. Cat chase its tail much?

    There is only one solution: toss the fractionally reserved banking system in the bin, introduce a sound money regime and set fire to the RBA building (preferably with the monetary policy committee present). Problem solved.

    Wealthy inequality gap narrows and the purchasing power of workers’ wages no longer gets debased at an alarming rate (or indeed at all).

    Who wins? The average citizen.
    Who loses? Cronies, zombies, banks and government.