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Wages chill in COVID-19 conditions

Real wage growth is taking a hit under the COVID-19 pandemic and may turn negative later this year and into 2021, reducing households’ purchasing power and living standards.

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In ANZ Research’s latest economic outlook, nominal wage growth is forecast to slow to 0.7 per cent year-on-year in the first half of 2021 from 2.1 per cent in Q1 2020, according to the Wage Price Index (WPI). From there, ANZ Research expects a gradual improvement to 1.2 per cent year-on-year by mid-2022.

"The mid-June Fair Work Commission announcement of a 1.75 per cent increase suggests some upside to forecasts.”

Much higher labour underutilisation underpins ANZ Research’s weak wage growth forecasts. The forecast also assumed a minimum wage freeze, similar to 2009 in response to the Global Financial Crisis (GFC).

However, the mid-June Fair Work Commission announcement of a 1.75 per cent increase suggests some upside to forecasts. This increase is smaller than usual though and has been deferred for some industries. There have also been a number of public sector wage freezes at all levels.

Uncertainty around current economic forecasts remains much higher than usual. It is possible wage growth doesn’t weaken as much as ANZ Research expects. Indeed, a growth rate of 0.7 per cent year-on-year would be well below the previous low of 1.9 per cent year-on-year in 2016-17. The WPI tends to be slow-moving and, so far, the Reserve Bank of Australia (RBA) is only forecasting a fall to 1.5 per cent year-on-year.

However, the COVID-19 crisis is very different from previous downturns.

There are downside risks, particularly given the unusual circumstances of actual and proposed wage cuts without a corresponding reduction in hours. For example, KPMG employees have taken a 20 per cent pay cut for four months and some Australian universities will cut salaries to reduce the number of job losses.

Higher underutilisation, lower growth

Wage growth has been persistently weak for several years. Although not all reasons are fully understood, greater spare capacity in the labour market – particularly higher underemployment – is undoubtedly a major contributor.

Due to COVID-19 and the necessary lockdowns and physical distancing measures, underutilisation has soared to more than 20 per cent. This is well above the peak of 15 per cent in the mid-2010s which preceded wage growth falling below 2 per cent year-on-year.

Furthermore, the unemployment rate is artificially low at the moment, due to the big fall in participation. JobKeeper has been successful in supporting links between eligible employees and employers but some are working few or even zero hours and still being counted as “employed”.

Despite ANZ Research’s forecasts for a recovery in employment from mid-2020, it will be a very long time before we see underutilisation back at pre-pandemic rates. And with the estimated non-accelerating inflation rate of unemployment (NAIRU) down to 4.5 per cent, the task of achieving full employment is even greater.

In fact, ANZ Research is forecasting the unemployment rate to continue to rise to a peak of around 7.5 per cent by Q4 - even as employment increases - as participation also recovers. ANZ Research expects the unemployment rate will remain in the high 6 per cent mark until well into 2021.

After an initial drop in underemployment (as some businesses prefer to increase current workers’ hours rather than hiring or rehiring), ANZ Research expects this too will decline more slowly. The underemployment rate may settle at a higher differential above the unemployment rate, as it has in previous downturns.

Smaller, partially-deferred increase

In June, the Fair Work Commission announced a 1.75 per cent nominal increase in the minimum wage, amounting to an additional $A13 per week for full-time workers. Aside from the post-GFC freeze, this increase is the smallest since the mid-1990s.

Changes to the minimum wage flow through to the award wage system. Almost a quarter of employees in Australia have their pay set according to minimum or award wages. But some enterprise bargaining agreements (EBAs) are also directly affected by minimum and award wage rates.

Overall, the RBA estimates up to 40 per cent of employees in Australia are directly or indirectly affected by the minimum wage decision.

But the minimum wage increase will be deferred for workers in some industries. Frontline workers in health, social assistance, education and child care will receive the increase from the usual 1 July. But workers in construction, manufacturing and most other industries will only receive it from 1 November.

Workers in the industries hit hardest by COVID-19, including accommodation, arts and recreation, aviation, retail and tourism, will only receive the increase from 1 February 2021. Award wages are more prevalent in some of these industries.

ANZ Research’s forecasts assumed there would be a minimum wage freeze, emulating the zero increase in 2009 in the wake of the GFC. So this announcement means there is some upside to wage growth forecasts.

The Fair Work Commission’s decision essentially took the middle ground. The Australian Council of Trade Unions (ACTU) proposed a 4 per cent increase to the minimum wage, arguing a freeze or minimal increase would reduce the purchasing power of lower income households and hamper the recovery in aggregate demand for businesses’ goods and services, particularly given lower income households have a higher marginal propensity to spend.

On the other hand, some business groups proposed a wage freeze, citing the unusually weak economic conditions and arguing an increase to the minimum wage would slow the employment recovery. The Federal Government had advised a “cautious approach, prioritising the need to keep Australians in jobs and to maintain the viability of the businesses”.

Aside from the Annual Wage Review, there have been a number of announced and proposed public sector wage freezes at all levels of government. The Commonwealth Government introduced a wage freeze for public servants in April. The Queensland Government has frozen public service wages from 1 July 2020 but will then double pay rises in 2022. The South Australian Government has frozen wages for department heads, ministers and their staff. In New South Wales, the Government’s planned wage freeze was blocked in the Upper House. The Centre for Future Work found public sector wages freezes can be “economically counterproductive” and can spill over into weaker wage growth in the private sector.

WPI vs hourly earnings

ANZ Research’s wage forecasts refer to growth in the Australian Bureau of Statistics’ (ABS) WPI. This index measures “changes over time in the price of wages and salaries, unaffected by changes in the quality or quantity of work performed”.

In contrast, average earnings per hour measure total wages and salaries and employers’ social contributions (including superannuation) paid to the average employee per hour. It is affected by changes in the composition of industries and occupations and other quality changes.

This means the WPI is a lot less volatile than average earnings per hour.

In its May statement on Monetary Policy, the RBA forecast growth in the WPI to slow from 2.2 per cent in December 2019 to 2 per cent in June 2020 and to 1.5 per cent by the end of 2020.

However, the forecast profile for growth in nominal (non-farm) average earnings per hour is much more volatile, doubling to 7.75 per cent year-on-year by June 2020 from 3.1 per cent year-on-year in December 2019, before reversing to -5.75 per cent year-on-year by June 2021.

Catherine Birch is Senior Economist at ANZ

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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