StatSnack: the forgotten benefit of slow wage growth

The slowdown in Australian wages growth, while negative for household income and consumption, has broader economic benefits by reducing costs for businesses. 

Together with a pick-up in productivity, lower wages growth has seen a substantial slowing in Australia’s unit labour costs in the past few years. 

As a result, Australia has not experienced a further deterioration in the international competitiveness of its labour in the past few years, following the sharp increase in relative unit labour costs between 2004 and 2012. 

Despite the recent stabilisation however, Australian unit labour costs still increased by 34 per cent between 2004 and 2013 in Australian dollar terms. 

Currency movements amplified the increase, with Australian unit labour costs rising by 57 per cent in US dollar terms over the same period, by far the strongest increase in Organisation for Economic Co-operation and Development regions.

The depreciation of the Australian dollar in 2014 and further expected depreciation through 2015 and 2016 will provide some welcome assistance. 

ANZ Research estimates Australian unit labour costs in US dollar terms will decline by 5 per cent in 2014 and another 4 per cent in total through 2015 and 2016.

Further out, it is difficult to envisage Australian wages growth running at a significantly lower rate than its global counterparts for a sustained period. 

Thus, once the currency benefit fades, ANZ research believes any substantive improvements in Australia’s labour competitiveness will depend on productivity outcomes.