Private Sector Pay Rises Hit New Low, But Why?

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ABS Wage Price Index March Quarter 2016 (18 May 2016)

Reserve Bank Statement on Monetary Policy Price and Wage Developments (May 2016)

The graph just keeps pointing south on the trends in private industry quarterly changes in wage rises. Eighteen years after this particular Bureau of Statistics index was established, it is now at its lowest level.

These figures are consistent with the Reserve Bank’s observations about wage prices however the last time the indices were this low, there was considerably higher unemployment. This circumstance is unusual, where wages pressures are low but so too is unemployment.

One explanation is that higher paying jobs in some sectors have disappeared and the new jobs those employees have taken up are lower paying. However the evidence appears to show that these changes are within industries and not across different industries.

Other factors most likely at play include lower wages being paid to new employees than those they replaced, and lower promotion rates. It is thought that other income employees receive through travel and accommodation expenses, is in decline too. Given the prevalence and pervasiveness of telecommunications connectivity, this has some resonance.

The lower wage growth appears to have encouraged firms to employ more, which probably accounts for the overall stability in household incomes despite wages being virtually stagnant when inflation is taken into account. And on that front, it seems most, if not all, of the experts are of the view that Australia’s inflation rates will stay low. This suggests that interest rates will stay where they are or go even lower.

In enterprise bargaining outcomes, the statistics reflect these same trends. Wage increases in agreements, which include or retain productivity trade-offs, are very modest with many at 2% and less. The employers in trouble are those with expired agreements which have high annual increases embedded in them which continue to apply, despite the agreement’s expiration. There has been an increase in activity in this segment as the employers realise the competitive disadvantages of having 3+% increases in this economic environment which looks like lasting a while.