Good times, better wages 'not linked'

In the late 1980s, unemployment had fallen below six per cent and wages growth was between eight and nine per cent.

Today, unemployment is at a 33-year low at 4.3 per cent, while the economy continues to steam ahead with gross domestic product - the chief measure of activity in the economy - growing at an annual rate of 3.8 per cent.

But wages growth, at four per cent, is growing at a relatively moderate pace, with any substantial wage growth confined mostly to the resources sector.

Mr Eslake said there were several factors that explained why economic conditions had not translated into more significant wages growth.

"The most plausible explanation for that is that there has been a massive increase in the global supply of labour over the last 15 to 20 years, as a result of the entry into the world trading system of some countries with very big labour forces (such as India and China)."

"So you had an increase in the supply of labour relative to the supply of capital, and that has exerted a very significant market discipline on wage-setting behaviour.

"Partly because employers have the option in the face of wage claims in excess of productivity of shifting production to lower labour cost locations, and employees know it."

"This is a global phenomenon and I suspect it's the most important part of the explanation in Australia."

"All around the world wages growth is lower than people had expected, than models had predicted, given where the unemployment rate is in different countries."

Mr Eslake said that more specific to Australia were changes in the structure of the labour market, largely because of successive waves of labour market reforms.

There has also been a dramatic shift in the balance of power in the workplace, and also in the psyche of employees, he said.

"This goes back to changes that were begun in the second half of the 1980s and which further momentum from Keating government reforms in 1993 and then from Howard government reforms in 1996 and then in 2006 with Work Choices."

"It used to be the case 20 years ago and more that the primary loyalty of workers was to their union.

"A lot more people were in unions, and unions themselves were much more militant and sometimes saw what they were doing as part of a broader plan of bringing down the capitalist system."

"Whereas now far fewer people are members of unions and many people either own or manage their own businesses or have shares in the businesses in which they work.

"That changes people's attitudes."

Mr Eslake said another factor was that Australia had had 15 years of low inflation and that people's expectations of what they needed to maintain their living standards had changed.

"You go back to the 1980s and people thought that if they didn't get a 10 per cent pay rise then they were actually worse off.

"And there was some basis for that because inflation was not far off 10 per cent per annum.

"But now people understand and recognise, in part, because of the Reserve Bank's credibility and success of delivering a decade and a half of low inflation, that it's not necessary to demand such big wage rises."

But the Reserve Bank of Australia (RBA) has warned of the risks posed by a tight labour market, in which some economists would argue Australia has already achieved full employment.

"Most measures suggest that the labour market is as tight as it has been for a generation and that capacity utilisation is stretched," the RBA said in its quarterly statement on monetary policy earlier this week.

"The growth rates of domestic demand and activity are expected to remain strong, as are labour market conditions.

"These factors could result in more upwards pressure on wages growth and inflation than has been incorporated in (RBA) forecasts," the RBA said.

Mr Eslake said full employment was a risk that now needed to be monitored closely.