Wage developments in Australia

Geoff Gilfillan, Statistics and Mapping and Elliot King, Economic Policy

Key issue
A slowing in the rate of wage growth in Australia in recent years has contributed to slow growth in household incomes.
The gender pay gap has widened slightly in the past two years, based on hourly wage rates for adult non-managerial employees. Gender pay gaps are wider for older age groups.
Australia has the third highest minimum wage in the OECD.

Wage growth slowdown

Analysis has been provided by the Reserve Bank of Australia (RBA), Treasury and other institutions about the slowing in the rate of growth of wages in Australia in recent years which has contributed to a slowing in growth in household incomes. Slowing household income growth has implications for slowing consumption expenditure which can act as a brake on economic growth.

Australian Bureau of Statistics (ABS) data shows a deceleration in the rate of wage growth in Australia since March 2011—in both the public and private sectors. Wages as measured by the Wage Price Index (WPI) were growing at 2.3 per cent per annum in trend terms in December 2018 (Figure 1); and have averaged growth of 2.2 per cent per annum in the five years to December 2018. This contrasts with average annual wage growth of 3.3 per cent for the previous five years to December 2013.

Average annual growth in wages in the five years to December 2018 was more subdued in male-dominated industries such as Mining and Construction (at 1.6 per cent and 1.9 per cent respectively).
In contrast, female-dominated service industries experienced growth in wages that were well in excess of the industry average of 2.2 per cent including Education and training (2.7 per cent) and Health care and social assistance (2.6 per cent).

Figure 1: Wage Price Index, 1998–2018

Wage Price Index, 1998–2018

Source: ABS, Wage Price Index, Australia, 2018, cat. no. 6345.0,Table 1 (trend data); total hourly rates of pay excluding bonuses.

Figure 2 shows stronger wage growth in Victoria (2.7 per cent), Tasmania (2.6 per cent) and NSW (2.4 per cent) in the 12 months to December 2018. Annual wage growth was weakest in Western Australia (1.6 per cent) and the ACT (2.0 per cent).

Real wages—as measured by average weekly ordinary time earnings for adult employees working full-time, adjusted for inflation—grew by 0.5 per cent per annum in Australia in the five years to November 2018, which compared with an annual average of 1.8 per cent per annum in the previous five years.

Figure 2: Wage Price Index by state and territory

Wage Price Index by state and territory

Source: ABS, Wage Price Index, Australia, 2018, cat. no. 6345.0, Table 2b (original data); total hourly rates of pay excluding bonuses.

Reasons for the wage growth slowdown

A number of factors have contributed to the slowing in the rate of wage growth in Australia including:

continuing excess capacity in the labour market, indicated by persistent rates of underemployment (despite a steady fall in the unemployment rate)
a fall in inflationary expectations, which has contributed to a lowering of wage demands
restrictions on the magnitude of wage increases in the public sector
protracted enterprise bargaining negotiations for agreements in large enterprises in retail and hospitality and
declining rates of growth in labour productivity.

Gender wage gap

Data from the ABS Average Weekly Earnings survey shows growth in wages for women has been stronger than wage growth for men over the four years to November 2018. This has contributed to a reduction in the gender wage gap based on average weekly earnings for adults working full-time from 18.6 per cent in November 2014 to 14.1 per cent in November 2018 (Figure 3).

Figure 3: gender wage gap, based on average weekly earnings

Gender wage gap, based on average weekly earnings

Source: ABS, Average Weekly Earnings, Australia, 2018, cat. no. 6302.0, Tables 10A and 10D, original data.

However, ABS data from the biennial Employee Hours and Earnings survey shows the gender pay gap has increased slightly in favour of men, from 12.4 per cent in May 2016 to 13.6 per cent in May 2018, based on average hourly total cash earnings for all non-managerial employees that were paid at the adult rate. The gap in favour of males for all employees was 12.7 per cent in May 2018.

The advantage of the hourly measure is it includes all adult employees working on a full-time and part-time basis, and it adjusts for the number of hours worked. The gender pay gap measure based on average weekly earnings (Figure 3) excludes part-time workers and may be influenced by the average number of hours worked per week by men and women.

Gender pay gaps tend to be wider for adults working full-time, while pay gaps for adults working part-time and junior employees are relatively small. The gap in hourly earnings in favour of adult male employees working full-time was 12.2 per cent in May 2018, while the gap in favour of male adult employees working part-time was only 0.3 per cent. The gender pay gap for employees on junior rates of pay (aged 15 to 21 years) was 1.1 per cent in favour of females in May 2018. The gap in favour of males for people either on a training rate (apprentices and trainees) or a disability rate was 1.6 per cent.

Gender pay gap over the life cycle

Gender pay gaps, as measured by average hourly total cash earnings for non-managerial employees, fluctuate over the life cycle. There is a small wage gap in favour of women aged 18–20 years (of 5.8 per cent), and a small gap in favour of men aged 21–24 years (of 4.5 per cent). The gap in favour of men continues to widen for those aged 45–54 years (up to 16.5 per cent), but then narrows slightly for people in older age groups.

Figure 4: gender pay gap by age, based on hourly earnings, May 2018

Gender pay gap by age, based on hourly earnings, May 2018

Source: ABS, Employee Earnings and Hours, Australia, 2018, cat. no. 6306.0, Table 1.

National Minimum Wage

The National Minimum Wage (NMW) is set by the Fair Work Commission (FWC) at a level that seeks to incentivise people to look for work, protects the living standards of low paid workers, and minimises potential negative impacts of wage rises on recruitment.

The NMW is set by FWC following an annual review by an Expert Panel. In making decisions on a safety net of fair minimum wages, the panel needs to take into account:

the performance and competitiveness of the national economy, including productivity; business competitiveness and viability; inflation and employment growth
the need to promote social inclusion through increased workforce participation
relative living standards and the needs of the low paid
the principle of equal remuneration for work of equal or comparable value and
the provision of a comprehensive range of fair minimum wages to junior employees, employees to whom training arrangements apply and employees with a disability.

The Australian Council of Trade Unions (ACTU) has called for the NMW to be increased to a level reflecting a ‘living wage’ within two years. The ACTU argues in favour of aligning the earnings of those employed on the NMW to 60 per cent of median full-time earnings. The ACTU first advanced this argument during the 2017–18 review, and has reiterated its stance under the current review.

NMW and ABS data shows a steady decline in the ratio of NMW to median earnings of full-time workers—also known as the ‘minimum wage bite’—from 64.5 per cent in September 1995 to 52.7 per cent in 2012. There is evidence of a slight recovery since in the ‘minimum wage bite’, to 54.5 per cent (Figure 5). This change is due to a larger percentage increase in the NMW between 2012 and 2018 than the increase in median weekly earnings for full-time workers—18.6 per cent versus 14.8 per cent.

Figure 5: ratio of NMW to median weekly earnings for full-time workers

Ratio of NMW to median weekly earnings for full-time workers

Sources: Parliamentary calculations using: National Minimum Wage (NMW) data—Australian Industrial Relations Commission/Australian Fair Pay Commission/Fair Work Commission; and earnings data—ABS, Weekly Earnings of Employees, Australia, cat. no. 6310.0 (1994 to 1998); ABS, Employee earnings, Benefits and Trade Union Membership, Australia, cat. no. 6310.0 (1999 to 2013); ABS, Characteristics of Employment, Australia, cat. no. 6333.0 (2014 to 2018).

Adding to the debate are recent minimum wage changes in other OECD countries, such as Germany’s wage experiment and Hungary’s experience with large increases in the minimum wage.

One of the most notable developments is the United Kingdom’s National Living Wage (NLW), introduced in 2016. The UK Low Pay Commission advises the Government on the levels of the UK’s NMW and NLW. The UK Government’s objective is for the NLW to reach 60 per cent of median earnings by 2020. The Low Pay Commission Report 2018 shows recent increases in the NLW have not resulted in significant declines in employment or hours worked for groups more likely to be covered by the NLW such as young people and women.

How does Australia’s minimum wage compare with other OECD countries?

Despite Australia having the third highest minimum wage in real terms among 28 OECD countries that provided data in 2017, it had the ninth highest ratio of minimum wage to median earnings for full-time workers. Countries such as France and New Zealand had higher minimum wage ratios at this time at 62 per cent and 60 per cent respectively. Australia’s ‘minimum wage bite’ of 55 per cent was higher than the ratio recorded by the United Kingdom (54 per cent), Hungary (53 per cent) and Germany (48 per cent); and much higher than the ratio recorded by the United States of America (34 per cent).

There is conflicting evidence on the impact of minimum wage increases on employment, with some studies showing negative impacts for groups such as women and youth, while other studies show relatively insignificant impacts.