For some time, our federal politicians have argued that wages will grow when unemployment is lower, and they will moderate when unemployment is higher.

But with unemployment now at a record low of 4 per cent, why are wages growing less than inflation, and can they grow much faster without policy intervention?

Prime Minister Scott Morrison was asked this week about the Reserve Bank's prediction that pay will continue to be outpaced by inflation, thereby preventing real wages growth until the end of next year.

Mr Morrison indicated Australian workers would not see a real wage increase for another 18 months, and that the only thing the government could do to help workers was maintain a "strong economy".

"The way wages rise is unemployment goes down," Mr Morrison said.

"That is how wages rise."

'Lower unemployment won't solve the problem by itself'

But a new report argues wage rises are not a simple supply-versus-demand equation.

The real reason wages are not rising faster, according to the research from The Australia Institute's Centre for Future Work, is due to government policies that have eroded workers' rights over time.

"We have reviewed the data on wage growth in Australia, and something happened after about 2013," said Dr Jim Stanford, who co-authored the report, The Wages Crisis: Revisited, along with Professor Andrew Stewart from Adelaide Law School and Associate Professor Tess Hardy from Melbourne Law School.

"Prior to that, you normally would see wages growing at about 4 per cent a year. Since 2013 … we've been stuck at a trajectory of 2 per cent annual wage growth.

"We think the culprit is in policy and institutional changes — things like [low] minimum wages, things like the erosion of collective bargaining … and things like the pay caps that governments have imposed on their workers in that period."

The report noted that, even with the unemployment rate falling to a multi-decade low as the economy reopened after COVID lockdowns, wage growth has remained "stubbornly slow".

"You've had this unprecedented disruption in labour markets [because of the pandemic] — first, a whole bunch of people lost their jobs, then a whole bunch of people got rehired, you had the closing of the border, which has huge implications for the labour market," Dr Stanford said.

"And now you've got a relatively low unemployment rate, 4 per cent. But, despite that, we seem to still be stuck in that same path [of slow wages growth].

"We can't expect a lower unemployment rate to solve the problem by itself."

Australia's wage growth 'among the worst'

Dr Stanford said Australia's wage growth over the past decade had been "among the worst of any industrialised country".

The report noted wage growth fell by 2.2 percentage points per year on average, versus 1.2 points across the entire OECD.

In several countries, both nominal and real wage growth accelerated after 2013, including the US, Germany and Japan.

"And since Australia's employment and unemployment conditions were relatively robust compared to many other OECD countries over this same period, this uniquely poor wage performance reinforces the conclusion that policy and institutional factors explain this deceleration, rather than supply-and-demand conditions in labour markets."

At the same time, legal decisions have eroded worker rights, the report found.

Recent High Court decisions strengthened the ability of businesses to classify workers as independent contractors rather than employees (thereby potentially reducing legal entitlements such as leave).

"Because they basically say employers have open season to try to reclassify anyone in their business as a contractor, rather than an employee."

He said these High Court decisions need to be responded to with legislation that enshrined workers' rights, or it "will usher in even weaker wage growth in coming years".

The report suggested the best way to do this would be to introduce a statutory definition of employment.

"It is to say we define someone as an employee when they're doing work under someone else's direction, and don't have the other characteristics of a truly independent business," Dr Stanford said.

"If that sort of definition was put in place, then that loophole would be at least partially closed."

How to fix slow wage growth

Aside from enshrining a definition of employment under the law, the report also recommended other policy changes, including:

• For governments at all levels to lift "artificial caps" on public sector wages;
• To revitalise collective bargaining by simplifying the rules for enterprise agreements and for taking protected industrial action;
• To strengthen minimum wage regulation with the Fair Work Commission empowered to set a 'living wage' target and encouraged to place greater weight on the needs of the low-paid when reviewing minimum wages;
• To improve compliance with employment standards, including tackling the systemic underpayment of wages. It suggested increasing funding for federal and state inspectorates and more severe sanctions, either in criminal or civil form.

Dr Stanford said, while the study had not done a close analysis of major party election policies to address slow wages growth, the report clearly disputed the Morrison government's long-held position that sound economic management and a relatively low unemployment rate would solve the problem by itself.

"Unfortunately, they've been saying that for years," he argued.

"If you go back and look at the wage forecasts contained in each annual budget from the government going back to 2014, every one of them predicted an uptick in wage growth was just around the corner.

"The problem is that rebound [in wages] that was promised never arrived. And we don't think it will arrive."

Dr Stanford said the report did not analyse industrial relations policies being taken to the election and therefore he could not comment on whether, and to what extent, they might change the current situation if enacted.

But Dr Stanford observed that company profit margins were higher than they have ever been in Australia's recorded economic history.

"If there's anyone who should pay for the adjustments back to a lower rate of inflation, it should be companies [by taking a smaller profit margin], not workers being forced to accept a permanent reduction in their standard of living."