(Image: Mitchell Squire/Private Media)

According to the government’s latest budget forecasts, no one’s getting a real pay rise any time soon. In fact, we’re going to go backwards between now and the 2024, despite unemployment plunging to 4.5%.

That means that Australian workers will have entered a second decade of wage stagnation, despite the government’s insistence that it is being driven by a desire to see wages rise.

And remember this is all wages — not private sector wages, which have been trailing public sector wages in recent years. And it’s an average, so many private sector industries like construction, manufacturing and retail will experience even lower “growth”.

That’s why Robert Gottliebsen warning of a “wages explosion” in The Australian is so absurd. If there’s any wages explosion, it will be of the kind that Eric Abetz, during his fortunately brief stint as employment minister, warned of in 2014, right as historic wage stagnation was setting in.

Why is wages growth so poor that workers’ real wages will be falling when unemployment is at a level not seen since John Howard was fending off Kevin Rudd — and while the government is spending over 26% of GDP?

The budget papers provide some insight. Budget paper No. 1 explains:

The near-term outlook is consistent with low wage increases in new federal enterprise bargaining agreements and state public sector wage caps that are expected to moderate the outlook for wage growth over the forecast period. Towards the end of the forecast period, the lower unemployment rate and broader economic strength should see wages begin to pick up.

That’s true, but incomplete: there’s also the federal government’s opposition to minimum wage increases, its support for penalty rate cuts and — speaking of public sector wage caps — its policy of preventing public service wages rising faster than private sector wages. Those factors must have dropped out of the copy at some point.

And then there’s the general shift in bargaining power in favour of employers and against workers, as corporations get larger and unions shrink.

A government with any fiscal discipline might reflect on whether pumping tens of billions into the economy to get joblessness down so low might not be as good an idea as, say, providing subsidies for trade union membership, thereby encouraging workers to rejoin them, and loosening the restrictions around bargaining and industrial disputes. Given the demonstrated links between union membership and wage rises — even for non-union workers — this might do more to lift real wages than massive fiscal stimulus.

The budget papers do flag that “ongoing international border closures may cause labour shortages and place upward pressure on wages in selected industries” but otherwise there’s little joy for workers other than the promise of a juicy 0.25 percentage point increase in real wages — before tax — in the mid-2020s.

Treasury notes in the budget papers that it has recently revised its estimate of the Non-Accelerating Inflation Rate of Unemployment (NAIRU) “resulting in a lower NAIRU estimate that lies within the band of 4.5%-5%”. Once unemployment gets below that level, “wage and price growth become increasingly sensitive to employment growth. However, the extent to which tightening labour market conditions will flow through into wage and price pressures remains highly uncertain.”

So according to Treasury, if unemployment gets somewhere below 4.5-5%, wages might grow. Helpful, isn’t it? That’s because NAIRU is a hindsight-driven, utopian measure of the point where inflation and employment diverge, a point that can’t be identified accurately, only guessed at.

In Australia estimates have been all over the shop in recent years from more than 5% unemployment to 5%, to 4.5%, 4% and now according to the RBA, maybe with a “3” in front of it.

To illustrate how useless NAIRU has been in recent years, from 2016 to the start of 2020 we had the longest and most sustained growth in jobs we’ve seen in decades. The result? Slowly easing inflation, and softening wages growth, enough to make the Reserve Bank cut cash rates to new record lows. The latter is not supposed to happen under the Phillips Curve (of which the NAIRU is a supposedly important part). The Phillips Curve is based on a theory that inflation and unemployment have a stable and inverse relationship. Instead we got remarkably strong jobs growth while wages, for many workers, went backwards.

Explosion? We can only hope.

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