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PAY GAP: Australian wages growth is stuck at record lows, and running behind inflation

GREG WOOD/AFP/Getty Images

For the first time in several years, Australian wages are failing to keep up with inflation.

According to latest Wage Price Index released by the Australian Bureau of Statistics earlier today, wages grew by 0.5% during the March quarter, leaving the year-on-year increase at 1.9%.

Both figures were in line with expectations, and unchanged from the December quarter.

However, with consumer price inflation currently running at 2.1%, it means that real wage growth went backwards for the first time since the June quarter 2014.

By sector, the ABS said that private sector wages rose 1.8% year-on-year, well below the 2.4% increase reported for public sector workers.

However, without rounding, private sector wages grew by just 1.79%, the lowest level on record dating back to when the survey first began in 1997.

The year-on-year growth rate for public sector workers increased from the 2.33% pace of the December quarter, rising at the fastest pace since the June quarter last year.

As a result of the weakness in private sector wage growth, the year-on-year increase for total workers — at 1.87% — was also the slowest pace on record.

The WPI measures changes in ordinary hourly rates of pay, and does not include changes in amount of hours worked.

Without seasonal adjustments, the ABS said that wage growth ranged from 0.6% for the mining industry to 2.3% for public administration and safety, education and training, and health care and social assistance industries.

This chart from the ABS reveals both the quarterly and year-on-year wage increases by individual industry.

Source: ABS

By state and territory, and reflective of divergent economic conditions across Australia, Western Australia recorded the slowest wage growth over the past 12 months at 1.2%. At the other end of the spectrum, wages in Tasmania grew by 2.3%, the fastest of any state and territory.

For private sector workers, those in Tasmania saw their wages rise by 2.3%, the fastest rate across the country. Those in Western Australia grew by just 1.0%.

Public sector workers in the Northern Territory enjoyed the fastest wage growth over the year at 2.9%.

While the WPI was in line with expectations, and largely unchanged from the previous quarter, it shouldn’t detract from the fact that wage growth — particularly for private sector workers who make up the cast bulk of the workforce — are currently going backwards.

This has consequences on the outlook for household consumption, the largest component within the Australian economy.

The weakness in wages, feeding through to slow household incomes growth, is pressuring the ability of households to consume, something that has been seen frequently in recent years, particularly in retail sales.

And with households now saving less than what was the case in prior years, it does raise a question mark over the outlook for Australian economic growth, especially should weakness in wage growth persist.

“With the cost of living as measured by the CPI now rising faster than wages, real wages are falling and this will act as a drag on consumer spending,” said Shane Oliver, chief economist at AMP Capital.

Not only that, Oliver suggests weak wage growth may make it harder for the RBA to spur a pickup in underlying inflation, and for the government to return the budget to surplus.

“Weak wages growth also implies ongoing downwards pressure on underlying inflation which risks staying below the RBA’s 2-3% inflation target for longer than its currently assuming,” he says.

“Ongoing record low wages growth also underlines the risk that the government won’t see the doubling in wages growth it assumed in the budget over the next four years and, as a result, government revenue growth will disappoint, further delaying the return to a budget surplus.”

Given signs that the deceleration in wage growth may be at or nearing its end, both the government and the RBA expect wage growth to pick up in the years ahead.

In the recent federal budget, treasury projected that wage growth would accelerate to as high as 3.75% in the 2020-21 financial year.

In the minutes of its May monetary policy meeting released on Tuesday, the RBA echoed a similar view, noting that wage growth was “expected to increase gradually as labour market conditions improved and the adjustment to the lower mining investment and terms of trade drew to an end.”

That may well happen, but with wages currently growing at an annual pace of less than 2%, and given evidence that it’s been hard to stoke wage pressures in other developed nations even with recent improvements in labour market conditions, it’s little wonder that some remain sceptical about a sharp turnaround in wages, particularly to levels back above 3%.

“The fact that wage growth is stuck in the doldrums comes as little surprise given the deterioration in Australia’s labour market, with the jobless rate climbing from 5.7% to 5.9%,” said Tom Kennedy, economist at JP Morgan, following the release of the report.

“We expect wage growth to remain unimpressive for some time given significant slack remains in the labour market.”

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