Job Growth No Guarantee of Wage Growth

Measured by official employment statistics, Australia's labour market has improved in recent months: full-time employment has grown, and the official unemployment rate has fallen. But dig a little deeper, and the continuing structural weakness of the job market is more apparent. In particular, labour incomes remain unusually stagnant. In this commentary, Centre for Future Work Associate Dr. Anis Chowdhry reflects on the factors explaining slow wage growth -- and what's required to get wages growing.

Job Growth No Guarantee of Wage Growth

by Dr. Anis Chowdhury

'Remarkable' jobs growth raises hopes for wages” was the headline for a recent Sydney Morning Herald opinion piece by Clancy Yeates. He bases this claim on “some brighter news on the labour market to balance the bad: there is something of a jobs boom under way”.  Apparently “more jobs have been created in 2017 in net terms than any year since 2005, with 371,000 new net jobs so far this year”. Clancy Yeates also points to “the lowest number of unemployed people per unfilled position since 2012”.

This optimism is also shared by the Treasury Secretary John Fraser. In his opening statement at the recent Senate budget estimates hearing on 25 October, he said, “We expect that a period of stronger growth and falling unemployment will lift wages in the next few years.” He further noted, “We do expect that as the cyclical constraints that have weighed on the economy recede wages growth will accelerate.”

The RBA also holds a similar optimistic view. Philip Lowe, the RBA Governor, in his September statement observed, “Employment growth has been stronger over recent months and has increased in all states. The various forward-looking indicators point to solid growth in employment over the period ahead. … stronger conditions in the labour market should see some lift in wages growth over time.”  He had the same positive view in his October statement.

But can we really be so confident that job growth will eventually lead to wage growth? And even if it does, would it be strong enough to catch up and compensate for the losses incurred from such a long period of wage stagnation?

Unfortunately, the answer to these questions is a resounding 'NO'. This so-called remarkable jobs growth will not result in an eventual wage growth sufficient to close the wages gap. This has been confirmed by the latest data showing wages rose by less than expected last quarter; even a significant mandated jump in the minimum wage failed to lift the rate of growth of workers' pay across the economy. The most broad measure of average earnings growth (derived from GDP statistics) has actually turned negative – the weakest since the mid-1960s.

The reason for this contradiction is very simple – it is rooted in the different nature of new and old jobs. Jobs, whether part-time or full-time, are now more insecure. Just consider some recent news. The NAB has announced 6,000 job cuts by 2020 even when it announced $6.6 billion profit! Earlier Telstra confirmed 1,400 job cuts.

Job insecurity is not just a phenomena in the private sector. Governments – State and Commonwealth – have also joined the new trend. For example, the NSW department of Finance Services and Innovation has notified the union representing the cleaners that employment guarantees in place since 1994 "will not be extended in the new contracts from 2018".

The optimists seemed to have decided to ignore what Alan Greenspan, the former chairman of the US Federal Reserve, said in his Congressional hearing two decades ago (on 26 February, 1997). Explaining why “the rate of pay increase still was markedly less than historical relationships with labor market conditions would have predicted”, he said: “Atypical restraint on compensation increases … appears to be mainly the consequence of greater worker insecurity.”

He clearly elevated job insecurity to major status in the Fed’s policy analysis. Workers have been too worried about keeping their jobs to push for higher wages. And this has been sufficient to hold down inflation without the added restraint of higher interest rates.

But Greenspan also implied that workers’ fear of losing their jobs was not in itself a sufficient explanation for their failure to push for significant wage increases. The sense of job insecurity has to be rising over time; that is, continually getting worse. Because once the level of insecurity leveled off, and workers become accustomed to their new level of uncertainty, their confidence may revive and the upward pressure on wages would resume. That is particularly true when the unemployment rate is low, as it is today (at least officially).

However, looking at the length of contracts, Jeff Borland, a leading Australian labour economist, finds no evidence of increased job insecurity in Australia.  Others have reported similar findings, while others cite different data to indicate a growth in insecurity. A new ABS survey also showed that while there had been an increase in the number of people with more than one job since 2010-11, those doing multiple jobs as a proportion of the workforce had remained almost completely unchanged at 6%.

Job insecurity is notoriously difficult to measure. It is not the length of contracts or whether a job is full-time or part-time, that matters. It is the constant threat of losing jobs or pay conditions despite tenure due to constant restructuring that the workers fear. It is the news like that from the ice cream manufacturer Street wanting to terminate its enterprise agreement, or announcements like the one from the NSW department of Finance Services and Innovation, which generate the sense of job insecurity.

It is this sense of job insecurity and fear of not finding a decent job after losing one (as experienced, for example, when Holden and Toyota recently closed down) which Alan Greenspan had in mind when he calibrated Fed’s monetary policy levers. Thus, there has to be continuous restructuring in the guise of addressing falling or stagnant productivity to keep lid on wages, while the real intent is creating fears among the working class.

When nearly half the Australian families (41%) feel job security is chief among their concerns, this supposedly remarkable jobs growth won’t generate pressure for wage growth as hoped by the optimists. “Insecure, stressed, and underemployed: The daily reality for millions of Australians”, is how David Taylor summarised the labour market in Australia. This is experienced even as profits are growing at their highest rate in two decades.

Governments – State and Federal – should worry about rising job insecurity, instead of adding fuel to the fire with their own employment restructuring initiatives. The high level of job insecurity doesn’t just have an effect on wage growth and inflation. Recent research has found that it “cuts to the core of identity and social stability – and can push people towards extremism”.  We all have a stake in creating more secure jobs, and fairly rewarding those who perform them.


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