Research Discussion Paper – RDP 27 revised Earnings and Award Wages in Australia

Introduction

The recent widespread emergence of wage and price inflation seemingly associated with a slowdown in real activity and rise in unemployment makes an analysis of the determinants of average earnings an important matter. This paper examines the determinants of average weekly earnings in Australia, basing the analysis on the extensive overseas literature and previous Australian work in this area. We present quantitative estimates of the influence of imported inflation and award wage changes, as well as of more traditional variables such as demand pressure and productivity changes.

The inclusion of award wages in an equation for average weekly earnings needs justification. In the Australian literature there is widespread agreement on the influence of award wage changes in determining earnings, and hence on the apparent independent importance of the arbitration system. Thus, for example, Hancock [19] explains ‘earnings drift’, and Nieuwenhuysen and Norman [36] explain earnings with awards treated as exogenous, as does Nevile's well known model [33] The theoretical models underlying this specification implicitly view the wage determination process as consisting of two stages, with award wages providing a constraint, subject to which employers and employees determine earnings. This paper follows this procedure, and is also similar to most previous work on wage determination in that the theoretical model underlying the equation is a modified Phillips curve. Its chief contributions are the emphasis on imported influences upon wage determination in a small open economy and refinement of Higgins' work on the determination of award wages.

Despite the role of award wages in determining earnings, the common practice implicitly or explicitly assuming awards to be exogenous is not, we believe, valid. Although Hancock [20], Nieuwenhuysen [35] and Nevile (34), in their more literary contributions, recognize the influence of price changes on award wages, only Higgins [21] has previously presented a quantitative explanation or award wage changes. Our equations refine his but suggest the same general conclusion: that award wages must be regarded as endogenous. This is an important point, as the assumption of exogeneity of award wages often carries through to a belief that Arbitration Commission judgments can be or should be manipulated as an instrument of stabilization policy.

The structure of the paper is as follows. Section II presents a survey of the literature on earnings and our own earnings equations. Section III contains a discussion of our previous work on the determination of award wages, and Section IV recapitulates the structure of Australian wage determination suggested by our results. Section V briefly discusses some implications of our work in the context of recent work on the importance of imported inflation.