Australia is enjoying the strongest period of job creation we have seen in decades. Having endured some tough times in the prolonged wash-up from the Global Financial Crisis, Australian businesses are now starting to see the better days ahead that I spoke about in this year’s Budget.
Importantly, as they see these better days emerging, they are responding in the best way possible - by giving more Australians a job and investing into their future, laying down the foundation for our next growth phase. We have now seen 11 consecutive months of jobs being created - there has not been a longer run of jobs growth in 23 years.
In the past six months, we saw the strongest gain in jobs since the Sydney Olympics; more than 250,000 Australians stepping out of the unemployment queue or setting out at the beginning of their career. In the past year, over a quarter of a million Australians gained full-time employment - the strongest annual gain in full-time employment in six and a half years. Earlier this year we saw the fastest six-month gain in full-time employment since records began 40 years ago!
In August alone, more than 54,000 Australians went out to find a job and got one. And if you thought that was great news, consider this: 40,000 of those jobs were full time, and almost 27,000 of those jobs went to young Australians. Those workers are to be congratulated, as are the businesses that assumed the risk, took the punt and gave them a job.
The Turnbull Government’s successful record on jobs is now a fact not a slogan. It’s an outcome - 800,000 jobs created under our watch, 500,000 in the last two years, and 325,000 in the last year alone. More Australians are engaging with the labour market, pushing the participation rate to the highest level in five years, and the female participation rate to the highest on record. And it is a strength that is broad-based across the economy. In the past year jobs were created in the agriculture, construction and services industries, as well as to a much lesser extent in mining and manufacturing. Within services, the strongest jobs growth came in the health, education and retail trade.
While the recent jobs growth has been great for those 800,000 Australians and their families, for eleven and a half million other Australian workers, it has been a long time since most of them have had a decent pay rise.
And the bills that are jammed under their fridge magnets at home, in particular the ones you can’t avoid like power, rent, rates or the mortgage; they aren’t going anywhere.
In this year’s Budget, I announced a series of initiatives to ease the anxiety of Australians, by guaranteeing the essentials they rely on, such as Medicare and public school funding, while taking action to put downward pressure on the rising housing and electricity costs. But the best way to deal with rising costs of living is to be earning more, to be taking home more pay.
Together with growing our economy and balancing the budget; increasing what Australians earn is one of my most important objectives. It’s not just about more jobs, it’s about better paying jobs. This is what our national economic plan is working to achieve.
Consistent with this commitment, earlier this year I tasked Treasury to complete a thorough analysis of what was happening with wage growth in Australia - or more accurately what was not happening. I asked them what were the factors weighing down wage growth and what would be the key drivers to boosting the take-home pay of Australians. This was work that they undertook with the RBA, the ABS, the Department of Employment and other government agencies. It has been a big job and I commend them for what they have been able to pull together.
This evening I want to share with you some of their findings.
As we know, wages grew by a subdued 1.9 per cent through the year to the June quarter 2017 - the slowest annual growth in at least 20 years. This frustrating environment of low-wage growth is neither a unique or sudden phenomenon. Many advanced economies - including the US, UK and the euro area - have been wrestling with weak wages growth since the GFC. The story of advanced economies has been characterised by slow growth in labour productivity; inflation expectations remaining low after the GFC, spare capacity in the labour market being gradually taken up, but without so far a proportionate response in wage growth.
That said, they are expecting things to change. The US Congressional Budget Office is projecting wage growth to lift from 2.4 per cent in 2016 to 3.4 per cent in 2019; the UK Office of Budget Responsibility projects a rise from 2.1 per cent to 3.0 per cent over the same period, while the European Central Bank is projecting wages growth to rise from 1.2 per cent to 2.3 per cent.
In Australia, wages growth has been heavily impacted by mining investment boom washing out of the system, as the economy attempts to rebalance itself from the extraordinary terms of trade boom that fuelled our nation’s prosperity for almost a decade.
In the past five years, since around the peak of the mining investment boom, wage growth has eased to an average annual rate of 2.3 per cent, compared to the average of 3.6 per cent between the September quarter 1997 and the June quarter 2012.
The story is also subdued when looking at real wages - that is wages after accounting for inflation. Real wages in the past five years have averaged half of what they did in the preceding decade.
If you examine the broader measure of growth in Average Earnings in the National Accounts (AENA) - which takes into account if workers are receiving any other benefits - the picture remains stark.
Its growth is back to flat, after showing some promise in early 2014.
At the coal face, fewer than 10 per cent of jobs whose wages are adjusted are receiving pay rises in excess of four per cent - the lowest level since at least 2000. Ten years ago this was around 40 per cent.
In short, growth in household incomes has been subdued for some time - since the global financial crisis but especially since the peak of the mining investment boom. This is not a problem that is affecting one or two states in isolation, nor is it centred on certain industries or pay grades. It affects those on awards, collective agreements or individual agreements alike, and it affects those in regional areas as much as those in cities.
This is largely a nationwide story.
Certainly, Western Australia may have felt the effects more than other states, given it is following some very strong years of wage growth courtesy of the mining investment boom, falling from growth in excess of four per cent for an entire decade down to 2.3 per cent in the past five years.
Despite its subdued recent performance, wage levels in Western Australia are relatively higher compared to the rest of the country and remain higher than they were a decade ago. But all States and Territories have experienced the downshift in wage growth, as well as all regions and cities. While average wages in capital cities remain around 20 per cent higher than those in regional areas where costs of living are less, wage growth in recent years has been similar. And this takes in, of course, the sharp slowing in wage growth in mining regions - down from 8.5 per cent in 2011-12 to around 2.3 per cent in 2014-15.
This does not suggest a period of growing inequality, with one nation split into the haves and have nots. Such a notion is backed up by research conducted by the Grattan Institute in its Regional Patterns of Australia’s economy and population released last month. It determined the gap in incomes between cities and regional areas was not getting bigger. They called this notion of an economic divide a “misconception”.
The wage growth weakness we are seeing has also been indiscriminate across industries and occupations. For example, occupations that are described as more cognitive or non-routine, such as managers and professionals have experienced wage growth as low as more routine occupations. Everyone is feeling the strain, although some more acutely than others. Full-time workers with a university education fared better than those without from 2005-2010, since then they have experienced lower wage growth than those with no post-school education.
Younger full-time workers under 35 have also experienced slower wage growth.
Treasury’s research also debunks the populist theory that soft wages growth has also contributed to growing income inequality. It is in fact the opposite. As I have said on numerous occasions, unlike many other advanced economies, our tax and welfare system has protected Australians against rising inequality since the GFC.
When controlling for hours worked, wage growth has been broadly uniform across the employee income distribution since 2005. A notable exception in recent years has that growth in wages for full-time employees has been fastest for those in both the highest and lowest income deciles, with middle-income earners having more subdued growth.
This result points to the potential emergence of job polarisation, with simultaneous growth of high education, high wage jobs and low education, lower wage jobs (which benefit proportionately more from our tax and transfer system) at the expense of middle-education, middle wage jobs.
These findings do, however, back-up the latest reading of the Household Income and Labour Dynamics in Australia (HILDA) Survey, which actually shows that that there had been no increase in income inequality since the GFC, indeed it had marginally improved in the most recent survey.
These findings were backed in by the ABS Survey of Income and Housing released a couple of weeks ago.
Nonetheless, I understand that in a period of subdued wage growth people can rightfully feel like things are not getting better and can see others doing better than them.
Labor has chosen to cynically exploit this by seeking to leverage these people’s genuine concerns, promising that they can only do better if they make others do worse. It’s a con.
The Government has not only acknowledged and sought to understand the deep frustrations Australians are feeling over low wages growth, but we are doing the work to understand what is driving these outcomes and implement policies that will turn this around. The strong growth in jobs is a substantial down payment on the success of our approach to date.
Central to our continued response is embracing the economics of opportunity, providing hope, rather than surrendering to Labor’s cynical politics of envy.
There are three key factors that I wish to pick apart tonight that not only shine the light on what is behind this period of slow wage growth, but also show how those key factors are now becoming reasons for increased optimism.
The first key driver is spare capacity in the jobs market.
During the Global Financial Crisis, Australia’s unemployment rate took a noticeably different path to many of our global peers. While the US, and the UK unemployment rates spiked sharply, our increases were measured in comparison. The same feature has occurred on the downside.
So while spare capacity in the labour market was being squeezed in the US and UK due to the sharp downward movements in their unemployment rates, there remained a certain amount of slack in our labour market.
That slack means workers cannot push for higher wages as strongly as they potentially could have if there was less competition for their job.
At 5.6 per cent, while down ½ a percentage point over the past couple of years, our unemployment rate remains above what Treasury would deem full employment at roughly 5 per cent. But this is not a big enough gap to warrant such downward pressure on wage growth.
Wage growth is weaker than the unemployment rate would normally imply. That rate is simply not capturing the degree of slack in the labour market.
There are potentially a few reasons for this.
One is the degree of underemployment in the economy. While the unemployment rate has declined in recent years, the rate of Australians who have jobs but wish to work more hours, remains elevated at around 9 per cent.
Our underemployment rate is significantly above the OECD average and while underemployment in the UK, the US and New Zealand has been dragged downward over the last decade, our rate has steadily risen.
But in some respects this is the continuation of a trend that has been occurring for decades.
Australia’s share of part-time employment has grown to almost one third of total employment. In large part, this reflects strong growth in female employment, with the female participation rate reaching a record high of 60 per cent in August, up from around 43 per cent 40 years ago.
Similarly, the economy’s transition to a more services-based economy has exacerbated this trend, given by its very nature there is more part-time employment in these industries.
Of course there is nothing wrong with increased part-time work, which can provide flexibility for mums and dads working around school hours, and students who want to work around classes.
Part-time work is a real job, it pays real money and is important to real families and individuals who depend on it to support their standard of living.
This flexibility has allowed businesses to reduce the hours of their employees when things are tight, rather than sack workers or cut wages.
For small businesses owners, this reluctance to lay off workers means they have had to sacrifice and dip into their own pockets to ensure their staff either maintain their wages or receive a small rise.
So underemployment, this spare capacity in the jobs market, may explain some of the weakness we are seeing in wage growth.
But we should keep in mind that, on average, underemployed workers are not seeking the same amount of additional hours as an unemployed person, so they don’t contribute to spare capacity to the same extent.
But we still want to see that underemployment rate start to fall. Which is why the recent strength in full-time employment growth has been so encouraging.
And looking at a broader measure of capacity, Treasury’s Labour Market Conditions Index, there are some positive signs for all to see.
This measure takes into account things like unemployment figures, participation rate, and hours worked.
Pleasingly, the index is back in positive territory, having spent the majority of the last six years in the negatives, confirming that labour markets are tightening, and some of that spare capacity is now being removed.
And importantly, job advertisements which continue to increase at a pace that suggests this revival we are seeing in our jobs figures is not a flash in the pan.
We have seen the underemployment rate fall over the past six months and the underutilisation rate - that is unemployment and underemployed - has fallen to its lowest level in eighteen months. And in the most recent NAB quarterly business survey, capacity utilisation was at its highest level since the GFC.
In other words there is now clear evidence that the pressure is building again. RBA Governor Phil Lowe noted that the RBA has seen evidence from its liaison program that “where the demand for labour is strong, wages are increasing a bit more quickly than they have for some time”.
The second key driver of nominal wages is inflation expectations - how businesses and employees view where inflation is headed directly influences wage negotiations.
As has been noted publicly before, including recently by Governor Lowe, in the long-run we would expect nominal wage growth to be equal to productivity growth and the rate of inflation.
Inflation expectations have certainly declined in the aftermath of the mining investment boom.
In periods of rising inflation, workers become more empowered to seek out a pay rise to alleviate cost of living pressures.
If inflation is trending below average as it currently is at 1.9 per cent, businesses are likely to set their base for wage negotiations with employees and unions relatively low.
Although the fall in nominal wage growth has been sharper than the fall in inflation since the peak of the mining investment boom, the two have largely tracked each other from June 2014, partly explaining the current weakness in nominal wage growth.
But importantly, because wage negotiations are largely infrequent, businesses approach the task looking forward, basing their decisions on what inflation will be in a year’s time, or two years time.
And in the past couple of years we had seen measures of inflation expectations fall to their lowest levels in quite some time. Indeed, market measures of inflation expectations were more likely to have a 1 in front of them than the 2½ per cent that we had been accustomed to for a long period.
Affirming our optimism around wage growth, we have more recently seen a rebound in these measures of inflation expectations, and while they are still subdued, signs are encouraging and we can have confidence that inflation will move back towards the medium-term target of around 2¼ per cent in 2018-19, as expected by the Budget and the RBA forecasts.
Just like Mary and her little lamb, wherever inflation will go, wages will be sure to follow.
And finally, the third and most important driver of wage growth is productivity and investment.
The amount of output that is produced per hour is a measure of labour productivity, and the price business’ pays for that labour, compared to the price they are able to get for what that labour produces, is referred to as the real producer wage. These two concepts - labour productivity and the real producer wage - should grow together at the same pace over time.
The real consumer wage is the wages that people receive for their labour, compared to the prices of goods and services they consume. This is measuring how people's wages are keeping up with inflation.
Traditionally, during normal circumstances, the producer and consumer wage also move together.
This means that the value of what people are producing through their labour is growing with the value of what they can buy from their work.
Between 1993 and 2004, this is what happened. But after that time as the mining boom set in, they drifted and have remained apart.
The windfall gains of higher commodity prices meant firms could sell their output at much higher prices. At the same time, consumer prices did not increase nearly as rapidly, in part because of a high Australian dollar.
This meant the consumer wage rose more quickly than the producer wage, which kept growing at about the same pace as labour productivity.
The result was that people were now able buy more than they could previously when their wages were hardwired to their own productivity. This was not a normal period.
This balloon was always going to come down once the terms of trade began to return to more normal levels.
The good news is this has been happening gradually, through slower wages growth, rather than a dull thud that would have had a far more punishing effect for our economy, for workers and their households. That said, such slow wage growth is no picnic and is not going to make anyone feel fortunate, and we understand this.
This has been a painful process, but there are reasons to now be hopeful that we are near the end of this adjustment process and consumers will start to see their real wages growing in line with their productivity again.
Labour productivity has grown in line with the real producer wage for much of the past 25 years. There is no reason to suggest that this should now change.
As the real consumer wage and real producer wage converge again to labour productivity, and spare capacity in the labour market is absorbed, we can expect labour productivity to once again drive the growth in real wages.
Normal transmission will have been restored.
This supports the outlook for wages growth that was set out in this year’s budget. This highlights the key role driving productivity growth will have on wages going forward. It is why the government is focussed on improving productivity.
To boost our productivity, we must use the two main building blocks that determine growth in our living standards - we need to get smarter and get investing.
For the economists in the room this means boosting multi factor productivity and capital deepening through investment.
The long-run average for labour productivity growth is 1.6 per cent over the past 30 years. Of this, capital deepening contributed 0.9 per cent, while MFP added 0.7 per cent, reaching 3 per cent in the first term of the Howard Government.
This peak followed the widespread market reforms instituted in the 1980s and 1990s.
Today, capital deepening is returning as the main contributor to productivity growth following the mining investment boom.
But regardless of how we have achieved our recent productivity performance, it will need to improve in the future - because of our ageing population we need productivity growth to lift to 2.5 per cent to maintain the same rate of growth in our living standards.
This will require us to embark on a new productivity agenda.
The productivity agenda that was successfully implemented throughout the 1980s and 90s dismantled old economy regulation and led to a significant turnaround in the nation’s productivity growth and living standards.
Our challenge is not to reheat this previous agenda developed and implemented before the iPhone, but to create one fit for our times.
As I stated in my recent Bloomberg speech, it is an agenda that must focus more on the productivity software of our people and leverage the traditional advantages that we expect to serve us well into the future.
A year ago I tasked the Productivity Commission to begin the process of a five yearly productivity review as a sister act to the Intergenerational Report initiated by Peter Costello. It is my intention that these two reports provide the context for framing economic and fiscal policy, not just for the Commonwealth but for States and Territories as well.
I have received the first of these reports and am now working carefully through the draft with my colleagues. The report will shift the focus on how we think about productivity, and the need to focus on pursuing gains in the services industry, in innovation, agriculture, health and education and in government process.
It will also require us to change how we think about, discuss and understand productivity, just like we are doing with competition policy.
Effective competition policy is not about trying to replicate an episode of Australian Survivor.
It is about making customers stronger and placing their needs and interests at the centre of what we want businesses to be able to deliver for them. Customers, in an enlightened competition policy environment are the point. They are not a resource to be exploited to service the interests of the peak primate in the market jungle, the firm.
Customers are the reason the firm exists, in the same way the fans are the reason Rugby League or the AFL exists.
Productivity similarly needs a makeover.
While the term ‘productivity’ might light up the eyes of employers, policy makers and economists, for most workers it’s just code for ‘paying me less to do more for you’.
It’s almost as frightening as terms like reform, transition, globalisation or innovation. All of these things are critical to increasing our living standards, but when most Australians hear these words they get that look in their eye that says ‘well that’s gunna hurt’.
We need to change this if we are to have any hope of kick-starting a new productivity surge, like we saw in the eighties and nineties. A productivity surge that is necessary to not just lift living standards, but to ensure they don’t fall.
Productivity needs to be about improving the services and supports provided to help employees do things smarter to add even greater value, rather than some Dickensian process of extracting more sweat from the employees brow. If Australians are enabled to be more productive, businesses will benefit, demand more staff, putting upward pressure on wages.
To lift productivity and therefore lift wages, we must also lift investment.
According to the Business Longitudinal Analysis Data Environment (BLADE), average real wages are higher for businesses with higher labour productivity. And workers at the businesses that have the highest productivity have the fastest growth in real wages.
In other words, the staff lucky enough to work in a business that is growing, expanding and generating solid returns, are themselves benefiting by their firms’ success. So their pay slip says.
The data suggest further that as businesses invest, increasing the amount of capital per worker, it increases the average real wages within the business.
The BLADE data also confirms that larger businesses pay higher real wages and are more productive.
From 2001-02 to 2013-14, businesses with $50 million plus turnover had average annual real wage growth of 2.5 per cent compared with real wage growth of only 0.5 per cent for businesses under $2 million.
Put that down to economies of scale if you will, or that productive businesses are more likely to increase their market share and attract highly skilled and more productive workers.
But this divergence proves an important point: that our reasoning to deliver tax cuts to small business now, and large businesses later, was the right choice.
We have already lowered tax for 3.2 million small and medium-sized businesses, taking the tax rate for incorporated businesses with a turnover less than $25 million down to 27.5 per cent - the lowest level in 50 years.
It is small and medium businesses that need those cuts here and now, to lift their productivity and deliver higher wage growth for the 6.7 million workers they employ.
To drive greater investment, we have also announced the following tax initiatives: the extension of the instant asset write-off, tax incentives for early-stage investors in startups and innovators, modernising the tax system to recognise digital currency and reforming the depreciation of intangible assets. This complements related corporations law reform around competition, relaxing the rules for financial services innovators and the introduction of crowd sourced equity funding.
Now, just as our small business tax cuts begin to deliver a shot in the arm to the economy, it is time to go further.
This is why we are doubling down on our Enterprise Tax Plan, seeking to extend our significant tax cuts for small and medium businesses to all businesses - to give them the breathing space to grow their business, to invest in the economy, to hire more Australians and to give their workers a well-deserved pay rise.
Burdening our businesses with uncompetitive tax rates that our global peers simply got up and left behind a few years ago, is a sure fire way of killing off any decent recovery in wages and economic growth.
Which is why Labor’s reckless refusal to support these tax cuts is tantamount to economic sabotage.
Earlier this month I travelled to China to lead our participation in the Strategic Economic Dialogue between our two nations. There were some very productive discussions around investment, trade, competition policy and income policy. But I was pleasantly surprised to hear how China was seeking to lower the tax burden on its businesses to encourage more investment.
So we had a previous socialist government in France that thought company tax cuts were such a good idea, they legislated them. Now we have the Chinese Government making the same noises.
And here is Bill Shorten, appearing to the left of both of them, when it comes to cutting company tax, this is Chairman Bill’s Great Leap Backwards.
And now we have Donald Trump confirming his plan to lower US company tax to 20 per cent, laying down the challenge to the rest of the world to keep up, or risk your economy losing its competitiveness. In his own words, such a move was “pro-growth, pro-jobs, pro-worker, and pro-family”, designed to rebuild the nation. The “biggest winners”, President Trump said, “will be the everyday American workers as jobs start pouring into our country”.
The Labor party seem hell-bent on leaving Australian businesses stranded on a tax island, uncompetitive with the US, uncompetitive with the UK, uncompetitive with our biggest trading partner, China. The clear reality is, what Labor fail to recognise, is that it is the more productive businesses that pay higher real wages.
It should come as no surprise that the renewed confidence we have in wage growth comes as the global economy begins to move forward with renewed vigour, shaking off the post-GFC funk.
Last week the OECD upgraded global growth forecasts for 2018 to 3.7 per cent, pointing to an increase in investment, trade and employment that will support “synchronised” growth across most countries.
In our own economy, the better days ahead are now beginning to emerge. In recent weeks and months we have seen evidence of more jobs, more investment, and more exports.
The recent National Accounts for the June quarter showed solid and more balanced growth for our economy, with consumption, government demand, net exports and investment all contributing.
The contribution from new private business investment was particularly encouraging, as it rose for the third consecutive quarter - after 12 falls - with more in prospect given the signs from the Capital Expenditure Survey showed expectations for non-mining investment in 2017-18 improving strongly to be around 5 per cent higher.
Many of these businesses are benefiting and gaining confidence from the Government’s increased infrastructure investment and our pursuit of productivity-enhancing policies.
This is the confidence we have seen lead to record jobs growth, and that will lead to a much-needed pay rise for Australian workers.
Attachment:
Presentation slides from address to the Business Council of Australia [PDF 420KB]