'Australia needs a raise': wage-earners have rarely collected a smaller share of the economy

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Things were so different in the 1970s. Safari suits were in fashion, the Holden Kingswood was a best-seller and Australia still qualified as a workers' paradise.

One statistic shows how good things were for wage earners back then: the proportion of national economic output being paid to workers was at an historic high.

That “labour share” – as economists call it – had climbed steadily during the post-war Menzies era and peaked at just over 58 per cent of gross domestic product in 1975.

Australia still qualified as a workers' paradise in the 1970s.

Photo: Stuart MacGladrie

It was a function of labour market rules at the time which fostered wage growth and a more equal distribution of income.

But things have changed.

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Australians living on a pay cheque in 2018 have seldom had a smaller share of the nation’s economic pie. The wages, salaries and other payments to workers including superannuation reached a post-war low as a share of GDP last year and has been bouncing around the bottom ever since.

Total compensation to employees was $874 billion in the year to March 31, or about 47 per cent of GDP which totalled $1.86 trillion.

Labour's declining share is bound up with one of Australia's biggest economic problems – sluggish wages. Reserve Bank governor Philip Lowe warns the very low rate of wages growth is “diminishing our sense of shared prosperity”.

A mix of economic factors has contributed to the unusually long period of weak wage increases.

 

Peter Chung, who quit banking last year after three decades in the sector, blames the rise of performance-based remuneration for constraining his salary.

“I went through a period of 10 years without a pay rise and yet at the same time profits were going up and up,” he says.

Peter Chung went 10 years without a pay rise as company profits soared.

Photo: Darrian Traynor

A series of studies published in the latest Journal of Australian Political Economy analyses the causes and consequences of the falling share of the economy going to wage earners.

Dr Jim Stanford, director of the Centre for Future Work and co-ordinator of the series, says that decline exposes an unhealthy imbalance in the economic bargaining power of workers versus their employers.

 

“Workers are producing more with each hour of output, visible in rising productivity, but they don’t have the bargaining power to win higher wages to go along with that productivity," he says.

“The result is a shrinking slice of the economic pie.”

An economic rebalancing

The 1970s peak in the labour share coincided with economic upheaval. The protectionist economic regime in place for decades had reached its limits and a combination of wage “breakouts”, soaring inflation and slow growth triggered financial and political turmoil.

The sweeping reforms of the 1980s saw the proportion of national economic output being paid to workers fall appreciably. After stabilising, a more gradual decline in the labour share took hold, beginning in the late 1990s.

 

The labour share of GDP is now around 11 percentage points lower than during the mid-1970s, which translates to a huge amount of money.

Stanford estimates that if the proportion of national economic output being paid to wages was at the same level as in 1975, Australian workers would have received more than $200 billion in extra compensation last year – or $16,750 extra income, on average, for each employed worker.

Meanwhile, the slice accruing to the owners of capital in profits has been on the rise since the 1970s. That so-called “profit share” of the economy reached a post-war peak in early 2009. After a dip following the global financial crisis it is again close to an historic high.

(The proportion going to small businesses, independent contractors and other self-employed individuals – call the “mixed income” share - has remained relatively stable).

“Almost all of the loss in labour share since the late 1970s has been offset by a corresponding rise in the GDP share of company profits,” Stanford says.

 

The economic rebalancing in favour of profits and away from labour following the reforms of the 1980s is usually cast as a healthy trend.

A report released this year by the Department of Industry’s office of the chief economist said the way Australian wages growth ran ahead of GDP growth per person throughout the 1960s and 1970s “was a major source of underlying inflation”. But it said one of the key 1980s reforms – the Hawke government’s Prices and Incomes Accord – meant “real wages and GDP per capita were gradually brought into alignment and alleviated inflationary pressures in the economy”.

The 'financial capital' factor

But has the balance now shifted too far?

The proportion of economic output going to the compensation of workers has fallen in many advanced economies since the 1970s.

 

But Stanford’s research shows the decline in Australia's labour share has been severe by international standards.

During the 1970s Australia had the fifth-highest share out of 25 OECD nations compared by Dr Stanford. But since then Australia has had 18th largest fall out of the 25. It means Australia now has a relatively low labour share - 15th out of the same 25 advanced nations for the average between 2010 and 2015.

“Australia’s decline in labour share has been among the worst third of OECD countries,” Stanford says. “And in one-third of countries, the labour share has been stable or even increased. So it can’t be argued this is a universal phenomenon.”

Economists have offered various explanations for the slump in labour's share including the weakening of unions, the effects of globalisation, greater automation and the rise of “superstar” IT companies that are extremely efficient with a relatively small labour force.

Griffith University economist Professor David Peetz draws attention to another factor – the influence of the “financial capital”.

 

He argues the growth and power of the financial sector has been a driving force behind the overall decline in the share of economic output being paid to workers as wages.

First, banks and other financial institutions have benefited disproportionately from the trend away from wages and towards profits in the Australian economy. The financial sector has captured more than half of that gain in the “profit share” in recent decades.

But Peetz argues the “preferences and decisions” of financial institutions has reshaped the behaviour of many non-financial firms.

This process of economy-wide “financialisation” has also contributed to workers’ shrinking share.

“Financialisation causes all parts of the economy — including its international linkages — to operate in a particular way, enhancing the mobility and mobilising power of capital but restraining that of labour, leading to a structural shift in income distribution away from wages towards profits and executive remuneration,” he writes in the Journal of Australian Political Economy.

 

And yet, the income share going to finance workers, especially at the low and middle level, has also been squeezed despite huge financial sector profits.

Peetz estimates the portion of national income going to workers in the financial sector has actually declined over a quarter of a century.

Peter Chung isn’t surprised by that finding. He says many finance workers feel “distraught” about the contrast between their own pay and conditions and the profitability of the sector. Chung, who lives in Melbourne, says many middle and lower-level workers in the sector “are being pushed harder and harder but their wages are being squeezed”.

Kim Burman, a bank teller made redundant when the ANZ branch in the NSW south coast town of Gerringong closed in January, says she recently went for four years without a pay rise. “People are pissed off,” she says. “The big bank profits are coming at the expense of wage rises and jobs. But they just don’t care.”

Stanford warns the overall decline in the share of GDP going to wage earners will have lasting economic consequences. “Since wages are lagging behind productivity, workers essentially don’t have enough purchasing power to buy back the goods and services they produce,” he says.

 

Stanford believes a “systematic” effort by policy-makers is required to rebuild and modernise the institutions that influence wages and the distribution of income.

“When wages do not rise with productivity, the traditional implicit contract between workers and employers is broken,” he says.

“Workers used to get paid more, when they produced more, and that helped to motivate innovation and efficiency gains. That is no longer the case. To boost purchasing power, and restore the traditional link between wages and productivity, Australia needs a raise.”