Paradise Lost? The race to maintain Australian living standards

April 24, 2015

Progressive Economics

April 2015

By David Hetherington

Executive Summary

After the long Goldilocks period of the Australian economy, living standards for middle Australia are now under threat. Nominal wage growth is slowing quickly. Real wages have actually fallen.

Two decades of unprecedented prosperity added to the myth of Australian exceptionalism. Not only did the Australian economy grow incredibly strongly, it distributed the gains more fairly than almost any other developed economy. Lower- and middle-incomes rose year on year: the rising tide did lift all boats.

There’s no agreement that this was a good thing. Numerous business leaders, like Maurice Newman (2013) and Gina Rinehart (2012), have suggested that local wages are too high for Australian companies to remain competitive.

When living standards were rising steadily, the debate was academic. But now it matters. If we don’t get it right, the living standards of working Australians will fall. What’s more, Australia’s straitened budget position will deteriorate further as lower wages result in lower income tax receipts for government.

This paper explores what has driven rising wages growth, why the gains were more fairly distributed, why it’s come to a halt, and what we can do about it.

It finds that wages growth was driven by a combination of impressive policy reform and good luck, in the shape of a commodities super-cycle. Our analysis shows that this combination put, on average, an extra $484 each year in the pocket of the median Australian worker from 2001 to 2014.

These gains were possible because of strong improvements in labour productivity. Newman and Rinehart were wrong: productivity made these wages rises affordable. They flowed to workers because, unlike in other rich countries, Australia’s collective bargaining system meant workers got a fairer slice of aggregate economic growth.

Set against these income gains, we find that workers are commuting an extra 56 unpaid hours per year compared to 2002, and are bearing considerably more employment risk as a result of casualisation.

Now, as the effects of economic reform and the commodities boom have passed, wage growth has slowed dramatically. Nominal wage growth has fallen or remained flat in each year since 2010, and in 2013, real wages actually contracted, taking $118 out of the pocket of the average worker.

In addition Australia’s collective bargaining framework is weakening, as union coverage diminishes, shifting the split of national income towards profits and away from wages. Wages’ share has fallen from 65.6% at the turn of the century to 59.7% by 2012 (Cowgill, 2013: 9).

As Ross Garnaut has warned (2013), Australia must either reform once again or face a dramatic downwards adjustment in wage levels and living standards.

This reform must start now. To continue to lift labour productivity, we must lift our national investment in hard infrastructure like transport and broadband, as well as soft infrastructure like skills and education. A reluctance to borrow is not an excuse for not investing. What’s more, we must maintain the employment protection framework that has made Australia’s economy so fair.

The absence of such reform would mark a failure of capitalism in the modern social democratic context. If the promise of capitalism today is higher living standards over time, it is in danger of failing ordinary Australians in the years to come. And if Australia, for so long the workers’ paradise, can’t deliver better living standards, what social democracy can?