For at least five years now, Australia’s labour market has demonstrated signs of a structural shift that has undermined traditional patterns of wage determination, and eroded the quality and security of work. The economic and social consequences of this sea change in the world of work are severe and far-reaching: flat real wages (the worst labour income growth since the Great Depression), a severing of the traditional relationship between wage and productivity growth, a steady expansion of insecure work in various forms, growing inequality in income distribution (both between factors and across households), and a precipitous decline in collective representation and enterprise bargaining (especially in the private sector). Governments tell Australians to simply be patient, and let “market forces” do their work; wages will pick up and economic benefits will soon “trickle down.” But there is no reason to expect these concerning labour market challenges to resolve themselves. Instead, the whole history of Australia’s economy reminds us that pro-active policy efforts are always necessary to broadly distribute the fruits of economic growth to workers and their families.

Chief among these policy tools, of course, is the power of government to establish rules and regulations regarding labour market outcomes: everything from minimum wages and penalty rates, to the operation of the awards system, to the National Employment Standards, and the industrial relations and collective bargaining regime. Labour and social advocates are campaigning energetically (led by the ACTU and its “Change the Rules” campaign) to strengthen those rules. However, an important supporting role in a multi-dimensional effort to restore wage growth and stabilize labour standards can also be played by leveraging the enormous economic footprint of government. After all, Australia’s government sector (including all levels: federal, state, and local) constitutes by far the largest single part of Australia’s economy. This report documents the major dimensions of government’s economic footprint:

• Total revenue and expenditures of over $600 billion per year, equal to 35 percent of Australia’s GDP.
• Total “consumption” spending (that is, expenditures on current production of public goods and services) of over $330 billion per year (18.5 percent of GDP), and investment spending (on longer-lived capital projects) of over $85 billion (another 5 percent of GDP).
• Direct public sector employment of close to 2 million workers, with millions more jobs indirectly dependent on government injections of spending power into the economy
• Critical fiscal and policy support for public and community service provision by arms-length non-profit and non-governmental service agencies, which are worth at least another 4 percent of GDP.
• Goods and services procured from private-sector suppliers equivalent to around 10 percent of GDP (or about $175 billion per year).

This enormous economic influence, backed up by the unmatched fiscal capacity of government, has a powerful impact on labour market outcomes in all sectors and regions of the economy. Government expenditure affects wages, employment relationships, and labour standards through at least three distinct channels:

1. Wages and labour standards reflected in direct work and production undertaken within government and its departments and agencies (the public sector).

2. Wages and labour standards prevailing in arms-length service-producing organisations which depend on government funding for much or all of their activities, and whose performance is shaped by government rules regarding service standards and quality (the non-profit sector).

3. Wages and labour standards prevailing in the myriad of private-sector firms which supply government and public agencies with procured goods and services (the private sector).