If the costs of supplying labour are greater than then benefits (the wage), there will actually be lower employment and, importantly in the context of Australia’s demographic changes, this will lead to a lower workforce participation rate than would otherwise be. Fruit growers are a high profile example of a business where finding workers is apparently difficult. This is not because there is a shortage of labour. Unemployment and underemployment in regions near where fruit is grown is high.
Many people are willing and able to work.
Basic economics tells us that the problem is the miserably low wage offered by fruit growers for the task at hand. If they paid a higher wage — and let’s for a moment be a bit silly for the sake of illustration and say that was $100 an hour — they would undoubtedly be inundated with applications to pick apples, strawberries and peaches.
Price signals work in both directions.
When we look at the recent trends in the labour market, we can see some of these supply, demand and wage trends cutting through in a non-conventional, but fully logical, way.
High wages growth, lower unemployment
In recent years, the economy has delivered record low wages growth. Since 2014, the annual increase in the wage price index has been below 2.5 per cent and the most recent data show growth of just 2.1 per cent. The conventional labour market economics would suggest that this weakness in the cost of labour would have sparked a sharp fall in the unemployment and underemployment rates. Alas, the data shows little change in the unemployment and underemployment rates over that time. The unemployment rate is currently hovering around 5.5 per cent. In 2013, the unemployment rate was also hovering around 5.5 per cent.
So much for low wages as a cure to unemployment.
Just as concerning, the underemployment rate has actually increased in the period of low wages growth. It stood at 8.4 per cent in February 2018, which compares with rates under 8 per cent in 2013 and 2014. While demand for labour has been solid over recent years, as evidenced by the various measures of job vacancies, the willingness of labour (workers) to supply their labour at low wages rates is not strong.
If we look back at the most recent experience when wages growth was strong, in the period around 2004 to 2008 when the annual increase in the wage price index was around 4 per cent, the unemployment rate was anchored around 4 to 4.5 per cent and the underemployment rate was between 6 and 7 per cent. High wages growth was linked to a more fully employed workforce.
This is not what the proponents of low wages would have us believe.
Decent wages growth are also an important part of a well-functioning economy. When wages growth is weak, like now, the only way many workers can maintain their basic expenditure is to either accumulate more debt or to lower their rate of savings. There is no other source of finance to fund spending.
Wages growth is inexorably linked to household spending which makes up over half of GDP. When wages and household spending growth is weak, the overall performance of the economy also tends to be weak. When wages increase at a decent sustainable pace, workers will be more willing to supply their labour than when wages growth is low. History shows that strong wages growth is linked to low unemployment, not that this is what the proponents of low wages would have you believe.