Money Work RBA finds possible solution to the riddle of low wage growth
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RBA finds possible solution to the riddle of low wage growth

Wage growth in Australia is at historic lows, and the reasons are something of a mystery.
Wage growth in Australia is at historic lows, and the reasons are something of a mystery. Photo: AAP
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Reserve Bank research has found another suspect in the mysterious case of low wages growth: “Superstar” firms using technological advantage to increase profits and/or win greater market share, but not to increase wages.

The Superstars’ success means lesser firms are being squeezed, making it harder for them to afford the capital investment to become competitive or pay workers more.

And several studies suggest the Superstars’ use of technology “is an important factor behind declining union membership and employee bargaining power and – especially in sectors and occupations where digitisation is extending to automation – falling job security and lower wages”.

According to a research discussion paper by RBA visiting scholar Geoff Weir, current low wages growth may be more than just a cyclical phenomenon. Instead, structural issues would mean lower wages growth for longer, with obvious implications for low inflation and interest rates.

(And for whoever wins the next federal election, the budget outlook is based on wages growth suddenly jumping next financial year – a prospect that looks doubtful if Mr Weir’s thesis is correct.)

One of the many fine things about the RBA is that it puts up its hand when it has been wrong. For the past seven years, the RBA has been forecasting wages growth using traditional economic orthodoxy of the relationship between unemployment and wages – and it has been spectacularly wrong as its graph shows. Hence the RBA has been working hard to find other explanations.

But while wages growth has been surprising on the low side since 2011 – and has been effectively flat in the private sector for four years now – labour’s share of national income has been falling for decades in Australia and other advanced countries.

Mr Weir says both the long-term erosion of labour’s share of income and the shorter-term problem of low wage growth “ultimately reflect structural shifts in bargaining power between labour and capital over the distribution of value added”.

“They [the Superstar technology leaders] are primarily using their market and bargaining power to absorb most of their firm-specific productivity gains into higher profits and lower output prices, rather than into higher wages. While at the bottom end of the scale, the productivity laggards do not have the capacity to offer anything other than low wage increases in order to remain in business,” Mr Weir writes.

He argues the productivity gap between the Superstars and the laggards may be key factors in lower overall productivity growth, labour’s declining share of income and downward pressure on average wages growth.

“Technologies make it easier and cheaper for firms to keep in touch with and monitor employees, whether they are in the office, at home, in different offices within the same country or in different countries.

“This has enabled firms wanting to increase flexibility and reduce costs to use cheaper overseas workers in parts of their production process and/or non-standard forms of employment domestically, such as self-employed, contract and casual work.

“While in many cases this has been beneficial for employees looking for more flexible working arrangements that meet their specific circumstances, a number of studies suggest it has also been an important factor behind declining union membership and employee bargaining power and – especially in sectors and occupations where digitisation is extending to automation – falling job security and lower wages.”

Mr Weir notes that increased consumer price awareness through online price comparisons is often cited as increasing pressure on companies to cut cuts.

“But the take-up of ICT (information and communications technology) is also having a more pervasive impact on many other aspects of business, including marketing, distribution, just-in-time inventory control, automation and the spread of web-based service providers.

“It has also made it easier and cheaper to co-ordinate complex activities across different locations, allowing firms to take greater advantage of geographical differences in wages and other costs by ‘unbundling’ production processes through the creation of global supply chains: the new globalisation.”

It’s sobering to remember that there’s a lot more of the digital technology revolution to come with artificial intelligence and robotics.

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