It feels like every business is facing a worker shortage, but when you ask employers "have you tried increasing wages?" the answer always seems to be "no".
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Is economics broken? Our basic model of the labour market assumes that when the demand for workers outstrips the supply of workers, employers will lift wages to compete for employees.
The advice economists gave when people lamented the low wage growth of the 2010s was to wait until the demand for workers picked up as the economy strengthened. Once that happened, we predicted, wages would start rising.
Well, here we are. The number of job vacancies is at a record high and real wages are going further backwards than ever before.
What gives? And what can we do about it?
The data suggests we might be looking in the wrong direction.
The first thing to note is the difference between real wages and nominal wages.
Nominal wages are the dollars your employer puts in your bank account. Real wages are what you can buy with those dollars: they are nominal wages adjusted for higher prices (inflation).
Turns out, employers have been giving pay rises after all. Nominal wages have been rising.
Job vacancies have more than doubled since the end of 2020 and nominal wages, as economic models would predict, have done the same.
In fact, nominal wage growth is at a 10 year high.
The real problem is inflation. The 3.3 per cent annual increase in nominal wages in 2022 is no match for the 7.8 per cent increase in prices.
The consequence is dire: real wage growth is the worst it's been since the ABS started collecting wage data back in 1998.
This is a double-whammy for workers.
Workers had a decade of weak real wage growth before the pandemic. Inflation was low, but so was nominal wage growth. Now that nominal wages have finally picked up, so has inflation, pushing real wage growth even further behind.
To break this cycle, we need to hit real wages from both directions: we need to get nominal wages higher and inflation lower.
This requires reform. The government can't spend its way out of this one.
Start with nominal wages. When we look at the data, there is something striking about who is getting pay rises and who isn't.
The people who get pay rises are the people who change jobs. It might be a "grass is greener" effect where employers pay more for a mysterious new employee than the ones they already have.
But whatever the reason, the data is clear: the best way to get a pay rise is to change jobs.
The problem is that people aren't changing jobs as much as they used to. The probability that the average Australian worker switches jobs has fallen from 11.3 per cent in the mid-2000s to 8.5 per cent more recently, according to the e61 Institute.
Less job switching means fewer pay rises. So, if we want to get nominal wages up (and boost productivity), we need to make it easier for workers to change jobs.
MORE ADAM TRIGGS:
There's lots of things getting in the way.
Stamp duties, car registration fees, occupational licensing restrictions and a lack of affordable housing make interstate and long-distance moves expensive and difficult.
Non-compete clauses are stopping a growing number of workers from switching to new jobs or starting their own businesses.
A lack of services in remote and regional communities rules out many towns as options for many people.
An inadequate social safety net makes a risky job change even riskier.
Fixing these problems will help workers switch jobs and get more pay. But policies like multiemployer bargaining risk doing the opposite by throwing even more sand into the gears.
Why switch jobs if your pay is the same regardless of the employer? After all, it's the jobs covered by an individual arrangement (rather than an enterprise agreement or award) that have been the main drivers of wage growth.
But boosting nominal wages is only half the problem. We also need to get prices down if we want higher real wages. Again, there is plenty the government could be doing.
One of the biggest sources of inflation is housing. To ease prices, state governments could reform planning and zoning laws to boost housing supply while the federal government reins in expensive tax policies that inflate demand.
In July 2009, NSW removed limits on the construction of granny flats. It was a simple legislative change that saw construction increase five-fold in the years that followed.
Transport costs are the second largest source of inflation. But we could push down the prices of cars and trucks by removing parallel importation restrictions so people can import secondhand vehicles safely and cheaply, with flow-on benefits for every industry that relies on transport.
The prices of clothing, footwear and furnishings have skyrocketed. We could bring them back down to earth by eliminating our remaining trade tariffs and adopting a regulator approach where we allow imports of products that have already satisfied regulators in America or Europe.
Prime ministers and treasurers are always asked: what do you stand for? What is your government about?
For this Prime Minister and this Treasurer, the answer should be simple, and it should be the organising framework for everything they do: higher wages.
- Adam Triggs is a visiting fellow at the ANU Crawford School and a non-resident fellow at the Brookings Institution.
Adam Triggs
Adam Triggs is a partner at the economics advisory firm, Mandala, a visiting fellow at the ANU Crawford School and a non-resident fellow at the Brookings Institution.
Adam Triggs is a partner at the economics advisory firm, Mandala, a visiting fellow at the ANU Crawford School and a non-resident fellow at the Brookings Institution.
