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.”

The minimum wage was increased 3.5% effective 1 July 2018 – the biggest increase since 2010. That large minimum wage increase accounts for virtually all of the modest uptick in the WPI experienced in 2018. In other words, it was active policy (namely, the decision by the Fair Work Commission to boost the minimum wage faster than either overall wages or consumer prices), not a reflection of underlying “market forces,” that explains why this indicator of wage growth slightly improved. Without that increase in the minimum wage, overall wage growth would remain below 2%.

This perspective should be considered when interpreting tomorrow’s release of new WPI data.

Of course, many other Australians will be required to work during this period, and so for them the appeal of this coming period is diminished. Adding insult to injury, however, is the fact that their compensation for working during this period is being significantly reduced as a result on ongoing reductions in penalty rates for Sunday and public holiday work in the retail, accommodation, and food and beverage industries. A new report from the Centre for Future Work puts a number on the total loss of wages that will be experienced by workers in the broad retail and hospitality sectors through the coming holiday period: $80 million this year, rising to $107 million for a similar period once the rate cuts are fully implemented.

The reduction in penalties for public holidays (by an amount equal to 25% of base wages for most workers in these sectors) was fully implemented on 1 July, 2017. The reduction in penalty rates for Sunday work is still being phased in: a third reduction in the rate will occur on 1 July this year. And for workers in industries covered by the General Retail and Pharmacy awards, another reduction will occur on 1 July, 2020.

Over one-half million Australians are at work in these industries on a typical Sunday. The income losses experienced by most of these workers (both directly and indirectly) are substantial: presently amounting to about $16 million in lost wages for each public holiday, and over $8 million (at present) for a Sunday. The unique concentration of public holidays within the 10 days starting on Good Friday (amounting to a total of 6 holidays or Sundays in most states) dramatically highlights the scale of those losses. Over that 10-day period, we estimate that wages will be $80 million lower than if penalty rates had been maintained. And the problem is getting worse, due to the further reductions in Sunday penalties that are coming. After 2020, if the remaining Sunday penalty rate reductions are fully implemented, the loss in wages would equal $107 million for a corresponding 10-day cluster of holidays.

The coming concentration of public holidays dramatises the magnitude of income losses resulting from the penalty rate cuts, but those income losses are experienced throughout the entire year. In the current financial year (from 1 July 2018 through 30 June 2019), we estimate aggregate income losses at around $630 million. That loss will double once the Sunday penalty cuts are fully in place, to some $1.25 billion per year after 1 July 2020. In sum, this policy imposes a substantial income loss on a group of workers who are already vulnerable to low and uncertain earnings.

The report also examines the job-creation record of the sectors in which penalty rates were reduced. Employers promised that lower labour costs would result in more hiring, but that promise has been broken. In fact, hiring in sectors where penalty rates were not reduced has been five times faster since July 2017 than in the retail and hospitality sectors (where penalty rates were cut). The idea that cutting penalty rates will spur more hiring has been disproven by real experience.

New data on private-sector business conditions confirm that wage increases paid in the private sector of Australia’s economy continue to plumb record lows.

The ABS’s quarterly Business Indicators report, released yesterday, indicates total wages and salaries paid out by private businesses grew 4.3 percent in the September quarter, compared to year-earlier levels. This only slightly exceeded the increase in total private sector employment during the same period. As a result, wages and salaries paid per employed worker grew very slowly – by just 0.43 percent over the year.

A new briefing note prepared by Dr. Jim Stanford, Economist and Director of the Centre for Future Work, reviews the data on average wage and salary levels in the private sector.  The 0.43 percent year-over-year increase implies a reduction in real wages for private sector workers (relative to consumer prices, which grew 1.9 percent over the same period) of about 1.5 percent.

Over the last three years, average annual growth in wages paid per employed private sector worker has fallen below 1 percent per year. Private sector wages are not only lagging behind consumer prices, they have also become de-linked from growth in real labour productivity (which continues to advance at about 1 percent per year).

The report also finds that business profits are constituting a growing share of total income in the private sector. In the September quarter, 75 cents of profits (gross operating surplus of businesses) were generated for private firms for every $1 paid in wages. That is the second-highest ratio of profits to wages since the ABS began collecting this data. The finding suggests that the labour share of total GDP will likely continue to decline in coming months.

In the year ending in the September 2018 quarter, business profits per worker grew by almost 9 percent – 20 times faster than wage payments per worker.