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Low unemployment equals higher wages - or does it?

Woman working in cafe and person holding cash
While the minimum wage is set by the independent Fair Work Commission, experts say there are other ways governments can influence wages. (Source: Getty)

Wages have been catapulted into the middle of the election, with Labor leader Anthony Albanese attracting criticism on Tuesday for supporting a boost to the minimum wage in line with inflation.

The comments followed an announcement from the Australian Council of Trade Unions (ACTU) that it backed a lift in the hourly rate of the minimum adult wage from $20.33 to $21.45.

According to Prime Minister Scott Morrison, pushing for a 5.1 per cent increase in the minimum wage was an ill-considered idea.


“It’s like throwing fuel on the fire of rising interest rates and rising cost of living,” Morrison said.

Last week, Morrison also said he did not have a “magic pen that makes wages go up or prices go down”, pointing out that the Fair Work Commission determined the minimum wage level each year “based on the best information they have”.

However, there’s mounting evidence to suggest governments can influence wage growth.

Dr Jim Stanford, who has just co-authored a report on the “wages crisis”, said it was impossible to explain the slowdown in wages on the basis of normal supply-and-demand factors in labour markets.

By that, he meant there had been no visible relationship between unemployment and wage growth since 2013. Traditionally, it’s been understood that when unemployment is low, employers have to pay higher wages to attract scarce work.

Inversely, when unemployment is high, workers will offer to work for less because they're desperate to find a job.

“That's the theory,” Stanford said. “But that theory has not played out in practice.”

Wage growth has stalled since 2013

Stanford said if you looked at the historical wage data, it was quite clear that something changed in Australia’s wage system around 2013.

Prior to 2013, wages grew by about 4-5 per cent each year.

“And that was both typical and desired, it was actually considered a good thing,” he said.

He said wages slumped after 2013 to hover around 2 per cent a year, and declined again during COVID disruptions.

These super-weak levels had since rebounded, but only back to the 2 per cent a year seen pre-pandemic.

Stanford said there were several policy factors that had held wage growth back since 2013.

This included failing to act adequately on new challenges, such as the gig economy.

In other instances, Stanford said the Government was actively keeping wages down, such as imposing pay caps on public servants.

The underfunding of aged care was another example, which he said had worked to keep wages very low.

He said the Government could not rely on lower unemployment to “magically solve the wages problem”.

“The Government has been predicting that for years, and it hasn’t happened,” Stanford said.

What you are missing out on

Another report by the McKell Institute also identified a collection of policy settings that had contributed to sluggish wage growth.

The report also identified how much more people would be earning if wage growth in the period 2007-2013 had been sustained throughout 2014-2021, imagining these unfavourable policy settings had not come into force.

According to the report, the average worker could be earning an additional $307 per week if wage growth had continued at pre-2014 levels.

Small businesses are not happy

Business groups have criticised a lift in wages, arguing that higher wages would add pressure as businesses struggled to get back on their feet after the pandemic.

Stanford was not convinced that businesses could not afford to pay higher wages.

“In Australia, profits have never been higher - as a share of our GDP - than they are during the pandemic,” he said.

“So it is absolutely false to say business is on the edge and businesses cannot afford higher wages.”

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