Wed Jul 10

Why real wages in Australia have fallen while they’ve risen in most other OECD countries

Written by John Buchanan, Professor, Discipline of Business Information Systems, University of Sydney Business School, University of Sydney

Australia is now in the same league as Lithuania, Estonia and Hungary when it comes to cutting real pay, according to a new OECD report.

These are the only countries where cuts in real pay – pay adjusted for inflation – have been more severe for low-paid workers than those on higher salaries.

The OECD’s latest Employment Outlook 2024 ^[1] reports that, compared with the period immediately before the pandemic, real wages are lower today in 16 of the 35 countries.

Australia’s real wages are 4.8% lower than pre-pandemic levels while across the OECD real wages over the same period have, on average, risen 1.5%.

How did we get here?

Wages are an artefact of both market and institutional forces. As economist Thomas Piketty ^[2] has noted, “technology and skills set limits within which most wages must be fixed”, while institutions such as unions and government policy determine the wage levels that actually prevail in any particular country at a given time.

In recent decades, the institutions that shape wages have been transformed. Employers today enjoy far more bargaining power than they did in the era of full employment capitalism (that is, the postwar era up to mid-1970s ^[3]).

Employers have far greater bargaining power than in the past. Peter Rae/AAP ^[4]

This has not been unique to Australia. The OECD reports that several countries with which we normally compare ourselves are also struggling with real wage decline.

These include Canada, New Zealand, Norway and Japan ^[5]. Australia’s road to real wage decline has, however, been distinctive. There have been two profound changes.

The shift to enterprise bargaining

The first was to shift to enterprise bargaining in the late 1980s and early 1990s. Before this change, Australia had a distinctive system that combined collective bargaining and arbitration.

Well-organised unions in sectors such as manufacturing, construction, road transport, warehousing and coal mining set standards for the rest of the community.

Industrial tribunals then generalised these gains by increasing award rates of pay for all workers. In a nutshell, it was a system where the wage gains of the strong flowed to the weak ^[6].

Enterprise bargaining destroyed that system. It meant wage increases for the strong were quarantined to the enterprises where they worked. The rest of the workforce had to fend for itself.

The very low-paid receive some minimal wage protection in the annual wage review directed at the most vulnerable members of the workforce ^[7]. But even in this “reformed” system, wage leaders still played a role.

They set community norms that other workers could take as a standard for the going rate of a wage increase. With the decline of blue collar work and the rise of services, the nature of the wage leaders changed.

The changing workforce

In the 1960s, one in four worked in manufacturing, while other well-unionised blue collar sectors accounted for a further 15% of employment.

Today, manufacturing accounts for less than 7% of the workforce ^[8], and much blue collar work has been either replaced by automation or transformed through things such as outsourcing and labour hire.

Manufacturing has shrunk since the 1960s, accounting for just 7% of the workforce. Julian Smith/AAP ^[9]

In the late 1990s and early 2000s, new sectors such as education and health ^[10] emerged as pace-setters in defining wage norms.

Teachers and nurses in states such as New South Wales set standards through vigorous campaigns, and associated work value cases won wage rises of 8–10% in nominal terms and 4–5% in real terms.

These standards then flowed to other public sector workers and the community more generally as going rate wage increase norms.

All this ended in 2012. This marked the second major change.

In that year, the newly elected O’Farrell coalition government in NSW legislated for a cap that prohibited annual wage increases above 2.5% for state government workers.

This then became the norm as all other jurisdictions in Australia followed this model. This cap remained in place until the defeat of the NSW coalition government last year.

The cap worked with ruthless effect during the post-COVID inflationary surge. As a result, real wages for teachers, nurses and other government workers ^[11] have fallen by more than 10% in the post-COVID era.

What will it take to change Australia’s real wage problem?

In 2023, the incoming NSW Labor government removed the cap, and wages for public sector workers began to move again.

Last year the average wage rise for NSW public sector workers was 4%. NSW Teachers achieved gains of between 10% and 14% in a one-year agreement. Paramedics gained an average of 8% a year in a three-year agreement ^[12].

Victorian nurses recently settled for 28.4% over four years ^[13].

These recent changes are indicative of addressing the first of the two major factors holding back real wage growth. But the restraint on wage growth entrenched in our system of enterprise bargaining remains.

Changing our approach

The OECD observes ^[14] that in those countries where real wages have risen in recent times, inflationary pressures have been contained as businesses have taken a cut in profits.

Indeed, it notes

the growth … in profits over the last three years allows for more buffering against the inflationary pressures stemming from the recovery of real wages.

It is vital that the debate on wages policy move beyond the tired arguments of market economists fighting the battles of the past – obsessed as they are with a fear of a “wage-price” spiral ^[15].

In Australia, real wages have been suppressed for too long.

We need a mature debate on how this legacy can be overcome in a sustainable way. The OECD observations about excess profits providing the capacity to absorb future wage increases is an important contribution to the debate.