Should we be waging a war on wages?
6 March 2023
Much ‘expert’, media, political and other commentary on wage growth has been doing the rounds over recent years. On the one hand there are the claims that real wages have been heading south and that there is a need to do something to fix this. On the other, there are some who are cautioning employers to resist hiking up wages as this risks fueling a wage-price spiral rendering the task of bringing inflation under control even more difficult than it already is.
The purpose of this article is to suggest (in the words on my teenage daughter) that everyone take a ‘chill pill’, and that decisionmakers take a step back, question what is really going on, before acting. I do this by considering in turn the veracity five populous claims. While elements of what follows were inspired by a brilliant presentation by Professor Jeff Borland to the Economist Society of Australia, the verdicts reached are my own.
Claim #1: Wages are growing too slow
The data typically rolled out in support of this argument is changes in the Wage Price Index (WPI) when bonuses are excluded from its calculation (the light blue line in the chart below). Movements in this price index have indeed been stagnant for some time. And while after slowing to a low of 1.3 percent in 2020, the annualised rate of growth had reached 3.3 percent by the end of last year, this was a long way short of the 8.4 percent increase in the CPI for the equivalent period. The implication being that workers were able to afford less than previously with their wages. Real wages had decreased.
But perhaps we are focusing on the wrong measure. If we now allow for bonuses to be captured (the darker blue line in the chart below), the story is slightly modified. There is more volatility in what people have been taking home. While the slowing over the COVID period was more pronounced, so too was the acceleration. Growth in the measure once bonuses are included was a more healthy 4.1 percent in September 2022.
Wage growth looks different under alternative measures
Annualised changes (%) in WPI, ordinary hours
This aligns with what at least one major employment marketplace is observing. SEEK’s review of 2022 found that tight labour market conditions saw employers turn to new incentives and added benefits to attract candidates. Sign-on bonuses became more commonly used with 264 percent more references to this perk in jobs advertised in 2022 compared to 2021. The nature of other perks offered is picked up in the discussion under the next header.
Verdict: Wage growth has not kept up with inflation, but the difference is not as great as many make out.
Claim #2: Workers are worse off
Wage growth has not kept up with inflation, but does that mean workers are worse off? To answer an unequivocal ‘yes’ to this question would be to assume that the only thing workers care about is their pay packets.
Working in lockdown conditions provided many Australians with an opportunity to experience different ways of working, and time to reflect on the fuller list of things that matter to them. Such as the flexibility to structure work hours around other demands on their time, and/or when workers feel that they are at their most productive. Or the convenience and comfort of working from home. A recently published study found that on average Australians gained back 78 minutes a day by working from home, avoiding the daily commute and time spent preparing to head into the workplace. Around half of this time saved was apportioned to care and leisure activities.
As we have emerged out of locked down conditions many Australians have not been keen to hit the reset button. They have been eager to hold on to some of their new-found flexibilities regarding the time and location of their work. The latest official statistics reveal a large increase in people working under flexible conditions, and an even larger increase in those working from home. In 2021, more than two out of every five workers were spending at least some of their week working from home.
Workers have more flexibilities regarding where and when they work
Share (%) of employees who …
Source: ABS (2022) Working arrangements.
It could well be that workers are making perfectly rational choices and are foregoing wage increases in favour of cementing working conditions that suit them. A recent survey on working arrangements and attitudes in the United States found that, on average, employees valued the ability to work from home two to three days a week at eight percent of pay. While I cannot point you towards a similar Australian-based survey, the same survey that found that the average time Australian workers saved each day was 78 minutes, also found that the equivalent average in the United States was significantly lower at 55 minutes. This suggests that Australian workers are likely to place at least as much if not more value on the ability to work from home.
Employers seeking to attract new recruits are tapping into the preferences of candidates. The other notable trend in work perks SEEK found and reported in its 2022 review was the promotion of flexible work options in job advertisements. The number of roles that mentioned “Work From Home” within the job description increased from approximately 1200 per month in 2019 to 11 times as many in 2022.
Verdict: Workers are not necessarily worse off if they have rationally traded off wage increases for improved work arrangements.
Claim #3: Migrants depress wage growth
This view was perpetuated by the Reserve Bank Governor himself back in mid-2021 when in a speech he had this to say:
“In conceptual terms, one can think of this ability to tap into the global labour market for workers that are in short supply as flattening the supply curve for these workers. A flat supply curve means that a shift in demand has only a small effect on prices, or in this case wages. In my view, this is one of the factors that has contributed to wages being less sensitive to shifts in demand than was once the case.”
Similar fears are increasingly creeping into the newspapers as migrants return to our shores and as business interests push for a larger migrant intake. But is it true?
In a survey of 56 of Australia’s top economists, conducted only a month after the Reserve Bank Governor’s speech, the highest ranking intervention to promote wage growth was boosting productivity, with almost four out of five backing this. Cutting either temporary or permanent migration received very little support, with less than one in 10 supporting the former, and one in 20 the latter.
More productivity not less migrants is key to boosting wages
Responses of 56 economists to the question: "Higher wages growth is now a top priority of the RBA in its efforts to sustain stronger economic growth. Please identify the three of these government policies you think would best help deliver higher wages growth." Share (%) supporting policies
Some of the surveyed economists noted that the empirical evidence (by the Productivity Commission, CEDA and others) is that migrants have had no effect on wages. Others suggested that the Reserve Bank Governor was articulating only a partial analysis. Missing is the potential for migrants to boost productivity and thereby wages if they are highly skilled. And that also missing is recognition that migrants do not only add to the labour pool, they are consumers who expand aggregate demand.
Verdict: There is no evidence to support the claim that migrants depress wage growth. Highly skilled migrants, by boosting productivity, could have the opposite effect.
Claim #4: Reforming industrial relations is needed to support higher wage growth
So, if cutting migration is not the answer, apart from boosting productivity, are there other policy measures that should be wielded?
Another alternative put to Australia’s top economists was to reform industrial relations in a range of different ways. While these options received the support of some economists, they made the top three of less than a third.
When we look again at the WPI outcomes through the lens of how much the alternative methods of pay setting have contributed to the quarterly changes in this measure an interesting dynamic is observable over more recent quarters. Since the fourth quarter of 2020, as pandemic restrictions started to ease, Individual Arrangements have contributed more to the growth in this index than Enterprise Bargaining. Changes in Enterprise Bargains and Award rates are lagging.
Since late 2020 individual arrangements have contributed more to the wage growth than alternative methods of setting pay
Quarterly changes in the WPI, percentage points
Verdict: Industrial reform may not provide the hoped for silver bullet and, if ill-conceived, could perversely slow rather than hurry wage growth.
Claim #5: Wage increases risk a wage-price spiral
There is much inflammatory commentary about the risk of a wage-price spiral should employers not exercise wage constraint. An example of this is an article which ran in the Australian Business Review mid last year. There the journalist would have us believe that:
“… our economy now looks set for a wage explosion on the back of a substantial minimum pay rise and labour shortages created by overstimulation, lower immigration and Australians spending more money locally. The wage/price outlook is like a dry forest requiring only a small spark to create a raging inflationary bushfire.”
Well that certainly sounds very scary. But should we believe it? Should employers exercise wage constraint? For arguments sake, let’s say they do. Then what happens? Do the additional earnings that would have gone to workers magically disappear? And with it the threat of added inflationary pressure?
Of course they don’t. What happens is that they inflate the profits earned by businesses. What does not get invested back into the business gets paid out to shareholders. Should we not be just as concerned about shareholder spending sending prices spiralling out of control?
If we take a whole of economy look at what has been happening over time, there is a very clear trend of proportionally less of the total income earned economy-wide being paid out as wages and more being realised as profit. The trajectories in either direction have become more steep in recent years.
Proportionally more of income is going to profits, not wages
Wage and profit share (%) of total factor income
That said, regardless if whether income earned ends up in the hands of workers or shareholders, there is a leap in logic in assuming that it will fuel a price spiral of any description. While it may contribute to demand side pressures, there is a too often forgotten about supply side. Yet this is where much of what Australia is currently grappling with is coming from. These include close to two years of no migration, supply chain disruptions as COVID swept through and impacted manufacturing and transport capabilities, climate damaged produce, and the war between Russia and the Ukraine causing wheat, coal, gas, oil and metal prices to climb to new heights.
As Alan Kohler correctly observes in this special report, this time it is different, the rules have changed. Measures that we have traditionally relied upon, such as interest rate spikes and wage constraint will have little impact. They are hurting Australians, risking recession and may do little to bring prices under control.
Verdict: Wage constraint is not the means to bring inflation under control.
Should we be waging a war on wages?
So back to my original question: should we be waging a war on wages? Either to pump them up or hold them down?
Final verdict: No. Much better foci are boosting the productive capacity of the economy and productivity.
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