A weaker jobs market and stagnant wages are looming as growing risks for the economy and for the government’s finances — and for the political fortunes of the beleaguered Turnbull government.
Today’s Wage Price Index data from the Australian Bureau of Statistics show wages growing at 0.5% for the March quarter and just 1.9% annually, seasonally adjusted. Private sector wages grew just 1.8% annually. With an inflation rate of 2.1%, that means real wages have fallen, particularly for private sector employees. Most of us are going backwards, unable to keep up with even the current low level of CPI growth.
The government is well aware there’s a problem with stagnant wages. Private sector workers haven’t seen wages growth above 3% a year since Julia Gillard was prime minister, nor 4% since Lehman Brothers collapsed eight years ago. For the first three quarters of the 2016-17 financial year, private wage growth has been below 2% in seasonally adjusted terms.
The budget papers last week downgraded the forecast for wages growth in 2016-17 from 2.25% in December’s MYEFO to 2%. The MYEFO forecast itself had been downgraded from 2.5% in last year’s budget. For private sector employees, now even 2% looks ambitious. Treasurer Scott Morrison has been empathising with voters about it, and promising better times ahead. The budget predicts wages growth will lift to 2.5% in 2017-18 and then 3% in 2018-19, then 3.5%, and higher, beyond that.
That forecast has attracted greater scepticism than any other in the budget. Few people outside Treasury can see wages growth picking up that quickly. So even the decidedly unambitious goal of 3% growth in wages, which is unlikely to deliver much in the way of real wages growth, is being treated with caution.
To add further substance to that scepticism, the Reserve Bank revealed yesterday that it had devoted a substantial part of its May 2 board meeting to an in-depth discussion about changes in the composition of employment in recent decades — and in particular the growth of part-time employment. The outcome of that discussion was a relatively sanguine view of why part-time employment was growing: it was mostly driven by worker choice as young people who are studying, parents (usually women) and older workers preferred part-time work. But some workers do want more hours. And …
“… growth in part-time employment had become more cyclical over time because businesses had been more able to respond to changes in demand by adjusting the hours worked by employees rather than the number of employees. This increase in labour market flexibility had been enabled by a range of factors including labour market deregulation, technological change and the shift towards a more service-based economy. As a result, the distinction between full-time and part-time work had become less important in assessing labour market conditions.”
The business community hates acknowledging that anything less than a full-on, WorkChoices-style assault on workers benefits them and the economy, but that hasn’t stopped them from using greater labour market flexibility under Labor’s Fair Work Act to reduce workers’ hours as they need to in response to external conditions.
Unsurprisingly, the bank also devoted time to discussing housing and house prices. But more surprisingly, it concluded “the Board continued to judge that developments in the labour and housing markets warranted careful monitoring”. That doesn’t augur well for strong jobs growth — but does reflect the sentiment in the budget papers, which lifted the forecast unemployment rate by a quarter of a percentage point for this financial year and next, to 5.75%.
It also suggests the bank is worried it may have to cut interest rates this year, when many had expected the next movement, when it came, to be up.
Unless wages growth achieves the kind of impressive take-off forecast in the budget, the government won’t achieve anything like the tax revenue growth it anticipates in the budget — it believes personal income tax revenue will grow $16-18 billion a year from 2018. Weaker wages growth has already hit retailers hard, and further weakness will only make things tougher for a sector that will also face the arrival of the 800 lb gorilla that is Amazon.
But it will also create a political problem. Wage stagnation doesn’t merely create the obvious problem of an electorate receptive to an opposition that promises to lift wages, it gives workers the sense that the economy, and markets, aren’t delivering for them. Business and commentators can complain all they like about populism and how disliked business is, but if people feel they’re being let down by the economy, it’s entirely rational for them to look elsewhere for economic solutions.
This is the downside of the eternal demands of the business community for yet more reform and ever greater deregulation. Australian workers endure real wage cuts (exactly as many reform advocates have demanded) while corporate profits rise and business attacks them as selfish reform laggards. Unfortunately, workers vote and businesses don’t. That’s why the economic debate has shifted leftward. It might be very different if workers were still seeing the wages growth they had under Labor. But that’s unlikely to return for years.
“Unfortunately, workers vote and businesses don’t.”
I would think it fortunate that businesses don’t vote.
Unless you’re in Sydney City where you get two votes as a business and one as an individual
Businesses don’t vote, but they have the resources to buy the votes of the naive and stupid to vote on their behalf.
The extremely wealthy are anti-democracy. They always have been. We’re seeing that play out here and around the world right now.
What all the chest-thumping by so many industry lobby groups fails to address is that the more than half of the households in this country have struggled to keep their purchasing power above the inflation rate for the last twenty years.
And it’s even worse for the “bottom half” when their household income “growth” is compared to GDP growth.
Whether from Retail, Manufacturing, Hospitality or Mining, all industry lobbyists will suggest that workers wages in their industry must be reformed… downwards!
If we are to ask if they would be OK if half their customer base was to have little or no increase in spending power in the forseeable future, well they would have a serious objection to that.
Whilst the wealthiest one million households in Australia have enjoyed massive increases in purchasing power, and discretionary spending power particularly, the poorest million are slipping further behind.
From a macro economics perspective, adding income of $10,000/household/year to the wealthiest decile will see much of that leak out of the local economy through overseas travel (holiday-Aspen??), luxury cars etc, whilst an extra $10,000 in the hands of the poorest decile of households will see it come straight back through the local economy (holiday – caravan park!).
Over the past 20 years incomes for the top 10% have risen 72% and only 16% for the bottom ten percent; now the business sector is lamenting softening demand in many sectors! The average real wages growth for the last 20 years is around 50%, but if its not distributed for maximum economic benefit, well, we shouldn’t expect much of a lift in growth and therefore jobs.
It’s not just a matter of equity or fairness or even being deserving; the ever-increasing disparity between our wealthiest one million households and the poorest is not even good economics, it’s a drag on economic performance.
We should be debating what level of wealth and income disparity we’re comfortable with.
And also understand how economic modelling translates a given level of disparity into GDP growth and economic performance.
Well said, Dougz!
Inequality continues unabated…but no one at the top seems to understand the economic consequences of this phenomena.
Especially not this government or its business mates!!
Beautifully put Dougz and the numbers to go with the argument. Well done!
Nice work Dougz, you had the temerity to add figures as well. I just run my mouth off on stupid arguments that suggest that poor people spend their money locally while the rich squirrel their’s away in Cayman Island bank accounts. No need for figures from me when explaining the bleeding obvious (at least to you and me it is, anyway)
I find it scandalous that the RBA finds no issue with part time work being everywhere. None can plan a life on part time work. I have been working in the same place for a fair while and had several promotions. I sure haven’t got 50% more and over the last few years it has been pretty thin. The whingers at the top end are really getting my goat at present.
The Reserve Bank’s “…relatively sanguine view…” of part time work jumped out at me too.
Increasing part time work (and its bastard relation casualisation) reduce business costs at the expense of consumer’s purchasing power.
And they wonder why retail sales are down?
Our institutions and representatives just don’t seem to get it.
I don’t get this Turbott’s “Best Economic Managers” government “economic logic”?
They want wages growth : at the same time as they want to
* stomp out penalty rates (but only for a select class, of their Limited News Party choice, of worker);
* screw down the minimum wage;
* is sanguine about the rise in a casualised “flexible” workfarce and underemployment, and
* mans the barricades with sponsors/employers against workers wages growing on the grounds of “employers can’t afford” them – because there’s barely enough to pay those obscene executive/sponsor’s remuneration and bonuses???
….. So who do they think is going to shell out for these “rising wages” they’re banking on?
The Truth Fairy?
[In ’93 I happened to be working on-site at a (Belgian owned) company that placed “Just Vote Liberal” “reminders” in the pay-packets of their workers, on the pay-day of the week before the election.]