From Golden Age to Golden Age: Australia's ‘Great Leap Forward’?*

Abstract

I IntroductionDuring the 25 years following World War II, the Australian labour market produced extraordinary outcomes, probably surpassed only by Japan during this period. The labour market absorbed three million immigrants, many with poor English language skills; maintained full employment with unemployment levels often below 1 per cent; and increased average real wages at around 2-3 per cent a year, a rate similar to the USA and those countries of Western Europe with similar levels of economic development. This exceptional performance took place within an institutional framework of strong unions, centralised wage fixing, a compressed wage structure and an extensive welfare system. 1 Any analysis of this period would conclude that from a labour market perspective this was a golden age; all parts of the labour market were growing along a steady growth path with advantages for all. Of course, there were economic cycles, but even these seemed, in labour market terms, to be extremely benign. The most serious recession, that of 1961-1962, saw a brief unemployment increase to just over 2 per cent.* We thank the economists at the RSSS, the editor, Paul Miller, two anonymous referees and Jaques Poot for their useful comments on earlier versions of the paper. All errors are ours. Of course, Eva Klug has contributed a great deal as usual.JEL classification: J0, D6, E6, L5, O3 Correspondence : Paul Frijters, School of Economics and Finance, Queensland University of Technology, Garden Point Campus, GPO Box 2434, Brisbane, Qld 4001, Australia. Email: p.frijters@qut.edu.au or paul.frijters@anu.edu.au 1 An interesting research question, never properly answered, was why the Australian performance was so exceptional relative to the USA, for example, where unemployment and inequality were much higher but labour market and welfare institutions more closely approximated those suggested by basic text books for efficient labour market outcomes. Of course, the base level of average real wages was lower than in the USA but this gap primarily originated in the pre-World War II period, and it was relatively easy to attribute it to factors outside the labour market; such as economies of scale and the greater natural resources of the USA. See Pagan (1987) for a discussion of the reasons for what he terms 'the long boom' and its end. 208ECONOMIC RECORD JUNE

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“…Frijters and Gregory () set out the standard economic story of how shifts in production realities would change the distribution of the marginal productivity of skills. The stylised story is that between 1970 and 2014, the distribution of returns to skill became more unequal, with more people today both at the bottom and at the top of the wage distribution (see Figure ).…”

“…One standard policy response to these shifts is therefore to take changes in skill prices as given and try to generate relatively more of the skills that have become more valuable. Calls for educational improvement, public sector infrastructure in support of innovation and more skilled migration are often motivated by this view (Frijters and Gregory ).…”

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“…(ii) δ (Wage) = 0 and ε (LD) = -1: Hourly wages of minimum-wage workers do not rise, employment of minimum-wage workers falls by 10 per cent. This might occur if workers are heterogeneous and are always paid their marginal product (for such a model, see Frijters & Gregory, 2006). (iii) ε (Wage) = 1 and ε (LD) = -1: Hourly wages of minimum-wage workers rise by 10 per cent and employment of minimum-wage workers falls by 10 per cent.…”

“…This might occur if workers are heterogeneous and are always paid their marginal product (for such a model, seeFrijters & Gregory, 2006). This might occur if workers are heterogeneous and are always paid their marginal product (for such a model, seeFrijters & Gregory, 2006).…”

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“…He generally favoured the 'make work pay' policy but also advocated adoption of in-work benefits to increase the effective wage received when leaving IS. See also Frijters and Gregory (2006).…”