Mon Jun 19

Tired of shrinking pay? The real drain on Australians' productivity is falling wages

Written by: Mark Humphery-Jenner, Associate Professor of Finance, UNSW Sydney

When was the last time you got a pay increase? Was it anywhere near the rate of inflation?

If it feels as if your wage is shrinking and cost of living pressures are growing, you’re in good company. And it might just be harming productivity. Here’s why.

Labor productivity (measured as gross domestic product per hour worked) has been shrinking for a year now, after decades of reasonable, albeit declining, productivity growth throughout the 1980s, 1990s and the first two decades of the 2000s.

All sorts of reasons ^[1] have been suggested. One is working from home. Commonwealth Bank chief Matt Comyn has ordered staff to return to the office ^[2] saying there are “certain types of work that are done more effectively in person”.

Reserve Bank research says it might be a resurgence in the proportion of wages set by industry awards rather than workplace agreements, meaning there’s less scope for rewarding performance.

Another is weak wage growth itself.

Shrinking real wages are demotivating

We must also look at wages. Wages are falling in inflation-adjusted (“real”) terms.

Adjusted for inflation, Australians are being paid less than they were in 2020.

Shrinking real wages are demotivating. While this is hardly a new insight, a bemusing number of people seem shocked by the idea that someone might be less keen to work when the real value of what they are paid is falling.

Research on executive compensation established this as long ago as the 1970s ^[3].

The whole field of compensation contract theory is based on the insight that a person’s sense of wellbeing goes up with money but down with perceived effort and risk. Money can induce people to work in ways they otherwise would not.

Company boards have long used incentives ^[4] to encourage otherwise-cautious executives to take risks. They even tailor compensation contracts ^[5] to executives’ behavioral traits.

How do workers produce less?

Consciously or otherwise, workers whose real wages are falling might care less about their jobs. They might work more slowly, or they produce worse-quality goods or services. And their attitude might permeate to other workers and to clients, undermining productivity more broadly.

If this happens at enough corporations – and certainly real wages are falling at enough corporations – it will harm GDP per hour worked throughout the entire economy.

Poorly paid workers watch the clock. Shutterstock

Sluggish wage growth can also affect the number of observed hours worked.

When wage growth and incentives are strong, ambitious workers will work more than their contracted hours, and won’t claim for it.

They might work on weekends and nights, easing staff scheduling and time zone issues, helping the firm do what it needs to do.

Uncounted extra hours don’t increase the “hours” in GDP per hour, but they do increase the GDP, increasing measured productivity.

When people stop doing unpaid overtime, while their recorded hours mightn’t much change, the GDP they produce declines.

There are reasons to believe Australian workers are no longer going above and beyond to produce more to the extent that they used to.

One is an increase in the number of Australians holding multiple jobs.

Over the past five years, the proportion of Australian workers holding more than one job has climbed from 6% to 6.7%, which appears to be an all-time high.

These official figures understates the extent to which Australians are turning their focus away from their main jobs for three reasons:

they exclude side hustles not counted as “jobs”
they exclude jobs in the cash economy
they exclude workers whose “new” second job is spending time with their family rather than working overtime.

The rise in multiple job holders is likely to both increase the total number of hours worked, and reduce the effort workers put into their main jobs.

And, as these second jobs are often more junior, it can mean highly-skilled workers producing less per hour than they would have had they put the hours in their main job.

The overall picture is one of a demotivated workforce realising there is no longer much point in “going the extra mile”, “going above and beyond”, or buying into whatever the latest euphemism is.

Returning to the office might make things worse

Although returning to the office might is touted as a way to boost productivity by building collaboration ^[6], it might well do the reverse.

There is ample evidence ^[7] to show that workers hate commuting. In capital cities, commuting can consume two hours per day driving, parking and allowing time for unexpected delays.

It is also costly. Workers will tolerate it if there is no other choice or it is a clear path to more money.

But if companies reinstate a two-hour commute and associated costs without paying more money, they are likely to further demotivate their workers, further undermining their willingness to “go above and beyond”, produce more, and be more efficient.

What’s needed are incentives

A straightforward solution is to create incentives that make it clear that workers who care more will get cared for more.

The incentives need to be in addition to standard raises. Using them as a cynical ploy to hold wages constant unless employees work ever harder will backfire.

The incentives must also be credible. It isn’t enough to create the vague possibility of promotions. Employers have to demonstrate that if their workers produce more they will be paid more. And the extra pay needs to be enough to matter.

An even better solution would be job-hopping.

Australians have long been lethargic ^[9] about changing jobs, allowing themselves to be hit with a “loyalty tax” for staying put.

The most recent Bureau of Statistics survey, for the year to February 2022, shows an overdue uptick in the proportion of workers switching jobs, from 7.5% to 9.5%.

The 2023 update ^[10] will be released at the end of this month.

The importance of job-hopping (switching jobs to get better reward) as a means of incentivising both workers and employers makes Labor’s proposed expansion of industry-wide enterprise bargaining ^[11] a bad idea.

If employers set wages together, they are unlikely to set them differently.

In any event, there is little sign that employers are interested in motivating their workers to produce more. It’s easier to blame workers and make a case for low pay rises.