Morrison will feel relief at this overdue wages growth, but it is still pathetic | Greg Jericho

Yes, things are better, but we’re not quite at ‘good times are here again’ levels

The latest wages growth data released by the bureau of statistics on Wednesday has provided good news for the government. Wages are now growing faster than they have for three years and the news is generally good across all industries. We are finally seeing real wages increasing, albeit at a much slower rate than in the past.

After four-and-a-half years of slowing wages growth, we now finally seem to be back in a more regular scenario in which growth is mostly increasing – from an annual low in March 2017 of 1.9%, the latest growth is up to 2.2% in trend terms and 2.3% seasonally adjusted:

The private sector has seen a definite improvement in wages growth. Throughout 2015, 2016 and 2017 private-sector wages never grew by more than 0.5% in any quarter; now we have had three quarters in a row with growth above that level.

But that of course is a pretty low bar to get over – before 2015 there had only ever been one quarter in which private-sector wages had grown below 0.5% and that happened during the global financial crisis.

So yes, things are better, but we’re not quite at “good times are here again” levels.

The good news is that the wages growth is quite widespread. Across the economy, only the industries of arts and recreation, and information media and telecommunications, have slower annual growth now than they did a year ago:

The bureau notes that the wage growth is also coming from “an increased contribution of jobs covered by each wage-setting method” – awards, enterprise bargaining agreements and individual agreements compared with September last year.

Certainly there has been a good increase in the annual wage growth of enterprise bargaining agreements. EBAs set in the September quarter last year reached an average low annual growth of 2.2%, while those agreed to in the first quarter of this year averaged 2.7%:

Interestingly, the biggest driver of the growth is not a jump in large wage rises but rather an increase in the number of wage rise being given.

Research by James Bishop, the senior research economist at the Reserve Bank of Australia who is on secondment to the Australian Bureau of Statistics, reveals that the pick-up in the wage price index “largely reflects an increase in the frequency of wage increases, rather than an increase in the average size of the increases”.

So there is not suddenly a raft of “oh my god, wages breakout!”-style big wage rises, but that more businesses across the nation are once again granting wage rises after a long period of little or no increases.

All of this of course has big political implications. The government has for a long time now been struggling to convince voters that the solid economic and employment growth we are experiencing is delivering benefits for households.

It also very much impacts on the budget figures which predict strong wages growth – and thus strong income tax revenue growth over the next three years.

The latest figures make those predictions seem less unlikely, but there is still a way to go till we get wages growing at the 2.75% that the May budget predicted would occur by June next year – let alone the 3.25% growth to occur in the following year:

One bit of news that is firmly in the good news/bad news category is that the relationship between wages growth and unemployment does appear to be back in sync. As the unemployment rate falls, wages growth is expected to increase – something that did not happen through 2015 and 2016 but which has been happening for more than 18 months now.

But the problem is there appears to have been a dramatic shift such that unemployment rates now are associated with much lower wages growth than in the past. From 1998 to 2012, an unemployment rate of the current level of 5.2% would have been expected to deliver wages growth of around 3.8% – well below the current 2.2% trend rate:

It appears now that the better relationship is between that of underemployment and wages growth. The current underemployment rate of 8.3% is delivering the level of wages growth that would be expected over the past 15 years:

But it means that for wages growth to return to the 3.5% level that the Reserve Bank considers a neutral rate – and which should deliver on average 1% real wages growth – we need underemployment to fall still further to 7.0%, a level it has not been since the end of 2012.

But at least real wages are increasing. After an unprecedented five-year period of flat wages growth, finally we are seeing some signs of life:

The 2.2% annual wages growth is above the core inflation growth of 1.8% as well as the consumer price index growth of 1.9%.

It means that real wages grew in the past year faster than they have since 2013:

But the level of growth remains utterly pathetic compared with previous years – we have not seen real wages grow in a year by more than 1% now for six years, something that would have once been unthinkable outside of a recession.

The wages figures are good news – finally wages are going up consistently and most industries are experiencing the improvement. Should this translate into household incomes, the government will at least have a chance to argue that people are better off now than they were five years ago when it took office.

But there remain ongoing concerns that unless we are able to significantly reduce underemployment, we will continue to have much lower wages growth than in the past, even if unemployment falls to historically low levels.


Greg Jericho

The GuardianTramp

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