The latest wage growth figures should make the Reserve Bank cut rates in December as their absurd worries about a wage-price spiral have been completely blown to bits.
Six years ago, Gareth Hutchens and I wrote a special report titled “Whatever happened to wage rises in Australia?” It’s kind of annoying how well it holds up.
On Wednesday the latest wage price index figures revealed that in the past year private sector wages rose 3.5%, down from 4.1% in the June quarter. That is the biggest one quarter fall since the GFC in 2009.
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So much for a wages breakout (sigh). So much for the concerns of all those conservative commentators back in 2022 that Anthony Albanese supporting a minimum wage rise of 5.1% would send us down the path of hyperinflation.
It is quite infuriating now, as we look back with total hindsight, that the Reserve Bank’s concerns about a possible wage-price spiral were total and utter crap.
Of course, the infuriating thing is that this was known at the time.
The RBA boffins will note that they never actually said there was a wage-price spiral, but merely that there were risks.
But let’s not be so bashful.
The reason they raised interest rates 13 times was they believed households had too much money, were spending too much, and they were worried this would lead to businesses employing more people and thus causing wages to rise quickly.
And so they stomped on the brakes, hoping to get unemployment to rise to 4.5%, which they view as the right percentage of people to be living in the poverty that accompanies jobseeker.
But here we are with unemployment at 4.1% – below the level that the RBA thinks causes inflation to “accelerate” – and wage growth is slowing.
And worse, slowing in a way that takes us back to 2018 and wondering “whatever happened to wage rises”.
From 2016 to 2020 the relationship between wage growth and unemployment shifted such that wages grew much more slowly than expected, given how many people were looking for work.
For a brief period early this year it looked like we might be back at the old trend level of wages and unemployment from 1998-2012.
But alas, no.
These latest figures show us heading back to the 2016-2020 range, where wage growth is about 1.5% slower than was the case earlier this century:
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This comes at a time when we need wages to grow faster than cost of living to get back what we have lost.
The good news, on the surface, is that the 3.5% growth in wages is above the 2.8% increase in inflation over the same period. But if you are not feeling like your living standards have improved, that is probably because you have a mortgage.
Remember that the official inflation figures don’t count mortgage repayments. But the “cost of living” indexes do.
Since March 2022 the cost of repaying a mortgage has increased 155%. And because interest rates did increase in the past year, rather than the 2.8% inflation rise, “employee household” cost of living rose 4.7%.
That means that, rather than real wages increasing, if you count mortgages (which if you are paying one you certainly need to do when you are thinking about bills each month) your ability to buy things with your wage over the past year fell 1.1%:
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Even worse, workers have now lost about 9% of their purchasing power over the past three years.
Initially, while inflation rose and the RBA kept rates steady, employees’ cost of living did not rise as fast as the official inflation measures. But once the RBA began raising rates, the cost of living soared, and people’s real wages fell quickly:
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Interest rate rises have had an extraordinarily outsized impact on the increase in the cost of living.
If you exclude mortgage rate rises, the increase in the cost-of-living measure is not all that different from overall inflation. Inflation is actually a bit bigger because the official CPI includes the cost of building a new home, whereas cost of living does not.
But when you include mortgages, the difference is stark:
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So yes, the latest wage growth figures are better than inflation, but we have a long way to recover the ability to buy the same amount of things with our wage that we could three years ago.
The increase in interest rates was done to kill a boom in spending that was not actually happening. The increase was done to kill wages growth that was not occurring.
Inflation was driven across the world by supply-side blockages which companies took advantage of to increase profits.
Economists around the world now almost universally accept that this is what happened. Even the rather staid Brookings Institute argues that profit margins played “a key role”.
With wage growth now sharply dropping, it is time for the RBA to acknowledge its fears of a wage-price spiral were misguided and to give everyone a much-needed break for Christmas by cutting rates and easing the cost-of-living crisis, for which it can take much of the blame.
