Technology makes many things in life easier, but it could also explain why you haven't received a decent pay increase in years

  • Wage growth has undershot expectations around the world since the GFC, both in Australia and abroad.
  • Even with unemployment rates sitting at multi-year or multi-decade lows, wage growth is not picking up by anywhere near the degree usually seen in the past
  • The RBA has released a discussion paper written by a visiting economist that looks at the role technology may be playing in suppressing wage growth.

Wage growth, or lack thereof, has dominated economic discussion in recent years, both in Australia and abroad.

It’s also surprised many forecasters, including those at the Reserve Bank of Australia (RBA) as neatly shown in this chart from the bank below.

RBA

It’s Australia’s wage price index — the average increase in hourly wages excluding employee bonuses — including the RBA’s forecasts for wage growth looking ahead.

Year after year, wage growth has surprised to the downside during the post-GFC era, ensuring that inflationary pressures, and official interest rates, have remained well below historic norms.

And downside wage surprises have not been limited to Australia, but around the world.

RBA, OECD

So what’s behind this constant undershoot? Labour market conditions have strengthened both in Australia and abroad, seeing unemployment dip to multi-year or multi-decade lows in many advanced economies, but wages are not yet responding to a diminishing pool of available workers as has been the case in the past.

Some point to globalisation as a factor behind recent low wage outcomes. Others suggest weak productivity growth — in the past an important piece of the wage growth puzzle — may also be to blame.

But what about the impact of technology, a factor that continues to transform our lives each and every day? Could it be a factor as to why tighter labour market conditions have not translated to a meaningful pick-up in worker wages?

In a discussion paper released by the RBA, economist Geoff Weir, a guest of the bank up until May this year, argues that technology could explain why economic theories that worked in the past are not delivering the same outcomes on this occasion.

In particular, he says it’s the uneven shift towards new technologies between individual firms that could be capping the ability for higher wages.

He explains:

The uneven take-up of new technology is resulting in increasing dispersion in productivity performance across firms in a given industry. High productivity firms would appear to be using most of their higher levels of productivity to reduce prices and increase profit margins rather than passing most of it on to their workforce in higher wages, while the productivity ‘laggards’ have limited scope to pay higher wages.

So firms that use new technologies, aiding productivity growth and market share, are looking to bolster profits rather than employee wages. And those firms regarded as technological laggards, facing increased competition and declining market share, are not in a position to offer their staff higher wages.

Nor are more productive firms reliant upon increasing worker headcount by a similar margin to sustain their competitive advantage, Weir says.

“Larger and more productive firms are increasing their industry market shares as measured in terms of sales or value added, but much less so, if at all, in terms of employment.

“They are primarily using their market and bargaining power to absorb most of their firm-specific productivity gains into higher profits and lower output prices, rather than into higher wages.

“At the bottom end of the scale the productivity laggards do not have the capacity to offer anything other than low wage increases in order to remain in business.”

Weir says these may be key factors behind not only the declining share of wages as a proportion of national incomes and low productivity growth but also the downward pressure on average nominal wages growth seen in recent years, a trend that he expects will continue.

“Wages growth will pick up, but by a lot less than in previous cycles,” he told the AFR prior to the paper’s release.

“What I’m suggesting is this effect is going to be around for a long time. Nominal wages are going to stay low relative to what the old models would forecast.”

The views expressed by Weir are his own, not those of the RBA. The bank is forecasting that wage growth will gradually pick up in the years ahead, supported by stronger economic growth leading to lower unemployment levels.

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