Wage growth in Australia is broken

Photo: Ben Birchall/PA Images via Getty Images

Something is broken when it comes to wage growth in Australia.

See, look:

Source: Westpac

From Westpac, it shows the relationship between Australia’s labour market underutilisation rate — capturing unemployed and underemployed workers (primarily those in employment who would like to work more hours) — against annual hourly wage growth as measured by Australia’s Wage Price Index (WPI) released by the ABS.

Compared to the past, something has gone amiss since the start of 2015.

While Australia’s underutilisation rate remains elevated compared to past levels, wage growth remains below the levels you’d normally expect to see, clustered in a small grouping in the bottom-right of the chart.

In essence, the relationship between labour market slack and wage growth appears to have broken down.

But why?

According to Simon Murray, economist at Westpac, while there’s no clear explanation, there are some factors that could explain why the relationship has broken down.

“This could be because of ongoing structural factors weighing on wages growth such as globalisation, technological change, and the behavioural effect that has on workers who are concerned about job security,” he says, an opinion in line with the views offered by RBA governor Philip Lowe earlier this year.

Murray also notes that it’s not just Australia experiencing this phenomenon, pointing to a lack of wage pressures in other major economies such as the US, UK and Japan where labour market conditions are considerably tighter than in Australia.

“These factors are applicable to developed economies around the world, and may be what is holding back wages growth in countries with less slack in the labour market than Australia,” he says.

Given recent trends and still elevated levels of labour market underutilisation, Murray says the risk is that Australian wage growth will remain weak in the period ahead.

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