The submission also provided new analysis on the seasonal pattern of wage growth in Australia’s labour market. In recent years, quarterly wage growth has been twice as strong in the quarter that contains the annual wage award, as in the rest of the year. That attests to the growing structural importance of the annual award in supporting wages, and preventing wage growth from falling even lower.

The Centre’s submission was reported in the Australian Financial Review, and other media.

Many Australian employers have frozen the pay of their workers in recent years, typically justified on grounds of temporary financial duress. However, those pay freezes have a lasting negative impact on the long-run trajectory of wages. As a result, workers lose tens of thousands of dollars of income through the rest of their careers. To cap the losses, employers must implement special one-time catch-up pay increases to restore the pre-freeze trajectory of wages.

To illustrate the lasting, cumulative impact of pay freezes on workers’ lifetime incomes, a new Briefing Paper from the Centre for Future Work considers the case of an 18-month wage freeze implemented in 2014-16 by Jetstar. The pay freeze was implemented amidst financial losses at the airline. However, since then the airline (and its parent firm, Qantas) have returned to strong profitability, and executive compensation has soared. Normal 3% wage increases were restored beginning March 2016, and a one-time bonus payment was made at that time as “compensation” for the sacrifice of Jetstar workers. But the current incomes of Jetstar workers are still thousands of dollars per year lower than if the pay freeze had not been imposed.

The report considers three distinct categories of losses resulting from a pay freeze:

1. Loss of real purchasing power while the freeze is in effect.
2. Loss of future income resulting from the permanent downward shift in pay trajectory.
3. Loss of superannuation contributions and investment income resulting from lower pay.

The report quantifies these cumulating costs for the case of the pay freeze at Jetstar. Jetstar workers could lose $150,000 or more in cumulative earnings by the time they retire, despite the restoration of annual wage increments after 2016 and the one-time bonus. Moreover, workers’ superannuation accounts will also be suppressed accordingly: because of lower employer contributions (resulting from lower earnings) and lost investment income. On the basis of typical investment performance, the report estimates potential superannuation losses of $40,000 or more by the time Jetstar workers retire. Some workers could lose over $200,000 in lifetime incomes and superannuation because of the “temporary” wage freeze.

The only way to stop these ongoing losses from getting bigger (let alone to compensate workers for losses already incurred) is to implement additional catch-up wage increases that bring wages back to their pre-freeze trajectory. In the case of the Jetstar wage freeze, that would require a one-time increase of 6.1%.

The Jetstar case is just one of many instances of wage freezes being imposed on Australian workers in recent years, in both the private and public sector. The legacy of those wage freezes contributes to the ongoing stagnation of real wages in the Australian labour market, and to the historic shift in income distribution away from workers and toward businesses and investors. While it may seem as if a wage freeze is a “temporary” sacrifice, without offsetting catch-up adjustments it nevertheless continues to impose ongoing economic harm on affected workers.

The research refutes claims made by some commentators and lobbyists that higher superannuation contributions would automatically lead to lower wages, and hence would be self-defeating. The new research finds no statistical evidence for that claim in Australian empirical data.

The paper reviews economic statistics from the introduction of superannuation to the present. On average, wages were more likely to accelerate and grow at a faster rate when the superannuation guarantee (SG) rate was increased, than to decelerate or grow more slowly. This indicates a slight positive correlation between wages growth and changes in employers’ minimum SG rate.

The paper also reviews theoretical predictions and empirical findings from previously published economic research. Even under very restrictive and unrealistic assumptions about competitive market-clearing behaviour in labour markets, the expectation of a fully offsetting one-for-one trade off between wages and SG contributions only occurs in the special cases of perfectly inelastic labour supply, or perfect substitutability between voluntary and policy-induced personal savings. Neither of those conditions prevail in practice. More realistic economic models (that allow for responsiveness in labour supply, minimum wages, and other real-world features) do not anticipate a full trade-off – and many expect no trade-off at all.

The paper concludes that current record-low wage growth in Australia cannot be “fixed” by abandoning scheduled increases in the SG rate (which is currently legislated to grow from 9.5% of wages to 12% over a five-year period, beginning 1 July 2021). Abandoning those increases would only further suppress the total compensation received by workers, which has been falling steadily as a share of GDP for decades. Instead, weak wage growth should be tackled with direct wage-boosting policies; the determination of wages and superannuation contributions are largely independent policy decisions.

Employers argued before the Fair Work Commission that if their Sunday and holiday labour costs were reduced, they would hire more workers, and the Commission cited this logic in accepting employer demands for lower penalties. Now, with two full years of experience since the first reductions, there is growing evidence that the penalty rate reductions have not spurred job creation in retail and hospitality. To the contrary, our new report shows that employment growth in retail and hospitality has been far slower than in other parts of the economy (where penalty rates remained constant) — and job-growth in the two sectors actually slowed by more than half after penalty rates began to fall.

This briefing paper, authored by Dr Jim Stanford (Director and Economist of the Centre for Future Work) reviews disaggregated employment statistics for 19 Australian industries in the two years after the first penalty rate reductions were imposed on 1 July, 2017.

The retail sector created 24,000 new jobs in the two years since 1 July 2017, and the broad hospitality sector (including accommodation and food & beverage services) created 30,000. In both cases, over 100% of the new jobs were part-time — both sectors actually shed full-time work during this period. The rate of job-creation was less than half as fast during the last two years in both sectors, as it had been in the two years before penalty rate cuts began — even though the pace of job-creation in the broader economy accelerated during the last two years.

The retail sector ranked 15th out of 19 sectors in job-creation over the past two years; hospitality ranked 12th. Their combined rate of job-creation (up by 2.5% over the two years) was less than half the combined rate of job-creation in the 17 sectors which had no change in penalty rates. 92% of all jobs created in the last two years were created in sectors with constant penalty rates. The two sectors with reduced penalty rates created just 8% of new jobs in this period — even though they accounted for 18% of total employment at the time the penalty rate reductions began.

It is clear that lower penalty rates have not ignited new hiring in either of these sectors. Instead, job-creation in both sectors has deteriorated well below economy-wide averages in this period. Clearly it takes more than cheapening labour costs to create jobs. Stronger consumer spending (a goal which would be supported by higher wages, not lower wages) is far more important to hiring decisions in these two domestic service industries.

The Centre for Future Work has released new research showing that just 3 specific actions by the Commonwealth government would lead to a significant rise in national wage growth, adding over $10 billion per year to aggregate wage income within three years. That doesn’t single-handedly solve the whole wages crisis, but it would be a big improvement.

The three measures simulated in the report include:

1. Reversal of the reductions in penalty rates for Sunday and public holiday work in the retail and hospitality sectors.
2. Introduction of a “living wage” mandate for Australia’s federal minimum wage, moving it toward a level that would lift full-time full-year workers above standard benchmarks of relative poverty.
3. Removal of the Commonwealth government’s restrictive cap on wage increases for its own employees, and restoration of normal collective bargaining and traditional rates of wage increase.

Those three measures alone would boost wages for an estimated 3.3 million Australian workers, by a total of over $10 billion per year once fully implemented.That is equivalent to a 1.25% boost in aggregate national wage income, thus helping to lift overall wage growth in the economy as a whole from current sluggish rates (of 2.3%, according to most recent data) back toward normal historical rates (of 3.5% per year or more).

The report also considers broader positive benefits from supporting wage growth, including: stronger consumer spending (estimated to rise by $8.5 billion per year), stronger GDP growth (as businesses respond to the increase in purchasing power with expanded output and hiring), stronger government revenues (expected to rise by over $1 billion per year from these measures alone), and a positive spillover onto wage settlements in the rest of the labour market (as employers are pressured keep up with renewed wage growth).

The research is contained in a new report from the Centre for Future Work at the Australia Institute.  It shows that average nominal wages in Australia grew just 1.7% per year between 2012-13 (when the wage slowdown took hold) and 2016-17 (most recent tax data available). That’s below the average national rate of inflation over that period (1.9%), resulting in a decline in the average real wage.

While the wage slowdown was experienced across the country, some regions were particularly hard-hit. Real wage losses were especially large in Queensland and Western Australia. Moreover, the impact was disproportionate in regional communities in both states — located in some of the most fiercely contested electorates in the current federal election campaign. This suggests that public anger over falling real wages could be politically pivotal to the result on May 18.

The new research uses a novel source of data on wages: personal tax returns, summarised in Australian Tax Office reports. The data is produced on a financial-year basis (less frequently than other wage statistics, such as those publishedby the Australian Bureau of Statistics). However, the tax data allow a more precise disaggregation of wage trends by state, community, and electorate.

The 1.7% estimate of annual national wage growth from 2012-13 through 2016-17 based on the ATO data was a full half-point slower than the 2.2% growth reported for the same period in the ABS’s commonly-cited Wage Price Index (issued quarterly by the Bureau). The WPI series makes adjustments for changes in the composition of employment, in order to create a hypothetical fixed “bundle” of jobs. As a result, the impact of changes in job quality (such as the rise of part-time work, casualisation, and ‘gigs’) is not reflected in the WPI results. In the tax data, in contrast, all of these factors affect the evolution of realised average wages and salaries reported per tax-filer. This is thus a more complete and accurate indicator of the evolution of earnings actually received by Australian workers.

Analysis of tax data also confirms that while wage growth in all parts of the country fell to historic lows, two states were especially hard-hit: Queensland and Western Australia. In those states, wages grew more slowly than elsewhere, and real income losses were larger. Real wages fell by over 3% in Queensland, and over 5% in WA, during that four-year period.

Those two states are home to some of the most tightly contested electorates in the current federal election. The tax data allow calculation of wage trends by electorate – a level of detail not possible with other data sources.

The report estimates wage trends for 17 marginal electorates in the two hard-hit states: including all electorates decided by less than a 5% margin in the 2016 election. Real wages fell in every one of the marginal electorates. In 7 seats (6 of which are currently represented by Liberal or LNP members) the cumulative decline in real wages exceeds 5%.

“Perhaps it is not a coincidence that some of the tightest contests in the current federal election are precisely in those communities where real wages have declined the most,” said Dr. Jim Stanford, Economist and Director of the Centre for Future Work, and author of the report. “Public anger over cost-of-living issues is clearly understandable, given this hard evidence that real wages in these communities have fallen substantially.”

“It would be a poetic irony for the whole election to be decided by frustrated voters in these hard-hit marginal electorates, which have been seemingly left behind by economic growth in the rest of the country.”