The government's wages growth predictions appear to be wishful thinking | Greg Jericho

Until underemployment levels fall significantly, the prospects of wage growth are nonexistent

The latest wages growth data released by the Australian Bureau of Statistics on Wednesday suggests the small improvements that occurred during 2017 and early 2018 have stalled, with private sector wages growth now stuck at 2.3% for the past nine months.

The data also makes clear that until underemployment levels fall significantly, the prospects of wages growth as predicted in the April budget above 3% are nonexistent.

There was a little bit of good news for some workers’ pay packets in the past three month. Public sector workers look to have done very well – an overall average growth of 0.8% in seasonally adjusted terms in the June quarter – the best for five years and well above the 0.5% growth of private sector workers:

But as the ABS chief economist, Bruce Hockman, noted, that was mostly due to “the healthcare and social assistance industry, where a number of large increases were recorded in Victoria under a plan to ensure wage parity with other states”.

And when we look at public and private sector wage rises in June across each state, it is clear the jump for public sector workers in Victoria was very much the exception, and in New South Wales, Western Australia, Tasmania and the Northern Territory, private sector workers actually had stronger wage growth than workers in the public sector:

In such cases it is best to look at the annual trend figures which wash out such one-off rises.

Here, the picture is clear that while private sector wage growth of 2.3% is above the record lows of early 2017, there has been a distinct halt in the improvement.

From September 2017 to December 2018, annual growth rose 0.43% points from 1.86% to 2.29%. But since then it has stagnated, and if anything, begun to fall ever so slightly:

This is not good news for the government. Not only was the seasonally adjusted wage rise of 2.3% lower than the 2.5% rate predicted in the April budget, but the slowing of the growth does not bode well for the government’s prediction that wage growth will be up to 2.75% this time next year:

At least the government can claim that private sector wages are growing in real terms. The 2.3% growth is above the inflation growth of 1.6%:

But while this is good news, it is a symptom of inflation levels being so utterly low rather than wage rises being strong. Wages have never grown by less than 1.6%, so when inflation is that low, it is almost impossible not to have some real wage growth.

The real aim for long-term real-wage growth is for rises above 3% – something that neither private nor public sector workers have experienced since early 2013.

Given that is now more than six years ago, it is hard not to agree with the statements by the head of the Reserve Bank, Philip Lowe, last week in his testimony before the House economics committee, that workers have experienced low wages growth for so long that their expectations on what is normal have also been lowered.

The figures also highlight the shift of the Phillips curve – which compares wages growth with unemployment. In the past, the current unemployment rate of 5.2% would have seen wages growing at around 3.75% rather than the current 2.3%:

It appears the relationship between unemployment and wages still holds but such has been the shift in the curve that it now seems that to get wages growth of around 3.75%, we would need an unemployment rate of below 4%.

There does, however, still appear to be a very strong relationship between wages growth and underemployment.

The current rate of 2.3% wages growth is bang on where you would expect it to be given the current underemployment rate of 8.3%:

What this suggests is that for wages growth to get to the government’s hope of 2.75% by next year and 3.25% the year after, the underemployment rate would need to fall to 7.7% and then 7.2%.

That is the equivalent of 80,000 fewer underemployed by June next year and 150,000 fewer by June 2021.

That would be wonderful to see but it remains a big ask.

The last time the underemployment rate was 7.2% was more than six years ago. And to get to that level requires a fall of 1.1% points. During the mining boom it took four years to fall by the amount. The government is hoping it will happen in half that time, and without the benefit of a mining boom. That appears to be rather wishful thinking.

• Greg Jericho writes on economics for Guardian Australia

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Greg Jericho

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