Australians Rediscover Wage Restraint, After 26 Years Of Growth
June 20th, 2017
Australian workers are earning an ever smaller share of the nation's economic rewards in a reversal that threatens to scupper 26 years of uninterrupted growth
The share of national income going to households has shrunk to its smallest since 1964, the year the Beatles first toured Australia.
The present share of under 52 percent compares to almost 56 percent in 1991, a pay cut that works out to A$70 billion ($53.3 billion) a year, according to Reuters calculations.
Wages are rising at the slowest pace on record and, at an annual 1.9 percent, slipped below the inflation rate early this year. With household debt already at all-time highs, many consumers are having to save less just to cover essentials. The savings rate is at a 10-year low.
At the same time, business profits are taking the largest share of the income pot since 2011.
If not reversed, the trend could end Australia's remarkable recession-free run. The A$1.7 trillion economy expanded at its slowest pace in eight years last quarter, with annual growth of 1.7 percent.
"We think there has been a sustained step-down in the pace of consumer spending growth as households adjust to the new world order of very low wage growth amidst the confronting reality of high mortgage debt," said ANZ senior economist Felicity Emmett.
While this is a global phenomenon, Australians now get a smaller share of the income pie than households in most advanced nations, according to Capital Economics.
"It wasn't always this way, with Australian households being close to the top of the international ladder in 1975. But they may need to get used to life closer to the bottom," said chief economist Paul Dales.
As a share of gross domestic product (GDP), Capital Economics says, the compensation of Australian employees is below the United States, France, Canada, the United Kingdom and even Japan. That might surprise Japanese Prime Minister Shinzo Abe, who long has berated companies to pay more, with little success.
Possible reasons behind Australia's decline include the usual suspects - technological change, globalization, the growth of financial markets and the waning of worker bargaining power.
In 1991, around 40 percent of workers were in a union and now fewer than 15 percent are.
The Reserve Bank of Australia (RBA) has confessed to being perplexed, noting wage growth was well below what would normally be associated with the current unemployment rate, a four-year trough of 5.5 percent.
OLD ARGUMENTS UPENDED
More Australian policymakers have recognized the danger.
"Some pick-up in the labor share of national income would be welcome," RBA Governor Philip Lowe said on Monday. "It would make us all feel better."
The country's Fair Work Commission (FWC) this month upended years of parsimonious restraint and raised minimum wages by more than double what industry bodies lobbied for.
The move affects about 2.3 million employees, or 20 percent of the workforce, and was bitterly opposed by business groups who presented the classic neo-liberal argument that higher pay awards killed jobs.
But a host of economic reports, especially a RAND Corp study of studies on the UK labor market, convinced the commission it had been "overly cautious" in past awards.
"Moderate increases in minimum wages are seen everywhere to have very low or no negative employment impacts," the commission concluded. "No new studies to the contrary were presented to the Panel for this Review."
Even the right-wing coalition government of Malcolm Turnbull has been sounding less dogmatic on the subject, if only because it realized slower pay growth meant less income tax revenue.
In May, Treasurer Scott Morrison declared record low wage growth the economy's "biggest challenge".
Yet change comes hard for a coalition that for decades lectured workers about the evils of high pay claims.
In its submission to the fair work decision, the government argued economists "generally agreed" that "excessive" minimum wage rises would cut employment, but did not cite evidence to support the assertion.
Morrison's budget predicted annual wage growth would almost double to 3.75 percent over the next four years, but included no policies encouraging such a dramatic turnaround.
Analysts say something bolder is needed to break the slow-wage cycle.
"The most direct way of boosting consumer incomes and potentially spending is for the federal government to deliver personal tax cuts," said Citi economist Paul Brennan.
Boosting consumer spending by 1 percent would cost the budget around A$17 billion. To pay for that, Brennan recommended abandoning a proposed corporate tax cut, delaying a rise in defense spending and slapping a tax on sugary drinks.
($1 = 1.3129 Australian dollars)