Westpac has some bad news for Australian workers hoping for a decent pay rise

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  • Australian wage growth appears to be bottoming following years of constant declines
  • While wage growth may start to pick up in the quarters ahead, Westpac says there is very little for workers to get excited about
  • Recent trends in new Australian EBA agreements and wage pressures abroad suggest wage pressures will remain weak for some time yet

Australia’s latest wage report was released last week, revealing a quarterly rise in hourly earnings of 0.55%, leaving the increase on a year earlier at 2.08%.

While barely ahead of inflation, meaning growth in real wages was next to nothing, the annual rate was above the recent-record low of 1.9% struck in mid-2016, suggesting that after years of constant declines wage growth may have turned the corner.

The question many are now asking is how far will wage growth lift, and how soon it will occur?

On that front, Justin Smirk, Senior Economist at Westpac, has some bad news for those banking on a return to the giddy days of annual wage growth in excess of 4% seen before the global financial crisis.

“Wage inflation may have found a base but there is very little to get excited about,” Smirk says.

“At a national level, the only real sign of any lift in wages is from the public sector, particularly in Victoria, with a focus mostly in education and training and health services.”

Outside of those sectors, Smirk says “wage growth remains quite weak and remarkably so across industries, sectors and states”, noting that of the 18 industries tracked by the ABS only two — healthcare and social assistance and arts and recreation services — had annual wage growth greater than 2.5% in the December quarter report.

For those employed in the private sector — accounting for the vast majority of the Australian workers — Smirk says the wage report provided little reason for celebration.

“Annual growth in private sector wages was flat at 1.9% year-on-year, close to the record low of 1.8% and much lower than the ten year average of 3.0%,” he says.

“Wages growth in the private sector hit a peak of 4.4% in mid-2008 from where it slowly trended down to the historical low in 2017.”

And while public sector workers enjoyed a faster increase in wages than their private-sector counterparts, lifting by 2.4% over the year, Smirk says there’s few signs that suggest wage inflation is accelerating.

“Public sector wages growth was a little stronger, lifting 0.6% in Q4, but this was on par with the average of 0.6% for the previous four quarters,” he says.

“So even in the public sector, it is really a bit of a stretch to argue that we have seen an acceleration in wage inflation.”

But what about the record level of employment growth in Australia last year, seeing over 400,00 new jobs created? Surely hiring of that magnitude — if sustained — will help to bring down unemployment and boost wage pressures?

In theory, yes, it should, says Smirk.

But this is 2018 — not 1998 or even 2008 — with the relationship between unemployment levels and wage growth diverging significantly from what was the case in the past.

Just look at this chart from Westpac for evidence as to just how much this relationship has changed since the GFC.

Source: Westpac Bank

Unemployment has slowly fallen over the last few years yet private sector wage growth has not responded, continuing to decelerate despite tighter labour market conditions.

“This relationship has shifted significantly over the last few years and is less reliable,” says Smirk.

“The muted reaction in wages to date could be because there is more slack in the labour market than that indicated by unemployment alone.”

To better understand why wage growth remains lower than what would have otherwise been the case in the past, Smirk says you need to look not only at the number of unemployed Australians but also those who are in employment but who want to work more hours, known as underemployed workers.

Combined, these two groups are defined as underutilised workers.

As seen in this next chart from Westpac, Australia’s underutilisation rate currently sits near the highest level on record, indicating that despite a recent decline in unemployment there’s still an abundance of workers available for employers to chose from, helping to keep wage pressures incredibly muted.

Source: Westpac Bank

And, creating even further doubt as to whether workers will start seeing a meaningful lift in wages ahead, Smirk says current wage outcomes are still well below the levels that you’d normally expect given underutilisation levels.

“At the national level this measure generates a better fit [on wage pressures] but nevertheless it still continues to overestimate where wage inflation should be,” he says.

“Based on an underutilisation rate of 14.2%, wage inflation should be around 2.75% year-on-year, quite a bit higher than where it currently is.”

That anomaly is captured in the faint red points clustered in the bottom-right of the chart.

Westpac says this may reflect structural factors relating to technology and globalisation which is potentially weighing in wage growth.

It’s also a similar scenario to that seen in the US, UK and Japan where extremely tight labour market conditions have not resulted in pickup in wage growth to anywhere near the magnitude seen in prior periods.

Creating further headwinds for Australian wage pressure, and ensuring uncertainty over the prospect for a meaningful lift in wage growth in the coming years, Smirk also points out that newly-inked enterprise bargaining agreements have also been far lower than those they are replacing, something that not only places downward pressure on wage growth now but potentially in the future.

Source: Westpac Bank

“In the September quarter 2017, the average wage rise paid by new agreements registered was just 2.0% year-on-year, well down from the recent peak of 3.4% in late 2016,” he says.

“It is starting to drag down the average wage rise paid for all agreements from a recent peak of 3.5% per annum at the end 2014 to 2.9% at the end of the September quarter last year.

Enterprise bargaining is the process of negotiation generally between the employer, employees and their bargaining representatives with the goal of making an enterprise agreement, according to Australia’s Fair Work Ombudsman.

It sets out the terms and conditions of employment, including pay rates, between an employee or group of employees and one or more employers.

According to analysis from UBS, EBAs cover around 36% of all Australian workers.

Given the downtrend in EBAs, a lack of wage pressures for private sector workers and what’s been seen in other advanced economies over recent years, it’s understandable why Smirk suggests there very little for workers to get excited about for wage growth in the years ahead.

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