Yesterday’s Wage Price Index showed that the rate of wages growth in Australia has slowed to a record low of 2.5%.
That’s bad news for workers used to higher increases over the past two decades.
But this chart of the relationship between Australia’s terms of trade and wages growth from Westpac senior economist Justin Smirk suggests that there is more pain, and lower wage growth, ahead for Australian workers.
It’s easy to understand this relationship and why it is so solid.
The terms of trade represents the price relationship between what Australia is being paid for exports and what we pay for imports. This is then reflected in income to Australian firms and by definition, informs their ability to grant pay rises.
So falling terms of trade means a decreased ability to pay higher wages – which is where we are now.
The bad news for Australian workers is the terms of trade is still falling.
So we’d all better get used to low wage rises.