Why Australian wage growth looks set to remain lousy for some time yet, in one chart

Meagre growth. Photo: Getty
  • Australian wage growth remains stuck near the lowest level on record.
  • Australian unemployment is currently well above the level where many expect wage pressures will start to build.
  • Despite near-record hiring over the past 12 months, larger numbers of Australians looking to enter or reenter the workforce, along with stronger population growth, has meant that labour supply has increased nearly as fast as demand.

Australians shouldn’t be getting their hopes up for a decent increase in their pay packets any time soon.

This chart explains why.

Source: National Australia Bank

From the National Australia Bank (NAB), it shows where Australia’s unemployment rate sits in relation to what the Reserve Bank of Australia (RBA) deems to be Australia’s non-accelerating inflation rate of unemployment, or NAIRU for short.

NAIRU is the level where unemployment falls to a low enough level to start putting upward pressure on wages.

Right now, Australia’s NAIRU level is estimated to be around 5%, significantly below the unemployment level, currently 5.6%.

Even with employment surging by over 420,000 in the past 12 months, strong growth in labour market participation, helped by more Australians being encouraged to join the workforce by better job market conditions and population increase, has meant that unemployment still remains at relatively high levels.

Along with an abundance of Australians who already have a job but who would like to work more hours, it has meant there’s no acute shortage of potential workers for employers to choose from, contributing to recent weakness in wage growth.

Indeed, as the chart shows, unemployment has remained above Australia’s estimated NAIRU level for most of the post-GFC era, coinciding with a steep deceleration in wage growth over the same period.

While the RBA sees Australia’s unemployment rate edging down to 5.25% by the end of the June quarter this year, it doesn’t think it will fall further over the next two years, helping to explain why the bank thinks any lift in wages increases will be very slow and steady in nature.

Further muddying the outlook for wage pressures, no one can say with any certainty as to whether Australia’s NAIRU level is currently around 5%.

If recent evidence from other developed nations such as the US, UK and Japan is any indication, where wage growth remains weak despite far tighter labour market conditions than Australia, it suggests it could be significantly lower.

Some think it could be as low as 4%, some 1.6 percentage points below where unemployment currently sits.

While that theory is yet to be tested, based on current labour market trends both in Australia and abroad, the prospect of wage growth returning to the levels seen before the global financial crisis, at least in the short-to-medium term, appears to be remote at best.

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