Here's another theory for why Australian pay growth is still lousy

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  • No one really knows why wage growth in Australia and abroad remains so weak despite a tightening in labour market conditions in recent years.
  • The RBA has offered another theory that may explain why wage growth isn’t responding as it did in the past.
  • Whatever the reason, it now appears that unemployment needs to hit incredibly low levels in order to deliver even a modest increase in wage pressures. Australia isn’t close to that point yet, hinting wage growth is likely to remain weak for some time yet.

Despite stronger economic conditions, booming employment growth and a full percentage point decline in Australia’s unemployment rate to a six-year low, there’s not been much joy for Australian workers when it comes to pay growth in recent years.

No matter what indicator you look at, pay growth still remains well below the levels seen in prior decades.

The chart below from the Reserve Bank of Australia (RBA) makes for grim viewing for Australian workers.

RBA

While Australia’s unemployment rate, at 5.3%, is still above the 5% level where some, including the RBA, anticipates where pay growth will start to accelerate, helping to explain why recent pay outcomes have been so weak despite a noticeable improvement in the economy.

Technological advancements leading to a concentration of wage growth in certain sectors, demographic changes, continued caution among workers, increased globalisation and weak inflationary pressures may also have contributed to the softness seen in wages.

Guy Debelle, Deputy Governor at the RBA, says there could be another factor at play: firms are finding additional ways to attract or retain key staff without having to lift basic wage rates for all workers.

“As the labour market has tightened, businesses are finding ways to retain some of their employees without raising wages for everyone,” Debelle said in a speech in Sydney today.

“Many businesses in our liaison program report that they are linking wages growth outcomes to individual performance, which provides employers the flexibility to reward and retain strong performers and valued skill sets while keeping average wages growth contained.

“The use of bonuses, especially to retain key staff, is also prevalent, which doesn’t permanently raise labour costs.”

Along with rewarding key personnel through traditional means such as pay increases and bonus payments, Debelle says there are reports some firms are offering other incentives to retain staff, an outcome that could be keeping average pay levels across the broader labour market at depressed levels.

“Some firms are attempting to retain staff by using non-wage incentives, including flexible work arrangements, shares, subsidised gym memberships, development opportunities and additional annual leave,” he said.

Like the other factors mentioned above, the theory offered by Debelle is just that — a theory.

No one knows for sure why tightening labour market conditions both in Australia and abroad hasn’t resulted in a pickup in wage pressures to the same degree as witnessed in the past.

While everyone continues to ponder that question, the recent evidence suggests ultra-tight labour market conditions are now required to help lift wages in a sustainable manner, and even then the pickup has been modest.

Australia’s not in that position yet, pointing to a continuation of recent themes for some time to come.

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