Workers without digital skills lose out in the wages game

Scott Morrison has stepped up calls for employers to turn increasing profits into higher wages to help end the record ...
Scott Morrison has stepped up calls for employers to turn increasing profits into higher wages to help end the record run of flat wages growth. Andrew Meares
by Janine Dixon and Nhi Tran

Growth in real wages has been weak for the past seven years, averaging less than 1 per cent per year. But some workers have fared better than others. Those in high-paid occupations, such as managers, engineers and doctors, experienced real annual wage growth averaging 1.4 per cent.

Meanwhile, lower-paid workers including cleaners, sales assistants and labourers, on average haven't received a real wage rise at all.

Disparities in wage growth contribute to inequality, challenging our traditional notion of a fair go for all. Ongoing increases in inequality may eventually detract from economic growth.

New research from the Centre of Policy Studies separates three influences on recent wage growth: first, the overall macroeconomic climate; second, changes in demand for occupations and in the qualifications that make up the occupations; and third, changes in the level of education of the workforce.

Macroeconomic factors such as economic growth, changes in household consumption, demand for imports and exports and movements in the exchange rate have had a positive effect on wage growth. These factors have affected the occupation groups fairly uniformly and so do not explain the divergence in wage growth.


Instead, our results indicate the second effect – changes in the types of workers demanded by industry – explains strong growth in wages of the highest-paid occupations and weak growth in most of the middle-to-low-paid occupations.

The relative increase in demand for high-paid occupations reflects the impact of automation, which displaces low-paid workers while making high-paid workers more productive. For example, we were able to download all the data we used for this project quickly and easily ourselves, whereas once upon a time we would have employed a data-entry clerk to type it in for us.

Although there has been weak demand for most low-wage occupations, "caring" occupations, such as child carers, personal carers and education aides, are somewhat immune to the displacement effects of technological change. Regulatory requirements and the nature of the work generally require certain ratios of staff-to-children or patients that are not easily reduced.

Qualifications in demand

The general trend we found is that within every occupation, industries are gradually requiring more highly qualified workers. For example, there has been a gradual shift towards accountants with post-graduate qualifications rather than with bachelor degrees; and in childcare, there has been a shift away from workers with no post-school qualifications towards workers with certificate qualifications.

The occupation and qualification demand effects together mean the most highly qualified workers in the highest-paid or highest-skilled occupations are the big winners in the digital age.

The third influence on wage growth is the overall change in the level of education or qualifications held by the workforce. The past decades have seen a large influx of workers holding degrees and certificates, while older workers, who are more likely to have no post-school qualifications are gradually retiring from employment. On its own, this effect reduces the wage premium associated with a high level of education, which is no longer the preserve of the elite.

In other words, growth in the supply of highly-qualified workers has dampened, but not eliminated, the disparity in wage growth.

What does this mean for income distribution? Despite some exceptions, overall growth in low-skilled wages has been slower than growth in high-skilled wages, so we have seen an increasing gap in wage income between Australia's richest and poorest households. However, official measurements of the Gini coefficient, a measure of income inequality, do not indicate that household income inequality has changed much this century. In part, this is because when people from low-income households move into better-paid occupations, income disparities are reduced.

Australia's Gini coefficient is not high by international standards – we have a more equal income distribution than most and it has remained steady for some time. Despite this, we must not downplay the importance of growing wage inequality in Australia. While innovations such as automation and other labour-saving technology are crucial to economic growth, they have contributed to a growing wage gap between the highest-and-lowest-paid workers. The good news is the increase in education levels in the workforce has worked in the opposite direction, dampening what would have been an even wider spread in wage growth.

In the absence of a concerted program of investing in the creation of relevant skills, low-skilled workers will be left behind in the digital age, as their jobs are automated or taken by more highly qualified workers. If the fruits of productivity growth are to be fairly shared, education and training will play a crucial role.

Janine Dixon and Nhi Tran are senior research fellows at the Centre of Policy Studies, Victoria University. They will be presenting today at a Melbourne Economic Forum on inequality supported by The Australian Financial Review.