Wage Growth Distribution and Changes over Time: 2001-2018
Guyonne Kalb and Jordy Meekes.
As in many other countries, employees in Australia have experienced declining wage growth since the 2008 Great Financial Crisis. The slowing wage growth has received much attention from policy makers and central banks, because of the social impact it could have by making households vulnerable to financial distress. The low wage growth has been surprising to economists given the low unemployment rate up to 2018, and various macro-oriented explanations have been given to explain the decline in wage growth. However, few studies examine how the decline in wage growth has affected different groups of employees – for example to what extent the slow-down in wage growth varies among employees with different demographic or job characteristics. We study how wage growth varies among Australian full-time employees over the 2001-2018 period, using the Household, Income and Labour Dynamics in Australia (HILDA) Survey. This paper has two sets of research questions and key results.
First, to what extent is wage growth explained by individual characteristics and job characteristics? We show that after increasing between 2002 and 2007, real (and nominal) wage growth has indeed slowed down from 2008 onwards. Similar results are found for part-time employees. We argue that the real wage growth may have been relatively high at around 5 per cent in 2007 instead of being relatively low at around 2 per cent in recent years. Moreover, our empirical analysis shows that wage growth seems to a large extent determined by employee characteristics such as age, education, employment contract, occupation and industry. Gender appears less important for wage growth.
Second, how does the role of employees’ characteristics in wage growth change over the period 2001-2018, focussing on the Global Financial Crisis (GFC) and the recent slow-down in wage growth? Interestingly, we show that the employee’s education is most important for wage growth in the pre-GFC period, whereas occupation is particularly relevant in the post-GFC period. This observation suggests decreasing returns to education and an increasing importance of specific occupations. Specifically, employees who have occupations that are more cognitive, less routine, such as managers and professionals, experienced relatively high wage growth from 2014 onwards. Moreover, we show that employees in insecure –casual– jobs receive a wage growth premium during the economic upturn and a penalty during the economic downturn. This finding indicates that the returns to casual jobs are pro-cyclical and strongly depend on labour demand driven by, for example, cyclical changes to specific economic sectors in the labour market.
The results suggest that wage growth inequality between employees is relatively independent of where the economy is in the business cycle, and that the differences between employees are more substantial than the year-to-year variation. Taken together, our findings are relevant for policy makers, as they inform which subgroups of employees are at risk of lower wage growth.
June 2, 2020