Low Wages Growth the New Normal!

Two indicators recently published by the Australian Bureau of Statistics signal the end of an employment era.

The consumer price index declined in the quarter to March 2016, prompting the Reserve Bank of Australia to lower the cash rate and raising the possibility of further interest rate reductions.

The most recent release of the Wage Price Growth index shows that growth in wages has fallen further, from 0.5% in the December quarter to 0.4% in the March Quarter, leading to a year-on-year growth rate of 2.1%.

This is the lowest wage price index growth since the beginning of the dataset in 1998, as shown in the figure below.

Wage Price Index Growth

Some industries have hit their lowest point of wage growth over the same time period, including Mining, Construction, Wholesale trade, Electricity, Gas, Water and Waste Services, Transport and Real Estate. Financial services and the Insurance sector experienced lower growth during the global financial crisis, while ICT experienced its nadir around the time of the dotcom bubble.

Sector variability impacted by positive and negative global pressures is aptly highlighted by the following graph of the Wage Price Index growth of the mining industry versus that of all industries.

WPI Index Mining 2

Experts have been warning that declining terms of trade would see wages and living standards decrease unless the nation managed to increase its productivity. The Productivity Commission reported a 0.8% increase in multi-factor productivity in its 2016 update, the highest in recent years. Yet the falling terms of trade led to negative growth in Australia’s per capita income. If the terms of trade continued their trend, it would fall further, according to the Commission.

After many years of enjoying high growth in wages for the developed world, has Australia’s run come to an end? Will the current level of wage growth be the new normal, or will Australia create wage growth through innovation, championing new industries and export opportunities while focusing its citizens’ energies on striving to achieve global best in class productivity outcomes in all fields of national endeavour?

Unless Australia can focus its efforts on improving the nation’s productivity through education, technology and the application and development of technology, creating relative economic advantage in the above areas, there is a significant risk that the first scenario will occur.

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