CoPS/IMPACT Working Paper Number G-279

Title: A decomposition and microsimulation analysis of occupational wage growth in Australia, 2010-2017

Author: Janine Dixon and N.H. Tran


Dynamic historical and comparative static decomposition CGE simulations are a powerful tool for understanding structural change and its impacts. In this paper, we examine the impact on wages of three sets of structural drivers: macroeconomic factors, qualification supply, and technical change.

To the CGE analysis, we add a microsimulation analysis. Microsimulation addresses a shortcoming in CGE modelling, which is that the household sector is represented by one or several representative agents. With the representative agent treatment, CGE modelling is unable to capture all of the diversity in the household sector in relation to the levels of income, sources of income, and composition of expenditure by different households.

Over the study period of 2010 to 2017, average growth in real wages in Australia was weak. Growth in high-wage occupations was generally stronger than growth in low-wage occupations, resulting in a widening gap between the wages of the highest- and lowest-paid workers. Over the period, key results from our research indicate that:

(a) Macroeconomic factors played a role in determining overall wage growth, but did not explain the disparity between wage growth at the occupational level;

(b) Strong growth in the supply of qualifications at the level of bachelor degree level and above detracted from wage growth in the high-skill occupations;

(c) Skill-biased technical change in favour of the high-skill occupations led to relatively strong growth in the wages of high-skill occupations, an effect that dominated the results; and

(d) Relatively strong growth in the wages of high-skill occupations added disproportionately to the incomes of high-income households and led to an increase in household income disparities and an increase in the relative poverty rate. However, this result did not take into account possible changes in occupation by households over the study period. With the wages of low-skilled occupations falling further below average, a change of occupation, rather than a pay-rise in their existing occupations, was a better prospect for low-income households to avoid falling into absolute or relative poverty.

The decomposition analysis could be extended to a broader analysis of structural change in the Australian economy, and may be the subject of future research. The links built for this analysis between CGE modelling and microsimulation also suggest scope for future research.

An earlier version of results reported here was presented at the Melbourne Economic Forum on December 12, 2017. We are grateful to members of the Forum including Peter Dixon, James Giesecke, Craig Emerson and Mark Wooden for valuable feedback.

JEL classification: J11, J24, J31, C68, D58.

Key words: CGE decomposition, microsimulation, wages, technical change.

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