One thing we know for sure about the Reserve Bank of Australia – it knows even less about the outlook for wage growth than it does about inflation. Ditto Treasury.
For the past dozen years, a graph of official wages forecasts versus outcomes has provided a laugh in any economic presentation. There’s a good chance that will continue to be the case.
Just before the “highest wage price index (WPI) growth in a decade” of 3.7 per cent was announced this week, both the RBA and Treasury were predicting the WPI will keep rising to hit 4 per cent.
The track record of both bodies and the actual WPI suggest that is unlikely. It is more unlikely when you throw in rising unemployment, weak consumer confidence and rapid population growth.
Meanwhile, in the real world, the headlines about high wage increases are only headlines for most people. In the way of statistics, a minority of outliers can distort the average.
As the Australian Bureau of Statistics showed on Wednesday, wages for 47.1 per cent of jobs – let’s round it up and say half of all jobs – scored an increase of less than 3 per cent. (Close to a fifth of jobs – 18.6 per cent – had an increase of less than 2 per cent.)
Only 14.4 per cent of jobs were in the headline zone of 3 to 4 per cent increases.
Nearly a quarter of jobs had increases of between 4 and 6 per cent, and a fortunate 10.6 per cent saw gains of more than 6 per cent.
For the WPI to keep kicking up, those with the bargaining power to have pushed much higher than average would have to keep doing so or the rather powerless bottom half would have to suddenly find much stronger bargaining muscle.
I’ve seen no sign of the latter and the figures for the past six months says neither is happening.
In both the December and March quarters, the WPI grew by 0.8 per cent – 1.6 per cent for the six months. To get to the forecast 4 per cent this year, the next two quarters have to rack up a fat 2.4 per cent.
The June quarter WPI last year grew by a solid 0.9 per cent and then the September quarter scored 1.1 per cent, the biggest quarterly increase in a dozen years.
Could happen, likely won’t
Let’s say the present June quarter is again 0.9 per cent. That means the September quarter would have to jump by a rather extraordinary 1.5 per cent while the economy is weakening, the impact of higher interest rates is still worsening and unemployment is continuing to rise.
It could happen – but you wouldn’t want to tip the economy into recession on such a chance.
“Ah,” you might think, “there could be a big minimum wage rise coming from the Fair Work Commission.”
Yes, there could be a decent increase for the people hurt most by high inflation – but that doesn’t flow through into broader wages growth nearly as much as the occasional alarmist business lobby might suggest.
For example, last year the Fair Work Commission increased the minimum wage by 5.2 per cent on July 1 and gave a bunch of award wages a 4.6 per cent rise.
Despite those increases, remember the September quarter WPI only increased by 1.1 per cent. What’s more, the rise in award wages was a minor part of that increase.
According to the ABS at the time, 57 per cent of that quarterly rise came from “individual arrangement”, 28 per cent came from enterprise agreements and only 15 per cent from award increases.
(If you’re being pernickety, some award increases were delayed to October 1, but as demonstrated, that did little to the WPI for the December quarter.)
The other reality is that wage rises averaging between 3 and 4 per cent are what we should be seeing if inflation was running at 3 per cent – what the RBA was hoping for pre-COVID after years of wages suppression.
Wage rises averaging between 3 and 4 per cent when inflation is 7 per cent are actually remarkably conservative, and certainly not inflationary of themselves.
Darwinian capitalism
Yes, there is that minority of jobs achieving wage rises closer to the inflation rate. They either are among the few to still have any industrial muscle or are in areas suffering severe skills shortages.
The promised rising unemployment and weakening economy – our per capita recession – will impact both of those exceptions.
And to repeat a broader economic reality, a shortage of labour resulting in higher wages actually encourages greater productivity.
The less-productive enterprises that can’t handle the competition for scarce resources are meant to go broke, freeing up resources for the more productive enterprises.
It’s tough, it’s Darwinian, it seems cruel, but that’s capitalism.
And when Australian non-resources industries have been dragging the chain on investing to improve their productivity, it seems they need a challenge to make them do more.
