Short of another boom in the next few years, the government is now facing a major challenge in getting back to surplus.

The September quarter’s Wage Price Index and its 1.9% annual growth rate (a record low and only matched by the revised 1.9% reading for the June quarter) revealed last week prompted further reflection on the implications of an extended period of weak wages growth. But this isn’t a problem that will go away anytime soon.

The Reserve Bank and the Australian Bureau of Statistics have both conducted intensive analysis of where wages growth came from in past years and where it is coming from now — and the results tell us that without a boom in mining or construction (the two most likely candidates), Australia will have a continuation of weak wages growth for the next couple of years, even if the current resources bounce triggers a rebound in inflation.

[Company profits soar, but taxes MIA]

In a speech in October, Reserve Bank governor Phil Lowe revealed the work the RBA and the ABS have been doing on the size of wage rises. An examination of the 18,000 jobs that make up the index showed wage rises were happening less often, and that in most industries increases were smaller than in the past. That might sound like a statement of the obvious, but an index compiled with such a large number of jobs potentially disguises different effects in different parts of the economy. “The decline in the average size of increases is largely due to a very sharp drop in the share of jobs where wages are increasing at what, by today’s standards, would be considered a rapid rate,” Lowe explained. “Six years ago, almost 40% of jobs received a wage increase in excess of 4%. Over the past year, less than 10% have got that type of increase.” That’s backed up by ABS analysis. And the minutes of the most recent RBA board meeting noted “members discussed the joint analytical work conducted by the Bank and the Australian Bureau of Statistics on micro-level wage price index data, which showed that a significant fall in the proportion of jobs receiving wage increases of more than 4% had been part of the explanation of lower aggregate wage growth.”

And despite the risible assertion of Treasurer Scott Morrison and the Business Council that a corporate tax cut will magically feed into higher wages (Michael Pascoe has done an excellent job of demolishing that argument), there is very little chance of a step up in wages growth without another boom to drive it. In its final Statement on Monetary Policy for this year, the RBA noted that while the mining boom helped drive wages up across the economy, as the boom sagged, wage growth stalled, jobs were lost, wages fell and the impact rippled across the entire labour market. That fueled the growing financial conservatism of workers, many of whom boosted their savings by spending less and have been repaying home loans faster than they needed to:

“As the economy continues the transition away from mining-led activity, there are likely to be further adjustments to relative wages. Following a period of being above average, wage growth is currently lowest in industries and states that are more exposed to the end of the terms of trade and mining investment boom, and relative wages in these industries and states have started to turn lower.”

The impact of the slowdown in mining wage growth can be seen from comparing the WPI for the September quarter this year with that of the same quarter in 2011, when the WPI rose almost double that — 3.7%. Mining rose an annual 1.0% in the latest WPI — five years ago wages down the mines were growing at 4%. And construction wages grew an annual 1.7% in the latest WPI — five years ago it was 4%.

[All hail the economic panacea of company tax cuts]

This doesn’t mean wages are falling. “Only a small share of jobs has experienced a decline in wages, indicating downward nominal wage rigidity,” the RBA noted. But it does mean that, if you’re looking for a source for increased wages growth from current levels, history suggests a boom in one sector is probably your safest bet. The building and construction industry is the only other big employing sector where wage rises approaching 4% or more could happen and act as a stimulant to wage rates in other sectors. But as we saw with the construction data on Wednesday, activity in this sector fell in the September quarter. While some analysts see a strong chance of a pick-up in building in 2017, it doesn’t look enough to see a series of 4% wage gains — and certainly not if the ABCC legislation passes and a draconian new body is established to go after the CFMEU.

That’s the problem with rhetoric from the government and business about big bad unions and their capacity to drive “unjustified” wage increases: you can’t on the one hand complain about weak wages growth and then demonise one of the mechanisms by which wages are increased. In the worldview peddled by the Coalition, business and their media shills, there are two kinds of wage rises: bad wage rises. which are produced by unions exploiting demand for labour to drive better outcomes for workers, and good wage rises, produced by businesses generously deciding to give a corporate tax cut to their employees in the form of a pay rise, rather than to shareholders.

Which one do you think is more likely to actually happen?

Government and employer attacks on penalty rates have a similar effect — especially given people on penalty rates have lower incomes and spend more of their incomes. Such attacks also make employees more fearful for their jobs and pay and feed into their behaviour, further weakening demand. Overall result — lower wages growth, less tax revenue, and the return to surplus pushed further away than ever.

Peter Fray

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