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.