Public Sector Wage Caps Push Wages in Agreements to 30-Year Low

Apr 1, 2021
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Public sector wage restraint has contributed substantially to the record-low wage growth that was already being experienced throughout Australia, long before coronavirus ever arrived here. Governments at all levels should abandon this misplaced strategy, and allow free collective bargaining once again with public servants – especially after their heroic efforts to help Australians through the pandemic.

There is wide consensus among economists, political leaders and commentators including the Reserve Bank Governor Dr Philip Lowe that stagnant wages growth is a critical barrier to Australia’s post-COVID economic recovery. Enterprise agreements (EAs) data provides a powerful window into wages trends across the economy, with current EAs setting the terms and conditions of employment (including wage increases) for almost 2 million workers. The federal government released its December quarter data on enterprise bargaining activity last week. And it does not bode well for Australia’s wage-growth challenges.

Wage increases across all approved EAs in the December quarter averaged only 2.2%. It’s the lowest quarterly wages outcome for approved EAs since the introduction of enterprise bargaining in 1991 – a record-low reached only once before in September 2017.

The number of EAs approved increased in the December quarter, with 126 more private sector EAs approved than in the September quarter. The slight increase in EA-making is consistent with gradual easing of health restrictions associated with the pandemic, and businesses rebooting. But there are still 695 less current agreements than at pre-pandemic (March quarter), almost entirely due to decline in private sector EA-making.

Governments Actively Choose to Suppress Wages Growth

Historic-low wages outcomes in approved EAs were driven by artificially suppressed wage growth in public sector agreements. Wages outcomes in public sector approved EAs collapsed to only 1.9% in the December quarter. This further decline in public sector pay raises is not an accident, resulting from the pandemic and the recession. It is the result of a deliberate multi-year effort by governments at all levels to deliberately suppress public sector pay, primarily for political optics. Politicians think it looks good with voters to be ‘tough’ on public servant pay. But imposing more wage austerity on public sector workers, at a time of mass COVID-era unemployment and wage stagnation is both misguided and self-destructive.

The suppression of normal wage bargaining in the public sector drags down overall wage growth in the broader labour market, through at least three different channels. First there is a composition effect: public sector workers make up around 15% of overall employment, so freezing or capping their pay has a direct negative impact on economy-wide wage growth averages. Secondly, many private sector employers imitate the austere pay benchmarks set by governments. They argue that if governments can’t afford any more, neither can they – especially for businesses which sell goods and services to the public sector. Finally, there is a negative macroeconomic impact on private sector wages, resulting from the reduction in consumer spending that flows from suppressed pay.

The most contradictory and irrational wage policy of all is the Commonwealth government’s pledge to cap public servant pay at the average of private sector wage growth. Since private sector wage offers are pulled down by wage restraint by governments (who are the largest employers in the country), government in turn pledging to match falling private sector pay practices sets up a cumulative race to the bottom, in which public and private employers try to outbid each other for the lowest wages in town. The loser is Australia’s economy, which badly needs an injection of spending power and consumer confidence.

IR Bill Will Not Boost EA Coverage or Wages

Despite a small uptick in EA-making, genuine enterprise bargaining – including provisions for independent employee representation and real negotiation between the workforce and the employer – remains accessible to almost 90% of private sector workers.

Casual law changes passed recently by the Senate in the otherwise-gutted IR Bill will make matters worse. The new casual work legislation allows employers to hire on a casual basis in virtually any position ‘deemed’ to be casual. The expansive definition of casual work combined with low-benchmark permanency conversion rights will expand both the incidence and tenure of casual work. This will further erode enterprise bargaining coverage since an increase in the number of casual workers without predictable shifts and incomes, means more workers without the job security needed to meaningfully bargain with their employer.

The government’s plan to re-introduce recently scrapped enterprise bargaining changes will not boost wages in EAs. A weakened Better Off Overall Test (BOOT), combined with reduced scrutiny of non-union agreements by the Fair Work Commission (such as through weakening “genuine agreement” tests) will only expand the incidence of lower-wage EAs and reduce the effectiveness of the already weakened collective bargaining regime.

A New Direction

Australia’s enterprise bargaining system allows employers to avoid genuine bargaining processes (with independent employee negotiators like unions), to draw up agreements themselves and reduce workers to spectators of employer-controlled wage-setting. If the government’s aim really is to rebuild collective bargaining and lift wages and conditions, a very different direction is required in reforming Australia’s IR laws.

Retaining the BOOT-enshrined principle that EAs must improve on Awards, expanding bargaining scope to allow multi-employer or sectoral-level agreements, converting or phasing-out non-union EAs, and relaxing Australia’s punitive restrictions on normal union activity are all measures that could restore the ability of collective bargaining to lift wages and living standards, and secure inclusive economic growth at a time Australia sorely needs it.

Public sector wage restraint has contributed substantially to the record-low wage growth that was already being experienced throughout Australia, long before coronavirus ever arrived here. Governments at all levels should abandon this misplaced strategy, and allow free collective bargaining once again with public servants – especially after their heroic efforts to help Australians through the pandemic.

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