Low wages growth has been a spectre hanging around the Australian economy for some time. In our series What We Earn we unpick the causes for this and why some workers might be feeling it more than others.
The slump in wage growth is not just an Australian phenomenon – wage growth in most advanced economies has been lower than expected in recent years. This is because globalisation has put us all in the same boat when it comes to international competition.
There are two ways that international competition can reduce wages – imported goods and migrant workers.
In Australia, import prices of both items purchased by households and goods used in manufacturing, purchased by businesses, have fallen over the past two years. This means businesses in Australia are increasingly competing with imports. As a result these businesses are less able to afford wage increases and their workers are less likely to ask for them, in fear that they may lose their jobs.
Low import prices are usually due to the goods we import (think t-shirts from Bangladesh, hardware products from China). Our imports, particularly of manufactured goods, are coming increasingly from countries where labour is plentiful and cheap, according to research.
In fact about half of our manufactured imports come from low-wage countries, which is an increase from less than 10%, 40 years ago. This is important when we consider that 80% of the value of Australia’s imports comes from manufactured goods.
When we import cheap products we are effectively importing cheap labour. This effective boost to the supply of cheap labour drives down import prices and wages in Australia. A similar effect happens when businesses outsource products or services to another country.
Again this is a global phenomenon affecting all industrialised countries including the USand Australia. The most common primary motivation for global outsourcing cited by companies is cost cutting. Business functions that are typically outsourced are manufacturing procurement and services such as information technology, legal, facilities management, finance and human resources.
International competition can also reduce wages through migration of labour to Australia, although here the empirical evidence is less clear. The effect of migration on wages depends whether it creates enough jobs to absorb the extra workers, but teasing this out is not straightforward.
Net overseas migration has increased as a share of the population from 47% in 2000 to 54% in 2015. And the skilled migrant share of permanent migrants has increased from 55% in 2000 to 68% in 2015. Not only are migrants increasing as a share of the population, but a higher share of them are skilled.
Please click here to read the full “Explainer: how international competition affects how much you earn” article in The Conversation by Griffith Asia Institute member, Professor Ross Guest.