Here's why Australian wages are stuck in the mud -- and you shouldn't expect a big pay rise for years

Photo by Quinn Rooney/Getty Images

Australia’s wage price index, released today, revealed an increase in hourly earnings, excluding bonuses, of just 0.5%.

It left the year-on-year rate at just 1.9%, equaling the record low set in the prior quarter. With consumer price inflation running at 2.1%, it meant real wages growth went backwards for the first time since mid-2014.

That’s especially the case for private sector workers — the vast bulk of the labour market — whose saw hourly wages grow by just 1.8% over the past year, leaving them 0.3% worse off.

According to John Peters, senior economist at the Commonwealth Bank, there’s a good reason why wage growth is languishing at the lowest level seen since the survey began some 20 years ago: workers possess little real negotiating clout right now.

The reason is not as simple as weak labour market conditions, Peters says, noting that other factors such as technological change and labour market deregulation have also played a role.

Here’s his view on the role technology has played in placing downward pressure on wages.

A key reason behind the ongoing frail pulse of wages growth is most likely linked to the much more flexible labour market that has evolved in recent years against the backdrop of ongoing major structural changes (i.e. technological and digital revolutions) in the economy and jobs market. This dynamic has enabled companies to cap and bear down on wages growth in a relatively lacklustre jobs market.

And deregulation has also played a role, leading to marked shift in the structure of the labour market.

The major deregulation of labour and product markets since then has engendered major changes in the composition of employment. For instance, the share of part-time employment in Australia, has increased from around 10% in the early 1970s to over 30% at present, which is relatively high by international standards, especially for younger workers. And the services sector has been the chief source of employment growth over this period. Many areas in the services sector are heavily reliant on part-time workers. These areas are almost union free zones. Driving this point home are the facts that less than 5% of teenage workers and just 7% of workers in the 20-30 age group are union members. Not much collective bargaining going on here!

Peters says these factors have all contributed to “feeble wage pressures in recent years”, suggesting that its also being exacerbated by workers putting job security ahead of pay negotiations.

“In a period of jobs market slack with high levels of underemployment, employees tend to “cop it on the chin” and accept lower wages in return for heightened job security,” he says.

While those factors have been driving wage pressures lower, the question that all workers want to know is when will wage growth start to accelerate again?

Both the RBA and government are forecasting a pickup in the years ahead, particularly the latter who are projecting that wages will grow by 3.75% by the 2020/21 financial year.

While all Australian workers would welcome such an increase, particularly if it’s more, Peters — like others — thinks that projection is a tad optimistic, suggesting that an increase of this scale looks like “a bridge too far”.

He explains:

Even at the zenith of the recent mining boom, wages growth peaked at 4.3% per annum in late 2008 — a historically a benign result compared to previous booms in Australia. Back in late 2008, the unemployment rate was running just above the 4% mark and the inflation rate was running at 5% per annum — twice the central bank’s target. So it is hard to see how wages will grow toward this 4% level over the next four years as the Federal Budget has forecast, especially in the context of likely much higher unemployment and lower inflation over the 4 year budget forecast period.

It’s understandable why Peters and others are sceptical, particularly when looking at the chart below tracking the government’s past forecasts for wage growth.

Source: CBA

Year-after-year it’s been too optimistic, merely pushing back the wages recovery to a later date.

“For the record, wages outcomes have undershot budget forecasts over the past six years. Thus the forecasts risks are heavily skewed to the downside given there is elevated slack in the labour market and underutilisation is high,” he says.

Perhaps it’ll be seventh time lucky on this occasion.

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

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