ECON-DIT

Words by Jess Marnie

Have you ever asked for a pay rise? The answer is likely no, and neither have I. After all, what bargaining power might a student have to bring to the table in such a discussion? You may be interested to know that wage growth, the rate at which wages increase, has been extremely slow in Australia for several years. With inflation picking up around the globe, the cost of living is going up. Many are anticipating an increase in wages. So, should we expect to see our pay go up any time soon? As always, it depends. If low unemployment manifests as an increase in worker’s bargaining power, then perhaps, but while structural fixtures that dampen wage growth remain in place, it may be less than you were hoping.

Why are wage increases important? We are beginning to see prices rise with inflation heading towards the Reserve Bank of Australia’s target rate of between 2 and 3 percent. Without wages growing with them, Australians will suffer a loss of purchasing power. This means for the same hours worked, the amount of goods (groceries, fuel, hydro flasks etc) that you can purchase, will decrease. This is particularly bad news for those with a mortgage, as it will become harder for them to pay off their loans. In aggregate terms, this leads to a slowdown of household consumption. This in turn has a dampening effect on economic growth and reduces our Gross Domestic Product (GDP). You might choose to skip out on nice cocktails and new shoes to pay the bills, for others it might mean choosing between food and heating.

With an election looming, you have likely heard politicians and journalists talk about Australia’s unemployment rate. Economists would probably tell you that this is a headline figure with limited use for understanding the state of the economy, and they would be right. Nevertheless, it drives much of the economic debate in the political sphere. A lower unemployment rate is of course preferable. It currently stands at 4%, the lowest levels in 13 years. Broadly speaking, we are seeing a tightening of the labour market. Put simply, there is a smaller pool of unemployed workers looking for jobs. First year principles of economics would tell us that as demand exceeds supply, prices are expected to rise. Using this logic, one might think lower unemployment may lead to increased wages (as the price of labour goes up). This is certainly the thought process of our nation’s leaders at present. However, the tale of wages is one of twists, turns and external forces of which simple demand and supply models are poorly abridged versions.

Australia’s wage growth has been ‘stagnating’ since 2013. Granted, this period has been a lull for the economy as a whole, following the end of the mining boom and of course the pandemic. However, there are other

factors at play, largely to do with ‘bargaining power’ and who holds it. First of all, caps places on public sector wages have dampened aggregate wage growth as seen in the Wage Price Index (WPI). Historically, public sector wages have bolstered WPI, carrying private sector wages with them. This is because public sector wage growth spills over into the private sector. Employers would struggle to attract workers if they did not pay at or above public sector wages, thus, wages rise across the board. So, by introducing these wage caps, there is far less incentive for private firms to increase wages. Hence, we see the dampening effect linger over the past 9 years. Another potential factor is the erosion of unions. Unions play an important role in facilitating ‘collective bargaining’ for workers, this includes wages but also working conditions and leave entitlements. Think of this as strength in numbers. If you go and ask for a pay-rise, you’re unlikely to get it, but if you and your co-workers ask together, then you might have a chance. Union membership has been on a steady decline in Australia for decades, pairing this with increased regulation has seen instances of collective bargaining fall. Workers have been left with minimal pay increases, with no one to go in, to bat for them.

It is worth noting that all of this has coincided with a reduction in the share of overall Gross Domestic Product being paid to workers, from 58% in the 1980s to 47% in recent years. Reflecting an increase in the corporate share and stagnation in incomes. All the more reason to tax the rich right? A debate for another day perhaps.

Of course, other elements could be and would be at play, the effects of automation, as well as a shift towards global supply chains could well be impacting employee’s bargaining power. One thing for sure is that one off cash payments and cuts to the fuel excise are not sustainable nor effective ways to ease cost of living pressures. Steadily growing wages however, are. We can hope that upwards pressure on wages from unemployment will see wage rises in the coming months and years to keep up with inflation. Without sufficient bargaining power in the hands of workers the path ahead is unclear.