United States: No Silver Bullet For Wages Growth, But There Are Solutions

Last Updated: May 29 2019
Article by Michael Tamvakologos

The debate on what is to be done about slowing wages growth of Australian workers is, understandably, receiving an increased focus in the midst of an intense election campaign.

The Labor Party has described this election as "A referendum on wages". The Australian Council of Trade Unions, under its "Change the Rules" campaign, argues that the workplace relations system is biased in favour of employers' who are choosing to keep wages low and taking this labour share in the form of corporate profits. The solution, we are told, is further regulation and to increase union rights and bargaining power so that unions can extract better wage deals.

This paradigm disregards significant and powerful international and Australian economic research which examines the root cause of slow wages growth, and concludes that the major factor is advances in, and reductions in the price of, increasingly sophisticated technology and the emergence of global supply chains. The material referred to does not suggest that declining union density or bargaining power have had any material impact. Misdiagnosis of this problem is very likely to result in poorly targeted solutions which will be at best ineffective and, at worst, exacerbate the problem being solved for (such as adding higher unemployment to slowing wages growth).

This wealth of research shows that slowing wages growth is not a uniquely Australian problem. It is a prevalent phenomenon across many advanced economies, irrespective of the architecture of their industrial relations system. Advances in many forms of technology have induced companies to chase productivity and efficiency by moving away from labour and toward capital with the effect that the labour share of income has steadily declined. The effects on workers have been most pronounced in advanced economies where labour costs are highest. The historically low interest rate environment (reducing the cost of investment) has played its part. Businesses of all shapes and sizes must continually make these choices if they are to succeed in a hyper competitive global market.

To take a snapshot of the available learning: in 2013, two University of Chicago Booth School of Business economists, in a paper published by Oxford University Press, concluded that the global labour share of income has declined consistently and by at least 50% since the 1980's in the large majority of countries and industries. In 2017 the International Monetary Fund examined the problem in its World Economic Outlook, noting that in advanced economies wage growth had flatlined. Closer to home, in November 2017 the Australian Treasury in its "Analysis of Wage Growth" reached similar conclusions and noted that "the relative price of investment to wages has fallen over time due to large falls in the price of machinery and equipment and computer software". In 2018 an OECD report concluded that across 24 OECD countries, real median wage stagnation has occurred concurrently with a decoupling in productivity growth (which has also slowed) mainly due to technological progress and the expansion of global value chains. Finally, last month the RBA in its paper "Is declining union membership contributing to low wages growth" concluded that the declining trends in unionisation rates are unlikely to have materially contributed to the decline in wages growth.

So if slowing wages growth is a global, macro, advanced economy problem, what is the solution? The answer inevitably will be multi-faceted and context driven. Ensuring Government policy incentivises investment in knowledge based capital is a common recommendation in the research. Bringing Australian workers as high up the skills value chain as possible is paramount. Constant innovation; supporting growth industries and training or re-training employees to work in them; stronger partnerships between Universities and business, will all form part of the mosaic. We could do worse than consider the recommendations of brilliant Philanthropist and self-made billionaire Ray Dalio, who clearly cares deeply about these issues.

Artificially lifting wages or increasing labour market regulation and union power will not work, at least beyond the short term sugar hit. As concluded in a 2017 OECD Economic Survey:

"Ensuring competitive and flexible product and labour service markets is particularly important in Australia. The country's geography separates markets, compromising competition for goods, services and labour. Whilst Australia's regulatory and policy frameworks are already relatively flexible and supportive, further improvement would enhance the economy's ability to absorb innovation and increase the share of businesses operating at the frontiers of technology and best practice".

Ultimately, ensuring Australian companies have every chance to compete and succeed, buttressed by Government and business support, gives us our best chance of ensuring that Australia's workers receive the high wages they deserve, and minimising the dislocation that can unfortunately occur in a rapidly changing global economy. Solution myopia in the face of new global problems will not serve us. It will set us back by distracting us from what really needs to be done to prepare for and thrive in a different world.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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