tag:theconversation.com,2011:/global/topics/what-we-earn-42620/articlesWhat We Earn – The Conversation2018-03-19T18:38:05Ztag:theconversation.com,2011:article/931222018-03-19T18:38:05Z2018-03-19T18:38:05ZWhy union members earn higher wages than their non-union colleagues<p>Over recent decades in Australia <a href="http://www.abs.gov.au/AUSSTATS/abs@.nsf/Previousproducts/6333.0Main%20Features5August%202016?opendocument&tabname=Summary&prodno=6333.0&issue=August%202016&num=&view=">union membership</a> has fallen from 40% of the workforce in 1990 to 15% in 2016 and so unions might seem less relevant in making a difference to what we earn. But our research finds that union members do earn higher wages per hour than non-union members. </p>
<p>This is because union members have more experience with their current employer, in their occupation and in the labour market generally, than non-union members.</p>
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<a href="https://theconversation.com/the-benefits-of-job-automation-are-not-likely-to-be-shared-equally-90859">The benefits of job automation are not likely to be shared equally</a>
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<p><a href="http://dx.doi.org/10.1080/00036846.2016.1273492">The study</a> used data from the Household, Income and Labour Dynamics in Australia (<a href="https://melbourneinstitute.unimelb.edu.au/hilda">HILDA</a>) survey from 2001-2013 with a sample of 80,000 workers. It showed that male union workers earned 12% more than male non-union workers per hour and female union workers earned 18% more per hour than female non-union workers. </p>
<p>We explored whether these pay differences could be explained by whether or not the two groups had different characteristics such as formal education levels and various forms of labour market experience. In <a href="http://www.econlib.org/library/Enc/HumanCapital.html">economics</a>, the more knowledge and skills a worker has, the higher productivity and higher wages they’ll have.</p>
<p>However formal education didn’t seem to factor in as a decider of differences in wages between unionists and non-unionists in the study. Rather, these findings suggest that when unions negotiate collective agreements for members they are concerned about employment security, as well as wages and this is a deciding factor.</p>
<h2>How unions add to workers’ experience</h2>
<p>The study also revealed that unionists received a lower wage increase for each year of additional labour market experience. But because they accumulated more expertise their overall earnings were higher than their non-union counterparts. </p>
<p>These findings can be explained by unions’ willingness to trade-off wage increases for improvements in employment security. For example, during collective bargaining a union may propose that the employer impose no forced redundancies on the workforce for the life of the agreement. However, this will be costly for the firm as it will have to commit more resources to redeployment. As a result the employer may agree to this provision if the union agrees to a reduction in wage increases.</p>
<p>This could be because unions are interested in more than just higher wages, but also in employment stability and training opportunities. In fact, they may be willing to trade-off some short-term wage growth in return for employment security and training opportunities and accordingly higher wages in the longer-term.</p>
<p>This idea was confirmed in <a href="https://businesslaw.curtin.edu.au/wp-content/uploads/sites/5/2018/02/AJLE-v20n1-Dobbie-et-al.pdf">an earlier study</a> we conducted. That study, also using HILDA survey data, found workers covered by a collective agreement (the majority negotiated by unions) had more workplace training (approximately 5% more). This is compared to workers covered by an individual agreement, which are mostly negotiated without any union involvement. </p>
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Read more:
<a href="https://theconversation.com/theyre-the-voice-how-workers-can-be-heard-when-unions-are-on-the-wane-57209">They're the voice: how workers can be heard when unions are on the wane</a>
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<p>This finding is also consistent with data from the <a href="https://docs.jobs.gov.au/system/files/doc/other/agreement_making_in_australia_under_the_workplace_relations_act_2007_to_2009_1.pdf">federal government</a> about collective agreements formed between 2007 and 2009. This data found there were training initiatives in 80% of union negotiated agreements, compared to 52% of non-union agreements. </p>
<p>From our findings we think workers might be financing training opportunities by trading-off potential wage growth under collective agreements. But these workers can accumulate more skills and accordingly increase their productivity, giving them higher wages in the long-term.</p>
<p>Taken together these studies suggest that unions can get higher wages for their members, despite having less industrial muscle than they did in the past. It shows that unions need to focus on negotiating for improved employment security and training opportunities for workers and not simply for higher wages during bargaining for new collective agreements. </p>
<p>To remain relevant to Australian workers, unions <a href="https://theconversation.com/theyre-the-voice-how-workers-can-be-heard-when-unions-are-on-the-wane-57209">need to have an effective voice</a> on these matters.</p><img src="https://counter.theconversation.com/content/93122/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Craig MacMillan is a member of the NTEU. </span></em></p><p class="fine-print"><em><span>Daehoon Nahm is a member of NTEU.</span></em></p><p class="fine-print"><em><span>Michael John Dobbie is affiliated with NTEU. </span></em></p>Research finds union members earn more because they have more experience than their non-union colleagues.Craig MacMillan, Lecturer in Economics, Macquarie UniversityDaehoon Nahm, Senior Lecturer - Department of Economics, Macquarie UniversityMichael Dobbie, Senior Lecturer in Economics, Macquarie UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/908592018-02-04T18:06:44Z2018-02-04T18:06:44ZThe benefits of job automation are not likely to be shared equally<p>While companies might reap significant gains in productivity from automating certain jobs, this won’t necessarily lead to pay rises for everyone. The evidence suggests businesses might pass on the gains to some workers, but not to all. </p>
<p><a href="https://cica.org.au/wp-content/uploads/Australias-future-workforce.pdf">Some 40% of all jobs</a> are predicted to disappear with automation in Australia. The jobs most likely to go first will be those that can be easily codified, those that are repetitive, simple, structured or routine: think of jobs in manufacturing or those that involve form processing or driving a vehicle. </p>
<p>More than three decades ago, the economics Nobel Laureate, <a href="https://www.jstor.org/stable/136425">Robert Solow wrote</a> that:</p>
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<p>…you can see the computer age everywhere but in the productivity statistics.</p>
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<p>At the time Solow’s comment created intense <a href="https://www.sciencedirect.com/science/article/pii/S0308596113001031">discussion</a>, especially in the context of the spread of technology. But it has <a href="https://hbr.org/2015/06/robots-seem-to-be-improving-productivity-not-costing-jobs">recently</a> been challenged. </p>
<p>Now we are starting to see the effect of automation everywhere and especially in <a href="http://eprints.lse.ac.uk/61155/">productivity and economic growth</a> statistics. It’s expected that automation will make a <a href="http://www.alphabeta.com/wp-content/uploads/2017/08/The-Automation-Advantage.pdf">A$2.2 trillion</a> boost to productivity in Australia between 2015 and 2030. But whether productivity gains will be redistributed equally, remains highly questionable.</p>
<h2>The growing divergence</h2>
<p>There is a <a href="http://cep.lse.ac.uk/pubs/download/cp401.pdf">general economic argument</a> that workers’ wages should grow in line with productivity growth and in doing so improve everyone’s living standards. Although there is overwhelming data about rising economic surpluses from automation, recent evidence indicates that the growth of productivity and the growth of workers’ wages are not actually linked. </p>
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<a href="https://theconversation.com/is-faster-profit-growth-essential-for-a-pick-up-in-wages-growth-83819">Is faster profit growth essential for a pick-up in wages growth?</a>
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<p>For example, in the United States, <a href="http://www.epi.org/publication/ib330-productivity-vs-compensation/">research</a> shows a large divergence between productivity and median hourly compensation growth, from 2000 to 2011. Similarly, in Australia, we found wage growth lagging productivity growth, across most sectors of the economy. Average productivity growth was much higher than average wage growth in most sectors of the Australian economy during 2012-16.</p>
<p>Since the 1970s, across most <a href="https://www.oecd.org/eco/Decoupling-of-wages-from-productivity-Macro-level-facts.pdf">OECD</a> countries, the share of income going to wages has been decreasing, and the share being reinvested in capital (for instance cash reserves, equipment and machinery) has been increasing.</p>
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<p>Clearly, profits arising from productivity gains have been going to capital rather than labour, reflecting growing income inequality in general.</p>
<h2>Where the benefits of automation do go</h2>
<p>Automation <a href="https://cica.org.au/wp-content/uploads/Australias-future-workforce.pdf">eliminates or replaces</a> many <a href="https://files.stlouisfed.org/files/htdocs/conferences/annual/Jaimovich.pdf">routine</a> tasks performed by people at work. <a href="http://www.epi.org/publication/ib330-productivity-vs-compensation/">Research</a> shows a growing polarisation in the job market, where highly skilled and educated workers are commanding good jobs, while those in unskilled roles or positions with lower levels of education required are <a href="https://theconversation.com/we-must-do-something-about-jobs-for-young-people-in-a-world-of-automation-68342">low paid</a>. </p>
<p>Given that highly skilled workers <a href="http://www.chairdigitaleconomy.com.au/wp-content/uploads/2016/03/PartB_HighGrowthFirms_.pdf">are in high demand</a>, these workers are more likely to receive the financial gains from automation or others in mid or senior level managerial roles. Indeed, CEO compensation has been <a href="http://www.epi.org/publication/ceo-pay-has-grown-90-times-faster-than-typical-worker-pay-since-1978/">growing much faster</a> than average workers’ wages. </p>
<p>The ratio of CEOs’ pay to workers’ average pay in large US corporations was 20:1 in 1965, and it rose to a whopping <a href="http://www.epi.org/publication/ceo-pay-remains-high-relative-to-the-pay-of-typical-workers-and-high-wage-earners/">271:1</a> in 2016. What these signs point to is that those with less bargaining power are less likely to reap the rewards from productivity gains from automation.</p>
<h2>Wage expectations of the tech savvy worker</h2>
<p>When real (human) workers produce more by putting in more time or energy, they expect, and agitate for, an increased share of the gains. But when automation (and not longer hours or more sweat) leads to increased productivity, and subsequently <a href="https://www.axios.com/the-erosion-of-worker-compensation-1516915779-5de48fc9-bfe8-4577-88e0-4e9b46591af3.html">increased profits</a>, it’s less clear which workers should (or could) receive the increased share of the gains.</p>
<p>Businesses also don’t have an incentive to distribute a share of the gains back to the workers. We can see this for example in <a href="https://theconversation.com/replacing-pharmacists-with-robots-isnt-the-answer-to-better-productivity-86231">pharmaceutical services</a>, which are becoming increasingly automated, yet workers are faced <a href="http://www.health.gov.au/internet/main/publishing.nsf/content/7E5846EB2D7BA299CA257F5C007C0E21/%24File/interim-report-final.pdf">with low starting salaries</a>. In such a highly competitive industry, the businesses are instead incentivised to pass on the gains to customers in terms of lower prices of goods and services they offer, rather than wages. </p>
<p>In economics, we often say that a rising tide lifts all boats. What we mean by that is that everyone benefits from economic growth and productivity. </p>
<p>But it’s not clear this will happen in an automated world. In the immediate future, there is no evidence to suggest that economic surplus from automation will be used to fund higher wages. </p>
<p>Workers may see some reward if their skills are valuable, rare and difficult to codify and automate. This value of being in high demand may be the incentive for workers to reskill or to look at how they organise to negotiate their share of the rewards.</p><img src="https://counter.theconversation.com/content/90859/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Shahid M Shahiduzzaman receives funding from QUT, Queensland Government, Brisbane Marketing and PwC. </span></em></p><p class="fine-print"><em><span>Marek Kowalkiewicz receives funding from QUT, PwC, Brisbane Marketing, and the Queensland Government. </span></em></p><p class="fine-print"><em><span>Rowena Barrett receives funding from QUT, PwC, Brisbane Marketing and the Queensland Government. </span></em></p>The productivity gains businesses get some automating some jobs, aren’t being passed on to workers in higher wages, evidence shows.Shahid M Shahiduzzaman, Research Fellow, Digital Economy, Queensland University of TechnologyMarek Kowalkiewicz, Professor and Chair in Digital Economy, Queensland University of TechnologyRowena Barrett, Head of School of Management (Human Resources, Small Firm Innovation), Queensland University of TechnologyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/883042017-11-29T19:10:16Z2017-11-29T19:10:16ZGovernments haven’t always shirked responsibility for our low wages<figure><img src="https://images.theconversation.com/files/196875/original/file-20171129-28869-1ymu7fl.jpg?ixlib=rb-1.1.0&rect=7%2C26%2C983%2C615&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Post-war Australia experienced a boom with full employment and falling inequality. </span> <span class="attribution"><span class="source">State Library of Queensland</span></span></figcaption></figure><p>For the last four years or so average wages in Australia <a href="http://www.abs.gov.au/AUSSTATS/abs@.nsf/Lookup/6345.0Main+Features1Sep%202017?OpenDocument">have barely kept pace</a> with inflation, meaning no real pay rises. And all the while, the government has been betting on the market to improve things.</p>
<p>Treasurer <a href="http://www.afr.com/news/politics/scott-morrison-urges-bosses-to-turn-profits-into-higher-wages-20170909-gyeb2f#ixzz4z2JiAoAM">Scott Morrison stated</a>:</p>
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<p>As the labour market tightens, that’s obviously going to lead over time to a boost in wages.</p>
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<p>As the Treasurer asserted, economic theory says these conditions should lead to rising wages, but they aren’t. The country continues its <a href="http://www.smh.com.au/business/the-economy/gdp-australia-grabs-record-for-longest-time-without-a-recession-20170606-gwm0o2.html">record run</a> of 26 years of economic growth and the banks and other big corporations continue to post <a href="https://tradingeconomics.com/australia/corporate-profits">record profits</a>.</p>
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Read more:
<a href="https://theconversation.com/how-market-forces-and-weakened-institutions-are-keeping-our-wages-low-83446">How market forces and weakened institutions are keeping our wages low</a>
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<p>The Reserve Bank of Australia is at a bit of a loss, <a href="http://www.rba.gov.au/monetary-policy/rba-board-minutes/2017/2017-11-07.html">speculating</a> at its latest meeting that maybe globalisation and technology are to blame.</p>
<p>However, to understand what’s really going on it’s helpful to look at something most economists and politicians ignore: history.</p>
<h2>How past governments have dealt with low wages</h2>
<p>There was a period in Australia, and much of the rest of the developed world, from the end of the second world war to the early 1970s, that is often referred to as the “post-war boom”. During this roughly 25-year period, unemployment averaged 2%, inequality fell steadily and economic growth was strong.</p>
<p><strong>Australia’s unemployment rate, 1901 - 2001</strong></p>
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<span class="caption">Unemployment in Australia.</span>
<span class="attribution"><a class="source" href="http://archive.treasury.gov.au/documents/110/pdf/round3.pdf">Treasury</a>, <span class="license">Author provided</span></span>
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<p>This didn’t happen by accident. Towards the end of the war, policymakers and economists began planning for the post-war period. </p>
<p>They had lived through the Great Depression with unemployment averaging 20% and then they had lived through the war, where the war effort resulted in full employment. They asked the obvious question: “If we can achieve full employment through government spending during the war, then why not during peace time?”</p>
<p>That question and the resulting policy answer, outlined in the Curtin government’s 1945 white paper <a href="https://openresearch-repository.anu.edu.au/bitstream/1885/47102/3/FromCurtintoKeating2.pdf">Full Employment in Australia</a>, resulted in the post-war boom with full employment and falling inequality for the next 25 years.</p>
<p>The 1945 white paper (a remarkable political document by today’s standards) tackled the complex questions of inflation, unemployment, wages and economic growth with mature nuance. Policy proposals weren’t made to appear win-win but weighed up costs and benefits, accepting that we must take responsibility for the costs. </p>
<p>One of the costs of a capitalist, market based system is unemployment. In this context, unemployment was not seen as an individual failing but as a collective responsibility. The paper stated the government <a href="https://openresearch-repository.anu.edu.au/bitstream/1885/47102/3/FromCurtintoKeating2.pdf">should accept responsibility</a> for stimulating spending on goods and services to the extent necessary to sustain full employment.</p>
<p>How far we have come from 1945. Today we <a href="https://theconversation.com/how-the-unemployed-disappear-and-why-it-matters-35850">blame</a> and <a href="https://www.ja.com.au/news/welfare-groups-say-job-seekers-are-being-demonised-budget-leadup">demonise</a> the unemployed for not being in work, even though there are many more unemployed people than there are available jobs. </p>
<p>Rather than governments taking responsibility for full employment, they set up punitive “employment services” regimes that require the unemployed to jump through <a href="http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.184.2866&rep=rep1&type=pdf">meaningless and often demoralising bureaucratic hoops</a> or face financial penalties.</p>
<p>So, what happened in the 1970s to change our attitude to full employment so radically?</p>
<p>During the post-war boom, inequality had been steadily falling. That is, for 25 years, the proportion of the country’s output that was going to the rich was steadily falling. Unsurprisingly, the rich fought back.</p>
<p>Skyrocketing <a href="https://www.aph.gov.au/binaries/library/pubs/bp/1994-95/94bp09.pdf">inflation combined with high unemployment (stagflation)</a>, caused by the oil shocks of the 1970s, allowed business representatives to claim that the Keynesian system that had given us the post-war boom was a failure.</p>
<p>Enter the age of individualism. Neoclassical economics and its political counterpart neoliberalism were all about individual choice and individual accountability. </p>
<p>To use the words of US billionaire <a href="http://www.nytimes.com/2006/11/26/business/yourmoney/26every.html">Warren Buffett</a>:</p>
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<p>There’s a class war, all right, but it’s my class, the rich class, that’s making war, and we’re winning.</p>
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<span class="attribution"><span class="source">Andrew Leigh, Battlers and Billionaires</span></span>
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<p>The current stagnation of wages we are seeing in Australia is no accident and no mystery. It’s the result of the <a href="http://www.unswlawjournal.unsw.edu.au/sites/default/files/3_patmore_2006.pdf">intentional erosion of worker power</a> (largely due to the successful campaign to demonise unions) and the end of the bipartisan federal government <a href="https://www.inderscienceonline.com/doi/pdf/10.1504/IJPP.2010.032299">commitment to full employment</a>.</p>
<p>The impact of full employment on wages is profound. The greatest bargaining chip a worker has is <a href="https://theconversation.com/how-to-ask-for-a-pay-rise-79756">to withdraw their labour</a>. </p>
<p>When it’s difficult to get a new job, unemployment benefits are well below the poverty line and the unemployed are demonised by politicians and the media alike, workers are <a href="http://www.abc.net.au/news/2017-06-29/rba-governor-philip-lowe-goes-marxist/8662228">much less inclined</a> to push hard for improved wages or conditions.</p>
<p>I’m not arguing that we could simply adopt the policies of 1945 and magically return to the golden years of the 50s and 60s; Australia is a very different country and too much has changed. However, we can learn a great deal from the 1945 white paper in terms of ambition, commitment, and the embrace of complexity and nuance.</p>
<p>The federal government could restore its commitment to creating full employment in Australia, using its spending power to make up for any shortfall in private jobs as it did during the post-war boom. History demonstrates that the careful and coordinated use of both fiscal policy (spending and taxing), and monetary policy (interest rates) to manage the economy can create a more prosperous and egalitarian Australia.</p>
<p>It’s well past time for a 21st century update to the 1945 white paper on full employment.</p><img src="https://counter.theconversation.com/content/88304/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Warwick Smith also works at public policy think tank Per Capita.</span></em></p>The federal government could restore its commitment to creating full employment in Australia, using its spending power to make up for any shortfall in private jobs as it did during the post-war boom.Warwick Smith, Research economist, The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/838192017-10-04T04:54:30Z2017-10-04T04:54:30ZIs faster profit growth essential for a pick-up in wages growth?<figure><img src="https://images.theconversation.com/files/188528/original/file-20171003-12146-zxxdyj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption"></span> <span class="attribution"><span class="source">AAP</span></span></figcaption></figure><p>Do higher profits necessarily lead to higher wages? The answer, as borne out by the data below, might surprise you. In fact, wages growth is more likely to arise from smart policy settings that directly boost economic and employment growth.</p>
<p>Australian wages growth is, as Reserve Bank governor Philip Lowe <a href="http://www.rba.gov.au/speeches/2017/sp-gov-2017-09-21.html">recently noted</a>, “the slowest since at least the mid-1960s”. Treasurer Scott Morrison recently <a href="http://sjm.ministers.treasury.gov.au/media-release/085-2017/">asserted</a> that a sustained <em>increase</em> in profitability is a prerequisite for a pick-up in wages growth.</p>
<p>But there is little data to support the idea that wages and profits are connected.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/188524/original/file-20171003-3782-1ws0esq.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/188524/original/file-20171003-3782-1ws0esq.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=552&fit=crop&dpr=1 600w, https://images.theconversation.com/files/188524/original/file-20171003-3782-1ws0esq.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=552&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/188524/original/file-20171003-3782-1ws0esq.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=552&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/188524/original/file-20171003-3782-1ws0esq.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=694&fit=crop&dpr=1 754w, https://images.theconversation.com/files/188524/original/file-20171003-3782-1ws0esq.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=694&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/188524/original/file-20171003-3782-1ws0esq.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=694&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption"></span>
<span class="attribution"><span class="source">The Conversation/Author provided</span>, <a class="license" href="http://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a></span>
</figcaption>
</figure>
<p>There does not appear to be any “leading” relationship between growth in pre-tax company profits and growth in wages, even if the mining sector (which accounts for a good deal of the fluctuations in profit growth over the past dozen years) is excluded.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/188527/original/file-20171003-3124-1ta5b97.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/188527/original/file-20171003-3124-1ta5b97.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=552&fit=crop&dpr=1 600w, https://images.theconversation.com/files/188527/original/file-20171003-3124-1ta5b97.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=552&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/188527/original/file-20171003-3124-1ta5b97.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=552&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/188527/original/file-20171003-3124-1ta5b97.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=694&fit=crop&dpr=1 754w, https://images.theconversation.com/files/188527/original/file-20171003-3124-1ta5b97.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=694&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/188527/original/file-20171003-3124-1ta5b97.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=694&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption"></span>
<span class="attribution"><span class="source">The Conversation/Author provided</span>, <a class="license" href="http://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a></span>
</figcaption>
</figure>
<p>Some relationship between profit <em>margins</em> (that is, profits as a proportion of sales revenue) and wages might have existed in the past. However, that appears to have broken down in the years since the peak of the commodities boom, in 2011-12, as you can see in the following chart. </p>
<p>Since then, aggregate profit margins have risen to levels not seen since the early 2000s, but wages growth has continued to slow.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/188529/original/file-20171003-12163-1qrzjgd.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/188529/original/file-20171003-12163-1qrzjgd.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=552&fit=crop&dpr=1 600w, https://images.theconversation.com/files/188529/original/file-20171003-12163-1qrzjgd.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=552&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/188529/original/file-20171003-12163-1qrzjgd.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=552&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/188529/original/file-20171003-12163-1qrzjgd.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=694&fit=crop&dpr=1 754w, https://images.theconversation.com/files/188529/original/file-20171003-12163-1qrzjgd.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=694&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/188529/original/file-20171003-12163-1qrzjgd.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=694&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption"></span>
<span class="attribution"><span class="source">The Conversation/Author provided</span>, <a class="license" href="http://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a></span>
</figcaption>
</figure>
<p>Rather than being a precursor to faster growth in wages, the growth in Australian company profits in recent years appears to be part of a broader global pattern: the share of aggregate income accruing to capital is rising while that accruing to labour is falling.</p>
<h2>In line with global trends</h2>
<p>Researchers from the International Monetary Fund (IMF) have provided a plausible set of explanations for these developments in their <a href="https://www.imf.org/en/Publications/WEO/Issues/2017/09/19/%7E/media/Files/Publications/WEO/2017/October/pdf/analytical-chapters/c2.ashx">latest World Economic Outlook</a>. They contend that “macroeconomic factors such as labour market slack, inflation expectations and trend productivity growth can account for the bulk of the variation in nominal wage growth … in recent years”. </p>
<p>Echoing <a href="http://www.rba.gov.au/publications/smp/2017/feb/box-b-underemployment-and-labour-market-spare-capacity.html">a point frequently made by the Reserve Bank of Australia (RBA)</a>, the IMF researchers note: “True labour market slack may … be larger than suggested by headline unemployment rates.” This is because of the growth in the number of workers working fewer hours than they are willing and able to work.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/explainer-how-wage-growth-contributes-to-the-economy-75625">Explainer: how wage growth contributes to the economy</a>
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</em>
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<hr>
<p>The researchers find that even in economies where unemployment rates are now below their pre-GFC averages, “involuntary part-time employment … appears to be weighing on wages growth”, alongside “slower-moving drivers … such as automation, diminished medium-term growth expectations and the growing importance of the services sector”. </p>
<p>The IMF researchers conclude that, overall, “wage growth … may continue to remain subdued until involuntary part-time employment diminishes or trend productivity growth picks up”.</p>
<p>All of this suggests that policy measures that seek, in the first instance, to (further) lift corporate profits will not enhance the prospects of a pick-up in wages growth in Australia. </p>
<h2>Preferential taxation not the answer</h2>
<p>As I’ve argued <a href="https://theconversation.com/why-small-business-tax-cuts-arent-likely-to-boost-jobs-and-growth-72658">previously</a>, there’s absolutely no evidence that preferentially taxing small businesses will do anything to boost innovation, productivity, investment or employment. Hence, there’s no reason to think it will do anything to lift wages growth. </p>
<p>Nor is there any <a href="http://economics.mit.edu/files/7666">compelling empirical evidence</a> to suggest that across-the-board tax cuts for larger companies will have any significant impact on employment and hence on wages. </p>
<p>Rather, an acceleration in wages growth is more likely to come from policies that directly boost economic and employment growth – such as increased spending on (well-chosen) infrastructure projects – and that boost productivity growth (including well-targeted education and training initiatives).</p>
<p>A more controversial proposition may be that measures designed to reverse, in part, the shifts in the shares of national income accruing to labour and capital over the past decade or so could also help accelerate wages growth. </p>
<p><iframe id="53kAt" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/53kAt/5/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<p>Partly because real wages have grown more slowly than labour productivity since the turn of the century (as you can see in the previous chart), the “profits share” of Australian national income is well above its long-run average. The “wages share” is close to a record low. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/188692/original/file-20171003-31723-6uw84z.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/188692/original/file-20171003-31723-6uw84z.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=518&fit=crop&dpr=1 600w, https://images.theconversation.com/files/188692/original/file-20171003-31723-6uw84z.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=518&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/188692/original/file-20171003-31723-6uw84z.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=518&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/188692/original/file-20171003-31723-6uw84z.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=651&fit=crop&dpr=1 754w, https://images.theconversation.com/files/188692/original/file-20171003-31723-6uw84z.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=651&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/188692/original/file-20171003-31723-6uw84z.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=651&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption"></span>
<span class="attribution"><span class="source">The Conversation/Author provided</span>, <a class="license" href="http://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a></span>
</figcaption>
</figure>
<h2>Historical precedent</h2>
<p>In some respects, the present situation is the obverse of the “<a href="https://www.rba.gov.au/publications/rdp/1988/pdf/rdp8806.pdf">real wage overhang</a>” that emerged in the second half of the 1970s, whereby real wages surged much faster than productivity. </p>
<p>One of the main purposes of the Hawke government’s <a href="https://theconversation.com/australian-politics-explainer-the-prices-and-incomes-accord-75622">Prices and Incomes Accord</a> was to secure the ACTU’s acceptance that wages would grow more slowly than productivity (and fall in real terms) to eliminate this “overhang” and reduce unemployment. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/australian-politics-explainer-the-prices-and-incomes-accord-75622">Australian politics explainer: the Prices and Incomes Accord</a>
</strong>
</em>
</p>
<hr>
<p>Hence, it could be argued that what is required now is a period during which real wages grow faster than productivity to eliminate what could be termed a “real wage underhang”. That would be difficult to achieve via an accord-type process given the changes in how the labour market works since the 1980s. </p>
<p>And it would be important to ensure that real wages did not grow at a pace relative to productivity growth that led to higher unemployment. </p>
<p>The government could consider using its submissions to the Fair Work Commission’s annual determinations of the minimum wage, and its approach to wage negotiations with its own employees, as a way of nudging wages growth upwards.</p><img src="https://counter.theconversation.com/content/83819/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Saul Eslake does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Treasurer Scott Morrison recently asserted that an increase in profits is a prerequisite for wages growth. But is his position supported by data?Saul Eslake, Vice-Chancellor’s Fellow, University of TasmaniaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/834462017-09-08T07:04:34Z2017-09-08T07:04:34ZHow market forces and weakened institutions are keeping our wages low<figure><img src="https://images.theconversation.com/files/184846/original/file-20170906-9835-e207yu.png?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Since the mid 1970s and especially since the 1980s the job market changed and so did how our wages are set.
</span> <span class="attribution"><span class="source">Ryan Derry/Flickr</span>, <a class="license" href="http://creativecommons.org/licenses/by-nc-nd/4.0/">CC BY-NC-ND</a></span></figcaption></figure><p><em>Low wages growth has been a spectre hanging around the Australian economy for some time. In our series <a href="https://theconversation.com/au/topics/what-we-earn-42620">What We Earn</a> we unpick the causes for this and why some workers might be feeling it more than others.</em></p>
<hr>
<p>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 <a href="http://journals.sagepub.com/doi/abs/10.1177/0022185617693875">policies they have long advocated</a>. </p>
<p>While Australia still has systems like Industrial Tribunals and Awards - given how they interact with market forces today, these institutions now work to <a href="http://journals.sagepub.com/doi/abs/10.1177/0022185617693875">entrench wage inequality rather than reduce it</a>.</p>
<p>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. </p>
<p>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 <a href="http://press.princeton.edu/TOCs/c5377.html">are determined by institutional forces</a> – in Australia, the award system of minimum wages and unions collective bargaining rights. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/the-costs-of-a-casual-job-are-now-outweighing-any-pay-benefits-82207">The costs of a casual job are now outweighing any pay benefits</a>
</strong>
</em>
</p>
<hr>
<p>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. </p>
<p>These rates were not set unilaterally, but in coordination with what employers and organised workers indicated was possible, in industry level collective agreements. </p>
<p>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. </p>
<p>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. </p>
<p>Since the mid 1970s and especially since the 1980s all this has changed. </p>
<p>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, <a href="http://www.ausstats.abs.gov.au/ausstats/meisubs.nsf/0/389553AE1C42D239CA2580890012526F/$File/62020_nov%202016.pdf">underemployment has been on the rise</a>.</p>
<p>This has not been cyclical. It has racketed up after each recession.</p>
<p>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 <a href="http://www.oecd-ilibrary.org/docserver/download/5kg58j9d7b6d-en.pdf?expires=1504841676&id=id&accname=guest&checksum=691EE7B4D2025F7FB16DA6E529FBE74D">as being between 15 and 25%</a>.</p>
<p><a href="http://www.rba.gov.au/speeches/2017/sp-gov-2017-02-22.html">High levels of indebtedness</a> 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.</p>
<h2>The legacy of labour market ‘reform’</h2>
<p>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. </p>
<p>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.</p>
<p>This was a <a href="http://journals.sagepub.com/doi/pdf/10.1111/1472-9296.00003">key “reform” of the Keating government</a>, 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. </p>
<p>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.</p>
<p>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. </p>
<p>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 – <a href="https://www.fwc.gov.au/documents/sites/wagereview2014/research/report6.pdf">currently about 15% of the workforce</a> directly and a further 15% indirectly. </p>
<p>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. </p>
<p>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.</p>
<p>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. </p>
<p>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. </p>
<p>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 <a href="https://www.imf.org/external/np/g20/pdf/2017/062617.pdf">such as the IMF</a> now recognise growth needs to be inclusive if it is to sustainable. </p>
<p>It’s much easier to destroy institutions that deliver fair pay than build them. Australia <a href="http://www.ianwatson.com.au/pubs/wages%20policy.pdf">found ways of achieving fair pay</a> over the course of the twentieth century - it can to so again.</p><img src="https://counter.theconversation.com/content/83446/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Over a 25 year career as an academic John Buchanan received funding from over 50 different organisations. In addition to the ARC I have received millions of dollars of research funds from governments of all persuasions, unions, employers and international bodies. No funds supported the production of this article. It is based on a scholarly paper published in the peer reviewed British Journal of Industrial Relations.</span></em></p>Austraila’s minimum wages now operate in relative isolation. Until the 1990s they were part of an inter-connected system.John Buchanan, Head of the Discipline of Business Analytics, University of Sydney Business School, University of SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/822702017-09-05T20:06:03Z2017-09-05T20:06:03ZExplainer: how international competition affects how much you earn<p><em>Low wages growth has been a spectre hanging around the Australian economy for some time. In our series <a href="https://theconversation.com/au/topics/what-we-earn-42620">What We Earn</a> we unpick the causes for this and why some workers might be feeling it more than others.</em></p>
<hr>
<p>The slump in wage growth is not just an Australian phenomenon – wage growth in most advanced economies has been <a href="https://www.rba.gov.au/publications/bulletin/2015/jun/pdf/bu-0615-2.pdf">lower than expected</a> in recent years. This is because globalisation has put us all in the same boat when it comes to <a href="http://www.rba.gov.au/publications/bulletin/2015/jun/2.html">international competition</a>.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/181759/original/file-20170811-1159-x9ug1r.gif?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/181759/original/file-20170811-1159-x9ug1r.gif?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=453&fit=crop&dpr=1 600w, https://images.theconversation.com/files/181759/original/file-20170811-1159-x9ug1r.gif?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=453&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/181759/original/file-20170811-1159-x9ug1r.gif?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=453&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/181759/original/file-20170811-1159-x9ug1r.gif?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=569&fit=crop&dpr=1 754w, https://images.theconversation.com/files/181759/original/file-20170811-1159-x9ug1r.gif?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=569&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/181759/original/file-20170811-1159-x9ug1r.gif?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=569&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Earnings per hour.</span>
</figcaption>
</figure>
<p>There are two ways that international competition can reduce wages - imported goods and migrant workers. </p>
<p>In Australia, import prices of both items purchased by households and goods used in manufacturing, purchased by businesses, have <a href="http://www.abs.gov.au/AUSSTATS/abs@.nsf/DetailsPage/6457.0Jun%202017?OpenDocument">fallen over the past two years</a>. This means businesses in Australia are increasingly competing with imports. As a result these businesses are less able to afford wage increases and their workers are less likely to ask for them, in fear that they may lose their jobs.</p>
<p>Low import prices are usually due to the goods we import (think t-shirts from Bangladesh, hardware products from China). Our imports, particularly of manufactured goods, are coming increasingly from countries where labour is plentiful and cheap, according to <a href="https://industry.gov.au/Office-of-the-Chief-Economist/Research-Papers/Documents/2015-Research-Paper-2-Impact-of-international-trade-on-employment.pdf">research</a>. </p>
<p>In fact about half of our manufactured imports come from low-wage countries, which is an increase from less than 10%, 40 years ago. This is important when we consider that <a href="https://industry.gov.au/Office-of-the-Chief-Economist/Research-Papers/Documents/2015-Research-Paper-2-Impact-of-international-trade-on-employment.pdf">80%</a> of the value of Australia’s imports comes from manufactured goods.</p>
<p>When we import cheap products we are effectively importing cheap labour. This effective boost to the supply of cheap labour drives down import prices and wages in Australia. A similar effect happens when businesses outsource products or services to another country. </p>
<p>Again this is a global phenomenon affecting all industrialised countries including <a href="http://www.frbsf.org/economic-research/files/wp2013-27.pdf">the US</a> and <a href="https://theconversation.com/more-offshoring-of-australian-jobs-can-you-bank-on-it-5214">Australia</a>. The most common primary motivation for global outsourcing <a href="https://www2.deloitte.com/content/dam/Deloitte/nl/Documents/operations/deloitte-nl-s&o-global-outsourcing-survey.pdf">cited</a> by companies is cost cutting. Business functions that are <a href="https://www2.deloitte.com/content/dam/Deloitte/nl/Documents/operations/deloitte-nl-s&o-global-outsourcing-survey.pdf">typically</a> outsourced are manufacturing procurement and services such as information technology, legal, facilities management, finance and human resources.</p>
<p>International competition can also reduce wages through migration of labour to Australia, although here the empirical evidence is less clear. The effect of migration on wages depends whether it creates enough jobs to absorb the extra workers, but teasing this out is not straightforward.</p>
<p>Net overseas migration has increased as a share of the population from <a href="http://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/pubs/rp/rp1617/Quick_Guides/MigrationStatistics">47% in 2000</a> to 54% in 2015. And the skilled migrant share of permanent migrants has increased from <a href="http://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/pubs/rp/rp1617/Quick_Guides/MigrationStatistics">55% in 2000</a> to 68% in 2015. Not only are migrants increasing as a share of the population, but a higher share of them are skilled.</p>
<p>And their labour participation rates are high. In November 2016 the labour force participation rate for recent migrants and temporary residents combined <a href="http://www.abs.gov.au/ausstats/abs@.nsf/mf/6250.0">was at 70%,</a> which is higher than the overall participation rate for Australia of 66%. The effect is to boost the overall Australian labour participation rate. </p>
<p>Importantly, recent migrants have higher skill levels <a href="http://www.pc.gov.au/inquiries/completed/migration-population/report/migrationandpopulation.pdf">than others in the labour force</a>. Unless sufficient extra jobs are created to absorb these extra workers, wages could go down, and more so in skilled wages relative to unskilled wages.</p>
<p>However this effect on job creation is hard to pin down and so research shows the effect on wages could go either way. </p>
<p>One <a href="https://sites.hks.harvard.edu/fs/gborjas/publications/journal/JEL2015.pdf">US study</a> argues that the additional jobs created are not enough to absorb the extra workforce, creating slack in the labour market and a drop in wages. However, <a href="http://users.monash.edu/%7Easaduli/pub/ER1.pdf">another study</a> using Australian data shows an increase in wages with increased immigrant worker numbers but it’s small and statistically insignificant. Another Australian <a href="https://theconversation.com/new-research-shows-immigration-has-only-a-minor-effect-on-wages-74546">study</a> found no net impact at all. </p>
<p>The question turns mainly on the net effect of migration on the quantity and quality of nation’s investment in things like buildings, equipment and the like that are used by businesses. If this is sufficiently strong, then the workforce will be more productive and wages will tend to rise, otherwise they will fall. </p>
<p>So while it’s easy to calculate the extra workers from migration, it is much <a href="http://www.pc.gov.au/inquiries/completed/migration-population/report/migrationandpopulation.pdf">harder</a> to calculate the effect they will have on business investment and therefore on wages.</p>
<p>Globalisation has increased international competition through imports of both goods and labour. Imports of goods have tend to depress wage growth in Australia. The effect of labour imports through migration on wage growth depends on whether the boost to the workforce dominates any boost to job creation and that’s unclear in theory and evidence.</p><img src="https://counter.theconversation.com/content/82270/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Ross Guest has previously received funding from the ARC and is a member of the ARC College of Experts.</span></em></p>There are two ways that international competition can reduce wages. Both are effects of globalisation.Ross Guest, Professor of Economics and National Senior Teaching Fellow, Griffith UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/819992017-09-04T20:11:55Z2017-09-04T20:11:55ZWhy Australian CEOs are sharing part of our wages pain<p><em>Low wages growth has been a spectre hanging around the Australian economy for some time. In our series <a href="https://theconversation.com/au/topics/what-we-earn-42620">What We Earn</a> we unpick the causes for this and why some workers might be feeling it more than others.</em></p>
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<p>Even though shares and bonuses for CEOs have been fluctuating over the years, recently CEO salaries have remained stagnant. This trend lines up with the stagnant wages workers <a href="https://www.google.com.au/url?sa=t&rct=j&q=&esrc=s&source=web&cd=5&ved=0ahUKEwiqtJ7Ng9jVAhVDUbwKHTPPBMkQFgg9MAQ&url=https%3A%2F%2Fwww.rba.gov.au%2Fpublications%2Fbulletin%2F2017%2Fmar%2Fpdf%2Fbu-0317-2-insights-into-low-wage-growth-in-australia.pdf&usg=AFQjCNFV0AsGOp94cfJn301kpQjCB4f2y">have been experiencing across the board</a>.</p>
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<p>I calculated the average CEO salary, bonus and remuneration for a sample of ASX100 firms, for the period 2012-2016. I only included firms with available data for the same CEO for the entire five year period, which was 45 of the 100.</p>
<p>Looking just at the salary component of remuneration, it’s clear CEO salaries plateaued across 2016 and 2015 with modest increases of 2.31% and 3.15% respectively. In contrast, CEO salaries increased by 7.54% and 8.53% in 2014 and 2013, well above the growth in average Australian wages. CEO salaries as a multiple of average Australian wages show a small but steady increase over the five-year period. </p>
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<p>However CEO bonuses and share-based payments show a different story. Bonus payments were much more volatile across 2012-2016. </p>
<p>CEO bonuses are usually payments based on <a href="http://www.sciencedirect.com.ezproxy.library.uq.edu.au/science/article/pii/S1573446399300249/pdf?md5=f3d68f03169320b774cea3da861d1f0b&isDTMRedir=Y&pid=1-s2.0-S1573446399300249-main.pdf">short-term performance</a>. This explains their volatility across 2012-2016; the large increase in average bonus payments in some years and the large negative change for 2016.</p>
<p>Share-based payments are usually calculated with a standard accounting method and reflect the amount of shares a CEO owns during a year, rather than the money those shares earn during that period. </p>
<p>There’s been large increases in share-based remuneration awarded to CEOs in every year except 2014.</p>
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<p>Share-based payments are also usually linked to the company’s <a href="http://www.sciencedirect.com.ezproxy.library.uq.edu.au/science/article/pii/S1573446399300249/pdf?md5=f3d68f03169320b774cea3da861d1f0b&isDTMRedir=Y&pid=1-s2.0-S1573446399300249-main.pdf">share performance</a> and so its value is subject to changes in both the individual business and the whole capital market. </p>
<p>Overall the data shows that growth in total CEO pay has outstripped average Australian wage growth in every year of the last five years. But perhaps we need to look more closely.</p>
<h2>CEO pay and average wages</h2>
<p>CEO pay is made up of a base salary component plus a mix of elements that are subject to fluctuation. These parts of the executive pay packet are influenced by <a href="https://espace.library.uq.edu.au/view/UQ:252035">many factors</a> including firm size and complexity, individual company performance, internal benchmarks, share market performance, industry norms and the domestic and international economy. So many of the factors influencing low wages growth for Australian workers are also an important influence on CEO pay, although not necessarily in the same way. </p>
<p>For example, low wages growth has helped to <a href="https://www.rba.gov.au/publications/bulletin/2015/jun/pdf/bu-0615-2.pdf">moderate growth in labour costs for firms</a> and so improving profitability. However, low wages growth <a href="https://www.rba.gov.au/publications/bulletin/2015/jun/pdf/bu-0615-2.pdf">has also been linked</a> to higher unemployment levels, under-capacity in the economy, low consumer expectations about inflation and Australia’s weakening terms of trade. All of these factors will ultimately impact negatively on the profitability of individual businesses and it’s difficult to justify a large increase in CEO base salary if the firm is not performing well. </p>
<p>On the basis of the data provided, it’s reasonable to predict there will be a continued plateauing of CEO base pay and that any increase will, on average, be roughly in line with Australian wages growth. The other elements of CEO pay are much more unpredictable. Certainly if business performance slows, so will the amount of elements of executive remuneration that are variable because they are linked to performance.</p>
<p>Public scrutiny of executive pay and shareholder’s ability to vote against it with <a href="https://theconversation.com/au/topics/two-strikes-law-1721">Australia’s two-strikes rule</a> are also likely to moderate executive pay in the future. Pay levels well above industry norms or individual performance will continue to draw <a href="https://theconversation.com/australia-is-ripe-for-shareholder-activism-69422">shareholder ire</a> and a <a href="http://www.afr.com/business/banking-and-finance/cba-kills-shortterm-bonuses-for-ian-narev-top-executives-20170807-gxrd2d">swift board reaction</a>.</p><img src="https://counter.theconversation.com/content/81999/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Julie Walker is affiliated with Chartered Accountants Australia New Zealand. </span></em></p>Data shows that growth in total CEO pay has outstripped average Australian wage growth in every year of the last five years. But perhaps we need to look more closely.Julie Walker, Associate Professor in Accounting, The University of QueenslandLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/822072017-09-03T20:09:53Z2017-09-03T20:09:53ZThe costs of a casual job are now outweighing any pay benefits<p><em>Low wages growth has been a spectre hanging around the Australian economy for some time. In our series <a href="https://theconversation.com/au/topics/what-we-earn-42620">What We Earn</a> we unpick the causes for this and why some workers might be feeling it more than others.</em></p>
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<p>Workers aren’t being compensated as much as they should be for precarious work in casual positions. </p>
<p>One in four Australian employees today <a href="http://www.abs.gov.au/AUSSTATS/abs@.nsf/productsbyCatalogue/A8CAED8E5F9FB2E1CA257F1F00044E8C?OpenDocument">is a casual worker</a>. Among younger workers (15-24 year olds) the numbers are <a href="https://www.blackincbooks.com.au/books/generation-less">higher still</a>: more than half of them are casuals.</p>
<p>These jobs come without some of the benefits of permanent employment, such as paid annual holiday leave and sick leave. In exchange for giving up these entitlements, casual workers are supposed to receive a higher hourly rate of pay – known as a casual “loading”. </p>
<p>But the costs of casual work are now outweighing the benefits in wages.</p>
<h2>Costs and benefits of casual work</h2>
<p>Casual jobs offer flexibility, but also come with costs. For workers, apart from missing out on paid leave, there are other compromises: less predictable working hours and earnings, and the prospect of dismissal without notice. Uncertainty about their future employment can hinder casual workers in other ways, such as making family arrangements, getting a mortgage, and juggling education with work. </p>
<p>Not surprisingly, casual workers have lower expectations about keeping their current job. For example the <a href="http://www.abs.gov.au/AUSSTATS/subscriber.nsf/log?openagent&63330do006_201608.xls&6333.0&Data%20Cubes&A1DD74CD01213D99CA25811300187349&0&August%202016&02.05.2017&Latest">Australian Bureau of Statistics</a> (ABS) found 19% expect to leave their job within 12 months, compared to 7% of other workers. Casuals are also <a href="http://hdl.handle.net/2328/26203">much less likely to get work-related training</a>, which limits their opportunities for skills development.</p>
<p>The employers of casual workers also face higher costs. High staff turnover adds to recruitment costs. But perhaps the main cost is the “loading” that casual workers are supposed to be paid on top of their ordinary hourly wage. </p>
<p>Australia’s system of minimum wage awards <a href="https://www.fairwork.gov.au/how-we-will-help/templates-and-guides/fact-sheets/minimum-workplace-entitlements/minimum-wages">specifies a casual loading of 25%</a>. So, a casual worker paid under an award should get 25% more for each hour than another worker doing the same job on a permanent basis. In enterprise agreements, the casual loading varies by sector, but <a href="https://www.australianunions.org.au/casual_workers_factsheet">tends to be between 15 and 25%</a>.</p>
<p>The practice of paying a casual loading developed for two reasons. One was to provide some compensation for workers missing out on paid leave. The other, quite different, motivation was to make casual employment more expensive and discourage excessive use of it. However this disincentive has not prevented the casual sector of the workforce from growing substantially.</p>
<h2>Casual jobs aren’t much better paid</h2>
<p>One approach in determining whether casual workers are paid more is simply to compare the hourly wages of casual and “non-casual” (permanent and fixed-term) employees in the same occupations. This can be done using data from the 2016 ABS <a href="http://www.abs.gov.au/ausstats/abs@.nsf/mf/6306.0/">Survey of Employee Earnings and Hours</a>. </p>
<p>We compared median hourly wages for adult non-managerial employees, based on their ordinary earnings and hours of work (i.e. excluding overtime payments). If the median wage for casuals is higher than for non-casuals, there is a casual premium. If the median casual wage is lower, there is a penalty.</p>
<p>The 10 occupations below accounted for over half of all adult casual workers in 2016. In most of these occupations, there is a modest casual wage premium - in the order of 4-5%.</p>
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<p>The size of the typical casual wage premium is much smaller, in most cases, than the loadings written into awards and agreements. Only one occupation (school teachers) has a premium (22%) in line with what might be expected.</p>
<p>Three of the 10 largest casual occupations actually penalise this sort of work. And overall for these 10 occupations there is a casual wage penalty of 5%. This method of analysis suggests that few casual workers enjoy substantially higher wages as a trade-off for paid leave.</p>
<p>Taking a closer look involves controlling for a wider range of differences between casual and non-casual workers. <a href="https://doi.org/10.1111/j.1472-9296.2005.00181.x">One major Australian study</a> in 2005 compared wages after taking account of many factors other than occupation, including age, education, job location, and employer size. </p>
<p>All else equal, it found that part-time, casual workers do receive an hourly wage premium over full-time, permanent workers. The premium is worth around 10%, on average, for men and between 4 and 7% for women.</p>
<p>These results imply that most casual workers (who are in part-time positions) can expect to receive higher hourly wages than comparable employees in full-time, permanent positions. However, the value of the benefit is again found to be less than would be expected, given the larger casual loadings mentioned in awards and agreements. </p>
<p>It seems that while there is <em>some</em> short-term financial benefit to being a casual worker, this advantage is worth less in practice than on paper.</p>
<p><a href="https://doi.org/10.1177/0018726716686666">A recent study</a>, using 14 years of data from the Household, Income and Labour Dynamics in Australia Survey (HILDA), finds no evidence of any <em>long-term</em> pay benefit for casual workers. </p>
<p>The study’s authors estimate that, among men, there is an average casual wage penalty of 10% - the opposite of what we should see if casual loadings fully offset the foregone leave and insecurity of casual jobs. Among female casual workers, there is also a wage penalty, but this is smaller, at around 4%. </p>
<p>This study also finds that the size of the negative casual wage effect tends to reduce over time for individual workers, bringing them closer to equality with permanent workers. But very few casual workers out-earn permanent workers in the long-term.</p>
<h2>Inferior jobs, but fewer alternatives</h2>
<p>The evidence on hourly wage differences leads us to conclude that casual workers are not being adequately compensated for the lack of paid leave, or for other forms of insecurity they face. This makes casual jobs a less appealing option for workers.</p>
<p>This does not mean that all casual workers dislike their jobs – <a href="https://doi.org/10.1111/j.0022-1856.2004.00142.x">indeed, many are satisfied</a>. But a clear-eyed look at what these jobs pay suggests their benefits are skewed in favour of employers.</p>
<p>Despite this, the choice for many workers - especially young jobseekers - is increasingly between a casual job or no job at all. Half of employed 15-24 year olds are in casual jobs. </p>
<p>In a labour market characterised by <a href="https://doi.org/10.1177/0022185616634716">high underemployment</a> and <a href="https://theconversation.com/graduating-into-a-weak-job-market-why-so-many-grads-cant-find-work-45222">intensifying job competition</a>, young people with little or no work experience are understandably willing to make some sacrifices to get a start in the workforce. The option of “holding out” for a permanent job looks increasingly risky as these opportunities dwindle.</p><img src="https://counter.theconversation.com/content/82207/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Daniel Nicholson is affiliated with the Australian Labor Party and progressive think tank the John Cain Foundation. </span></em></p><p class="fine-print"><em><span>Josh Healy does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The costs of casual work are now outweighing the slim benefits in wages (and even those are not as much as they used to be).Josh Healy, Senior Research Fellow, Centre for Workplace Leadership, The University of MelbourneDaniel Nicholson, Research Assistant, Industrial Relations, The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.