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Wage growth in Australia has been tanking, and it explains why everyone feels in a rut

Ian Waldie/Getty Images

Consumer confidence is a fragile thing. It’s easy, and sometimes fair, to blame markets or dithering political leadership for lacklustre consumer confidence as the ANZ’s economics and markets research team did this week.

But that is too simplistic a view of the drivers of confidence. Consumers do not exist in a vacuum influenced only by financial markets and political leaders. Their happiness – their confidence – flows from myriad drivers at the individual level, as well as political and macro factors.

Who doesn’t know someone who was going along swimmingly until life intervened with illness, job loss, family breakdown, or some other unheralded sliding door that ushered in changed circumstance?

It is in recognising consumers are sentient beings affected by all their surroundings – rather than automatons influenced only by outside forces – that we can see where the real long-term influences on confidence come from.

Sure, the ebbs and flows of weekly changes in consumer confidence and sentiment are often driven by markets and politics. But it is the economy in which consumers, their partners, their families, their friends, colleagues, and bosses exist in that sets the overall base level from which confidence can rise and fall.

A big part of that day-to-day economy is money that arrives in your bank account at regular intervals from your employer.

To me, as a behavioural economics and finance guy, this is an important understanding of what drives consumers, and consumption.

And consumption makes up close to 60% of Australia’s economic growth. Get that firing, and the economy should hum.

Today’s update on the nation’s wage price index is something usually doesn’t generate much discussion. But coming in at just 2.2% for the year to December 2015 – the lowest in ABS records – perhaps it’s time to start paying a bit more attention to wages and their impact on the psyche of Australian consumers.

Australians have become used to strong, above-inflation pay rises over the years. These have consistently delivered more money in the bank account every month and are naturally one of those things that make people feel better about themselves and their control over their lifestyle.

So it’s worth thinking about the impact of the collapse in the rate at which Australian wages increase each quarter, and each year, over the past 18 months has potentially had on consumers and their psyche.

Now sure, the collapse in wage rises to just 2.3% annualised belies the strength of employment in 2015 which saw more than 300,000 new jobs created in the Australian economy. But that level of wage growth is a substantial departure from the long-standing relationship between trend employment growth and wages growth.

That, as the Reserve Bank said in its February Statement on Monetary Policy (SoMP), means “labour cost pressures remain weak”.

In reality wages growth for workers has been weaker than the low growth rate of the Wage Price Index (WPI) suggests. The bank said in its SoMP that “average earnings per hour (from the national accounts) grew by only 0.6 per cent over the past year. The recent period has been comparable to the episode of low earnings growth in the early 1990s. Unions and firms expect wage growth to remain low for some time.”

The question of why wage growth has slowed, and defied the growth in employment, is perhaps better understood when you look at Australia’s national income. After all if Australia is suffering lower income then consumers are spending less, businesses are making less, profits are squeezed and suddenly wage growth, consumption, and domestic growth all find themselves in a rut.

We asked Justin Smirk, senior economist at Westpac, what he thought was driving the slowdown in wages growth.

Smirk told Business Insider:

A first I would have argued that it was in part due to the massive negative (Terms of Trade) shock hitting incomes, inflation and so wage expectations but while it is still there the magnitude is not as great.

It is possible to argue about structural change, the movement away from mining, production and (even now) business services towards tourism and household services where the skill set is less and, you may argue as we can also tap into a greater pool of available workers – females. This too would have an expectation not just on wage expectation levels but rates of growth.

RBA data supports the very switch Smirk is talking about.

“Wage growth has continued to decline in many goods-related industries where employment growth has been weakest. In contrast, wage growth has been little changed in household service industries where employment has increased substantially,” the RBA said in its recent SoMP.

Consumers can’t help but feel this slowdown in wages, that expectations of slow growth and the material step lower in the path of wages growth from the 3-4% level to a much lower 2% level per annum.

That, as Stephen Koukoulas tweeted overnight, is important for the consumption side of the economy, for retail spending, and for overall economic growth.

Whatever the data is when it’s released at 11.30am on Wednesday, the reality is that consumers know their wages won’t grow the way they have in the past and they have adjusted their spending and consumption expectations accordingly. That has an impact on inflation and unemployment expectations as well.

It’s why the RBA and central banks around the world are trying so hard to re-ignite inflation. It’s good for wage growth, good for consumption, and better for the overall economy.

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