RDP 8806: Employment, Output and Real Wages 1. Introduction

Employment in Australia over the past five years has recorded one of the strongest increases in the post-war period. The performance ranked Australia first among the developed countries in terms of employment growth over the period. This experience stands in marked contrast with that of the mid 1970s and early 1980s when demand for labour in Australia was very weak.

Recent developments provide an opportunity to look again at the relative importance of two factors affecting the demand for labour – viz, output and real wages. This issue was the subject of considerable debate in the second half of the 1970s, both in Australia and overseas, and a large body of literature developed.

This paper presents estimates of the relationship between employment, output and real wages over the past two decades. The study therefore covers three major episodes in the labour market: the contractions of employment in the mid 1970s and early 1980s and the strong growth since 1983. It finds that real wages have been an important influence on employment in Australia – on average, just as important as output. A large part of the strength of employment over the past five years has been due to the fall in real wages.

Section 2 outlines the broad trends in employment, output and wages in the 1970s and 1980s. Section 3 reviews the Australian and some overseas literature on the relationship between these variables while Section 4 presents the results of the empirical work. Section 5 provides estimates of the contributions of real wages and output to employment growth in the three major episodes mentioned above. Some concluding thoughts are provided in Section 6.