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Immigration and pay rorts impact wage growth

Grattan Institute outlines the significant contributors to the low rate of wages growth in Australia.
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Immigration and pay rorts impact wage growth

Immigration and pay rorts impact wage growth

23 September 2019

A change of focus in the immigration program and relatively light penalties for employers that underpay employees are among the most significant contributors to the low rate of wages growth in Australia.

A submission by the Grattan Institute to a recent conference run by the Reserve Bank has made these claims and described how these factors have influenced the low rate of growth.

Wage growth rates have been less than Treasury forecasts for the past six years. One of the reasons for the Reserve Bank cutting interest rates was to encourage wages growth.

Impact of immigration


Author of the paper, John Daley, head of the Grattan Institute, noted that, in general, immigration does not cause lower wages growth. However, a change in the focus of Australia’s immigration program appears to have influenced it.

This change is towards younger and less-skilled migrants. Over the past decade or so, wages growth has been slower for employees aged under 40 than older ones, even more so in low-skill occupations. The trend contradicts the usual official line that Australia focuses on “skilled migration” programs.

The paper says that the number of temporary migrants (other than from New Zealand) has doubled since 2007 to about one million, or about 4% of the total Australian population. However, temporary migrants are about 10% of the workforce aged under 40. This means that about 4% of the total workforce are low-skilled temporary migrants.

There has been disproportionate growth in employer-sponsored migrants who apply for a work visa after arrival, partners trying to avoid ballooning processing times for spouse visas, and asylum-seekers (whose claims may take several years to determine). Temporary migrants are much less likely to be high-skilled than permanent ones, but those that are high-skilled are far more likely to eventually become permanent residents.

The paper claims that Australia now operates a predominantly low-skill immigration system. Visa conditions provide migrants with incentives to work for less than minimum wage rates.

How does this affect the labour market?


Overseas students and back-packers more often look for part-time and casual work, so they affect underemployment levels more than unemployment levels.

The fact that measured wage rates for employees aged under 40 have risen less than those for older employees indicates that temporary migrants have put downward pressure on younger employees’ wages.

The impact of underpayment


Daley noted that data on employees being paid less than the federal minimum wage rate is “inherently ropey”. He added that it is widely known, and now widely expected, that it happens, but documenting its occurrence is obviously difficult. Deliberate misreporting or non-reporting plus the operation of the “cash economy” mean that the total extent of underpayment is very much under-reported. Employees are frequently in a position where they would rather be underpaid than unemployed and not paid, and unable to do much about it.

About 20% of all employees are currently paid at the minimum wage level.

Some investigations of underpayment by the Fair Work Ombudsman (eg into convenience stores) have observed that franchisees would struggle to make their businesses financially viable if they did not underpay employees.

If a significant number of employers underpay employees, that places other employers in the same industry at a competitive disadvantage, and puts them under strong pressure to follow suit.

Another trend appears to be that, if employers are going to underpay employees, there is an incentive to do so by a considerable amount, as they will still be in front even if they are caught out.

Some official policies also provide incentives to underpay. For example, working holiday-makers can earn the right to spend a second year in Australia if they work for at least three months in a regional area in a primary industry.

Solutions?


The paper argues that if the current immigration policy is to continue, it is in some ways incompatible with a minimum wage-based system. It recommends tougher enforcement and higher penalties for breaches – possibly including gaol for serious and repeat offenders. At present, it is rational for many employers to underpay because the penalty (if actually caught in the first place) will be lower than the extra amount they should have paid.

The paper also recommends a review of some visa conditions, which it claims give employers too much bargaining power.

These include:
  • the limit on international visitors working more than 20 hours per week
  • working holiday-makers allowed additional residency (see above).

Not the whole story


The paper notes that while migration appears to have influenced lower wages growth in low-income parts of the workforce, it does not explain the overall trend of low wages growth among the entire workforce.

Read the submission here.

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