Australian wages growth at record low

The growth in wages in Australia is about half the rate it was four years ago at 1.9%. In a stark contrast to the period of the 1970's and 1980's this is a cause for concern.

During the 1970's Prices and Incomes policies, where governments tried to limit pay rises to control inflation, subdued wages growth would be the cause for celebration. This is because firms costs are closely linked to the prices they charge as wages make up a significant proportion of those costs. Therefore the low rise in wages indicates that inflation in Australia is likely to stay low for now.

In fact inflation is so low that it is a significant cause for concern. It indicates a low level of Aggregate Demand (AD) growth, which is threatening Australia's overall economic growth.

The cause of this low wage growth has several roots. One is the end of the mining investment boom of course and the adjustment of the economy to non-mining sectors. However usually low wages growth is associated with rising unemployment (the Phillips Curve relationship) and in Australia unemployment has been trending downwards.

As noted in several other posts the unemployment figures are misleading. In fact there is growing part-time work and underemployment. In addition the participation rate is falling as people leave the labour market. This is making the unemployment rate look lower as it is calculated using the formula:

Unemployed

                   Employed + Unemployed     x 100

As those not participating in the labour market are counted as neither employed or unemployed the falling participation rate leads to a lower recorded unemployment rate (i.e. they would be unemployed if looking for work).

The ABC provides an excellent commentary with data on this story below.

The ABC story is here

This is an excellent subject for IA's in macro. Note the ABC article has too much analysis to be a good base article, but there should be plenty of articles out there that deal with the story without spoiling the chance to analyse what is going on.

Wages rise more slowly

The last time that wages rose as slowly as they did last year was 1997. Should we be surprised by this?

The previous post talked about unemployment being at a ten year high, and this should give us a clue to the wages data. When unemployment is high employers are under less pressure to grant wage rises because people might prefer to keep their jobs than force the issue and find themselves unemployed.

A.W. Phillips first identified this wage rise/unemployment link in 1960, using data from nearly one hundred years. There was a clear trade off between unemployment and wage rises.

 

The diagram shows the data up to 1913, the data from 1919 to  1957 looked identical. 

The link between wage rises and inflation was soon established and often the Phillips Curve is shown as a relationship between inflation and unemployment (a point not made by Phillips himself). So one good piece of news is that Australian inflation might be expected to moderate in the next six months. However the price is higher unemployment and some will feel that inflation is the lesser of two evils.

The article also suggests that Australians are going to experience lower incomes as wages rise less quickly than inflation. This is probably inevitable as the Australian dollar falls in value causing imports to be more expensive. Also it is part of the essential readjustment of wages to allow Australia to be competitive in the world market.

The ABC cover the issue here