Most new migrants to Australia are low-skill, and they may be slowing wage growth for unskilled labour

by John Daley

Wage growth in Australia over the past decade has been much slower than in the past. Many explanations have been offered. In this presentation to a Reserve Bank of Australia conference, Grattan Institute CEO John Daley looked at whether migration might be one cause.

There is little evidence that high-skill migrants are to blame, and so there must be other reasons wages are growing more slowly for both high- and low-income earners.

But Australia now has a predominantly low-skill migration system – particularly international students and working holiday makers. This is a big change from a decade ago when a much greater proportion of migrants were more skilled. New low-skill migrants now comprise at least 10 per cent of the younger low-skill workforce.

These low-skill migrants have visa conditions that create incentives for them to accept much less than minimum wages. This is likely to flow through to the wages paid to some low-skill permanent residents. But it is hard to know for sure because the data about underpayment of minimum wages is inherently poor.

It doesn’t help that the minimum wage system is not strenuously enforced, and penalties are low. At the moment, the major risk for an underpaying employer is that they might have to pay a portion of the wages that they should have paid in the first place. In terms of pure incentives, it is rational for many employers to underpay. That’s particularly the case if the employer’s competitors are underpaying.

If Australia is going to run a migration system that is mainly low-skill, and if it is committed to a minimum wages regime, then more resources should be dedicated to enforcement, and penalties should be higher. And some visa conditions for international students and working holiday makers may need to be rethought so that their public policy purposes are appropriately weighed against the extent to which they undermine Australia’s minimum wages regime.