Here's why Australian workers pay rises could be even smaller in 2016

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Australia created plenty of jobs last year. According to figures released by the ABS, employment increased by over 300,000 in the 12 months to December, the second largest calendar increase on record.

Despite the strength in hiring, that failed to translate into similarly robust wages growth. Indeed, over the same time period, Australia’s wage price index grew by just 2.16%, the slowest rate seen since the 1990s recession.

The news for those in the private sector — the vast majority of all Australian workers — was even worse, with wages growing by a paltry 2.0%, also a record low.

Depending on where you live, and what industry you work in, some workers even saw their salary go backwards, even before inflation, according to a recent study by online employment search engine Adzuna.

It’s all a tad depressing, even if more Australians are finding a job as a consequence.

Unfortunately for those looking for a steep wage increase this year, we may not have seen the bottom for wage growth, even with the recent improvement in the job market.

The reason why? The weak outlook for inflation.

Joseph Capurso and Peter Dragicevich, senior currency strategists at the CBA, explain the relationship that exists between inflation expectations, the outlook for wages, consumer spending and, as a consequence of all three, economic growth.

“If expectations about future inflation decrease, employers offer smaller wage increases, employees become more accepting of those smaller wage increases and businesses are less aggressive in increasing prices,” say the pair.

“For workers, smaller wage increases, or wage cuts, reduce their income and spending below what it would have been otherwise. Faced with weaker sales, businesses may turn to cost cutting that in turn depresses other businesses sales and workers income.”

It can end up being a vicious cycle if allowed to persist, creating deflationary pressures and increasing the risk of recession. One only has to look to Japan as evidence as to what can eventuate.

The chart below, supplied by CBA, looks at the relationship between business expectations for Australian inflation, comparing the results to wage growth.

It’s more than telling.

The red line tracks the proportion of Australian businesses that expect long run inflation to be less 3% according to the NAB’s monthly business survey while the blue line represents the ABS’ wage price index. The CBA has moved the the inflation measure forward 12 months given it is seen as a forward indicator on inflation expectations.

“Businesses long run expectations for inflation is a good predictor for wage inflation and suggests Australian wage growth may decelerate even further in 2016,” say Capurso and Dragicevich.

“Together with the poor global growth outlook, the weak Australian wage outlook suggests there remains downside risks to Australian inflation, and our view that the RBA’s cash rate will not be cut further.”

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