Prior to COVID, wages growth in Australia was somewhat lower than was expected based on historical determinants. One potential explanation for this phenomenon is that employment had become more concentrated amongst a small number of large employers, reducing outside options for workers and lowering their bargaining power and wages.
This paper examines concentration in Australian labour markets and its impacts on wages using a large and representative database derived from administrative tax data. On average labour markets have not become more concentrated over time. However, since the 2010s the impact of any given level of concentration has become larger. As such, despite labour market concentration having remained constant, it may still help to explain surprisingly low wages growth pre‑COVID: simple back‑of‑the‑envelope estimates suggest that the greater impact of concentration may have lowered wages by a little under 1 per cent on average between 2011 and 2015.
Declining firm entry and dynamism appear to have contributed to the increased impact of concentration, and lower wages growth, by lowering competition for labour amongst incumbent firms. Declining union coverage and occupational mobility may have also played some role, but declining firm entry appears to have been the main driver.