Aug 14, 2014

In ‘high-wage, high-cost’ Australia, workers are going backwards

Australians' real wages are falling -- which is bad news for domestic demand but great news for business when coupled with productivity growth.

You may recall the "productivity debate" we had a couple of years ago when business and the Coalition, from Tony Abbott down, insisted Australia had a productivity problem, and it was because of Labor's Fair Work Act. Inconveniently, however, labour productivity then proceeded to increase significantly. It's still rising, in fact. It took a long while, but eventually the repeated hammer blows every three months in the national accounts numbers muted the incessant drone about labour productivity. True, some business leaders still can't help themselves and reflexively lament our poor productivity, but after two years of constant numbers showing rising productivity, the message got through. So the question is, how long until business and some in the government stop whingeing about wages? For a year now, wages have been growing more slowly than inflation, yesterday's Wage Price Index shows. In 2013-14, wages rose 2.6%, while the CPI rose 3%. For those not employed in the public sector, wages rose just 2.4%, seasonally adjusted. In real terms, average workers are going backwards. It's the largest annual real wage fall since 2008. As AMP chief economist Dr Shane Oliver wrote yesterday, "[t]his tells us that labour costs are no threat to inflation but by the same token highlights that household income growth remains very weak, which partly explains why consumer confidence is low relative to business confidence". Wages rose 0.6% in the quarter, which was down from the 0.7% fall in the March quarter, indicating that growth continued to slow. Workers in some sectors fared OK: mining wages were up 0.9% in the quarter (no surprise there, they were well over 1.5% a quarter during the boom). But wages rose just 0.1% in accommodation and food services -- exactly the sector where the business whining about penalty rates is shrillest. Public sector wages though rose 2.8% (even though conservative governments are in power federally and in every state except South Australia and the ACT), so public sector workers also went backwards, but at half the rate of those private sector employees.
"One business' wage costs are another business' revenue, and falling real wages is bad news for sectors like retail that rely on household demand."
Based on this data, the June quarter national accounts will show a continuation of the fall in real unit labour costs seen over the past year or so. The March quarter national accounts showed real unit labour costs (non-farm) fell 1.0% to be down 1.5%. This means workers are becoming more attractive for employers to hire because their costs are outweighed by their productive value. But that's not happening with labour force growth slowing from around 90,000 in the March quarter, to just over 20,000 in the June quarter. The chief complaint about the Fair Work Act was that it prevented businesses from responding flexibly to changing economic circumstances and gave unions too much power in wage bargaining. But that argument becomes impossible to sustain when you look at how real wage levels have responded to the softer economic growth and rising unemployment that has characterised the last 12 months. Over the next one to two years, the weak rate of growth in wages will be one of the main influences on the economy. In the Reserve Bank's third Statement of Monetary Policy of the year, the bank saw the current weak employment position not improving until 2016, and keeping labour costs under control for quite a while:
"Over the past two years, the growth of wages, as measured by the wage price index, has declined to its slowest pace in at least 15 years. Wage growth is expected to pick up only slightly from its current pace over the forecast period, remaining significantly below its decade average of 3-3⁄4 per cent. At the same time, productivity growth is expected to remain a bit above its average of the past decade, helping to keep overall labour cost pressures well contained. This sustained period of slow growth in labour costs should assist in an improvement in the international competitiveness of Australian firms, which will lend more support to labour demand than would otherwise be the case. Meanwhile, spare capacity in labour and product markets is expected to see domestic inflationary pressures remain contained. Inflation in non-tradables items, which tends to be affected more by domestic demand and supply, and less by the exchange rate, has declined over the past year to around its slowest pace in 10 years. This slowing has been particularly marked in those components that are generally more sensitive to growth of labour costs.
Of course, one business' wage costs are another business' revenue, and falling real wages is bad news for sectors like retail that rely on household demand. As we noted a couple of months ago, a report for the Australian Food and Grocery Council managed to simultaneously complain about high wages and weak wages growth. And at the moment, real wage falls will add the vicious circle effect of slower economic growth, rising unemployment, weak consumer sentiment and flat retail sales. But for businesses that aren't reliant on domestic demand, things could hardly get better -- low inflation, real wage falls and labour productivity growth. And the June 30 reporting season shows that companies large and small are lifting dividends to shareholders faster than the rate of growth in wage rises. The Commonwealth Bank, for example, yesterday lifted profit 14% and dividends by 10% and its 2014 staff wage rises were lifted to 3.75%, from 3.5% last year -- both substantially less than the increases in shareholder payments. Companies are also adding share buybacks to profit rises and dividend increases. Good times. But reckon that will stop them whingeing about workers? Don't bet on it.

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8 thoughts on “In ‘high-wage, high-cost’ Australia, workers are going backwards

  1. bushby jane

    Shane Oliver, business confidence is higher than consumer confidence because ‘the adults’ are in charge, consumers live in the real world.

  2. MJPC

    So the question is, how long until business and some in the government stop whingeing about wages?
    The answer: never whilst workers get paid money. The capitalist’s (supported by this excuse for a government) long for the days of subsistence wages for 18+ hour days; maybe we will all go onto an Intern agreement and work for nothing, they would love that.
    By the way, in the Federal government PS’s are being offered 1% together with a loss of conditions…any society is only 3 meals away from a revolution.

  3. Liamj

    Who needs facts when you’ve got scores of amoral ‘communications professionals’ churning out acres of newsprint & hours of soundbites. The ACCI, IPA, BCA, CEDA, CIS, all will deserve a share of the credit for stalling the economy by underpaying the peasants.

  4. klewso

    All Right :-
    “Job’s done. You’ve all maximised profits (and, thus, your remuneration to management) by minimising wages to the working poor – what do the working classes have to spend, on your products, after they’ve scraped enough together to pay for necessities, such as shelter and nourishment”?

  5. drsmithy

    “High wage, high cost” Australia also entirely comes back to the property bubble. Until that’s fixed, nothing will improve.

  6. The Pav

    One of the other things about wages not keeping up with inflation is that it means going to work isn’t worth it.

    Part of the reason I ceased is becuase the economic rewrads ( salary) didn’t match the hassle or recognise my skills so I quit and took to travelling

  7. Luke Hellboy

    I would be curious to see how upper management and board level incomes increased (or decreased, lol) over the same period.

  8. TomM

    Recently released analysis by BCG here ( on global manufacturing costs. Labour costs is adjusted for productivity. While the headline number supports the BCA etc. on labour being too expensive in Aus, it also shows Germany & Japan are #2 and #4 largest exporters, yet are more expensive than China and US at #1 and #3…well yes of course. But what it shows is just because your costs may be high (Germany & Japan) doesn’t mean you can’t have a big manufacturing industry.

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