In recent years, wage growth in Australia has been uncharacteristically low in a range of key labour cost advices, including the Wage Price Index (WPI). Persistent low wage growth has had a broad-based impact across all industries and states and has been associated with low inflation outcomes and government revenue from household spending. The most recently reported ABS Statistics on WPI (to June 2019) show that WPI for the private sector has remained flat at 2.3% for consecutive quarters. Public sector WPI has been only marginally higher at 2.6%. In the five years prior to the Global Financial Crisis, these rates averaged 4%. In the 22-year history of the WPI series, dispersion in wages growth across jobs has never been lower.
Labour productivity growth has been well below average over the past 5 years, growing by an average of only 1.1%, where previously it was 1.5%. Treasurer, Josh Frydenberg is challenging corporate Australia to boost its productivity by prioritising long-term investments like new technologies over short-term share buybacks and special dividends. At the same time, the Reserve Bank of Australia (RBA) interest rates are also currently at their lowest, sitting at 1% following two recent cuts in June and July 2019. The RBA Governor, Philip Lowe, has indicated economic growth in Australia has been lower than expected following a protracted period of subdued wage growth and declining house prices. Looking forward, Lowe says he expects growth to strengthen gradually and would welcome a further gradual lift in wages growth.
From July 2019, Australia has increased its national minimum wage by 3%, making it now the highest minimum wage in the world according to the OECD. According to ABS Labour Force Statistics, Australia’s unemployment, underemployment and underutilisation rates have remained steady, at 5.2%, 8.3% and 13.5% respectively for the year to June 2019. For the 12-month period to May 2019, full-time Adult Average Weekly Earnings increased by 2.7%, with employees in the Mining industry receiving the highest average weekly earnings. The Construction, Forestry, Maritime, Mining and Energy Union has just released its draft NSW pattern agreement, which pushes for 5% pay increases per year indefinitely from 2019 onwards.
Among Australia’s highest earners, more than a third of the top 100 CEOs had their fixed pay frozen in the last year along with 29% of top executives according to a report by PricewaterhouseCoopers. This is the first time since 2016 that executive pay has lagged behind general employee wage growth. 77% of chief executives in financial services received no increase in fixed pay following the Hayne Royal Commission. There has also been a move towards a greater reliance on base salaries and less on bonuses and variable remuneration.
In parallel with the above observations and the general uncertainty in global trade following the global financial crisis, together with the near term impact of the Hayne Royal Commission on the financial services sector, we are observing a decline in the rate of foreshadowed growth in earnings and revenue among many organisations.
Boards are showing resistance towards rewarding the company’s leadership and management group for a substantially diminished performance in a manner comparable to the past by reflecting relative outperformance aligned to diminished returns. Where this is coupled with a zero to modest rate of increase in annual salary, declining overall reward opportunity in the 2019 and foreshadowed 2020 Financial Year will have an impact on management’s view in relation to base wage increases.