Economic shorts: a new era of wages, labour

Businesses have been saying for some time they're paying their workers larger wage increases. But the wage data has only started to pick up gradually and workers are seeing their purchasing power fall. What is causing this disconnect?

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In the data, wage growth is up 2.4 per cent in the first quarter of 2022, only just above pre-pandemic levels. This is despite an unemployment rate of 3.9 per cent in May - the lowest Australia has recorded in almost 50 years. Underemployment also fell 0.4 percentage points to 5.7 per cent in May, taking the labour under-utilisation rate (unemployment plus underemployment) to 9.6 per cent, the lowest since April 1982.

“Australia’s Fair Work Commission awarded a 5.2 per cent nominal increase to the national minimum wage, equivalent to $A40 per week for a full-time employee.”

The continued downward trajectory in underemployment signals further wage pressures to come, particularly as underemployment has had a much stronger relationship with wage growth than unemployment over the past several years.

It is very competitive to find suitable workers at the moment. Some workers, particularly those on individual arrangements, have seen their wages growth pick up more quickly in response to the tight market conditions. But for other workers, particularly those on enterprise bargaining agreements, the minimum wage or award wage rates are only reviewed periodically and sometimes only after a few years. That's why wage growth can actually come through slowly in the data.

Recently, Australia’s Fair Work Commission (FWC) awarded a 5.2 per cent nominal increase to the national minimum wage, equivalent to $A40 per week for a full-time employee. But only an estimated 235,000 employees (less than 2 per cent) are paid the minimum wage. The FWC also awarded a 4.6 per cent increase to modern award minimum wages. Around 2.7 million employees (23 per cent) are paid an award wage. These are the largest increases we've seen for those in several years.

This is a good sign for many low paid workers. When those increases kick in from 1 July (or 1 October for some tourism-dependent sectors) wage growth will accelerate even further in the second half of the year.

But the FWC had to balance a lot of moving parts in the economy.

Finding the balance

Although Australia’s labour market is very strong at the moment, the cost of living has increased sharply. This disproportionately affects the lowest paid workers, particularly with inflation for non-discretionary goods and services going up more quickly than for discretionary items.

On the other side, the FWC weighed the potential inflationary effects of larger wage increases, as well as what they mean for business costs. Despite this, the key focus must be avoiding real wages falling for too long or too deeply.

Such a real fall is obviously not good for workers and households but it's also not good for businesses. If purchasing power continues to fall and people rein in their spending, that's going to put a hole in demand for business goods and services.

Ultimately, there are two main schools of thought. The first is that the economy is entering a wage price cycle where wage rises which push inflation higher and, in turn, push wages up even further. The other is we risk seeing ongoing high inflation without wages growth picking up enough to outpace it. That would lead to a larger, ongoing fall in real wages which is not a good thing for the broader economy.

ANZ Research is expecting nominal wage growth will accelerate but real wages will continue to fall through this year and into 2023.

A good thing

It will take time for households to see a pickup in living standards. But things like tightness in the labour market, rising inflation expectations, more people planning to or actually changing jobs to take advantage of higher wage offers elsewhere, look like good signs for wage growth to accelerate over the next couple of years.

ANZ Research expects stronger wage growth to be a good thing for the Australian economy.

For several decades, the labour share of income has trended downwards while the profit share of national income has risen quite significantly.

For the economy to grow sustainably and for the benefits to be distributed across businesses and workers - including the lowest paid - we need to see stronger wage growth going forward.

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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