The latest release of the wage price index saw yet another record low rate of wages growth. In the private sector, wages in the past 12 months grew throughout Australia by just 2.1% on average. The figures are yet another blow to the critics within the government of the current industrial relations system and also rather dampen the case made by the treasurer and prime minister that tax reform needs to urgently tackle “bracket creep”.
Since before it came into being, critics of the Fair Work Act have claimed it puts the unions back in charge and that it is an example of the “pendulum swinging” too far in favour of the workers, as opposed to some theoretical perfect middle in which employees and employers are equally favoured.
Joe Hockey in his final speech in parliament gave the rusty saw another turn when he suggested, “Yes, Work Choices did go a little too far, and the fairness test was too late. But I am afraid Labor went too far the other way, and we have a structural imbalance in our workplace relations system that costs Australians jobs – and better-paying jobs at that.”
It’s a view that has not become any more correct the more times it is repeated, and it is one which suffers a blow whenever the latest wages price index data is released.
In the past 12 months, wages in the private sector grew by a record low 2.1%; in the public sector they grew by 2.7% (just up from the record low of last quarter) and combined average wages grew by 2.3% – also a record low:
I feel almost some degree of sadness that Senator Eric Abetz is no longer minister for employment, because I always delight in repeating his claim from 2011 that, “The Coalition is concerned that we will see huge levels of wages growth across Australia if action is not taken to ensure sustainable pay increases.”
No one with any sense is worrying about a wages breakout now. Wages in the private sector for the past three quarters have grown by just 0.5% – which would be a record but for one quarter during the global financial crisis:
And we know no one with any sense is worrying about wages or the lack of flexibility in the system, because the RBA for some time now has been saying neither are a concern.
In its latest statement on monetary policy, the RBA noted that: “Low wage growth has been broad-based across public and private sectors, industries and states. All industries have experienced wage growth below their decade averages.”
It also noted that “increased labour market flexibility is likely to have provided firms with greater scope to adjust wages” and that “this low wage growth may have encouraged firms to employ more people than would otherwise have been the case.”
If that is the pendulum swinging too greatly towards union control, please spare us from it being more “in the middle”.
And you don’t need to listen to the RBA, the data shows the system is working as it should.
A comparison of wages growth in the mining sector with the total growth shows with the end of the mining boom has come the end of any wages boom as well:
When we transfer this to state-by-state growth, it’s clear Western Australia is struggling, with private sector wage growth in that state a chilled 1.6% (another record) whereas in New South Wales and Victoria, where jobs have been more plentiful of late, wages are growing by 2.2% and 2.4%.
And across industries, we see that even though the construction sector has seen some level of boom, wage growth is among the lowest of all industries. Not far above that industry is the wage rises of the transport, postal and warehousing industry which includes dockside workers.
Someone really should get on the phone to tell the CFMEU and MUA that under the Fair Work Act, they’re back in charge now:
The system is working as it should.
Indeed, as Justin Smirk, the senior economist with Westpac Economic Research has noted, given the historically low wage growth is occurring at a time hours worked is rising, you could argue wages are not performing as expected, but worse than they should be:
Usually when hours worked rises, wage rises increase. But since 2013 the opposite has occurred.
If anything, the data would suggest there is perhaps too much “flexibility” in the system and too much of an ability for businesses to keep wage rises down even as they increase employment and hours worked.
The limp wages growth also makes Scott Morrison and Malcolm Turnbull’s worries about bracket creep rather a bit overblown. Yes, over time wage rises put people into a higher tax bracket (at least for some of their income) but currently that is happening more slowly than ever before.
The concern for most workers isn’t that their pay rise might put them into a higher tax bracket, but that their pay rise will stay above inflation.
On this score, the low wage rises actually have some good news. Due to the extremely low growth in the cost of living for employees, real wages are growing at around 1.4% a year:
This is historically quite high, and agrees with the national accounts data that has shown that real labour costs have risen in the past 18 months.
But the reason hasn’t been a wages breakout, but rather that inflation has been so low that it is almost impossible for wages to stay below or equal with them.
Consider that employee cost of living grew by just 0.7% in the past year – would you agree to a wage rise of just that amount? And given most enterprise agreements are for three years, would you agree to a wage rise of just 2.1% over the next three years?
Given the low cost of living is mostly due to the RBA cutting interest rates, you would be foolish to do so. As the RBA is unlikely to cut further, and even if they did, rates are expected to rise with the next three years, expecting cost of living to stay that low is very ambitious. Consider over the past three years, in which interest rates have been slashed and overall inflation growth has been near record low, the cost of living still rose on average by 1.23% each year.
Currently union officials expect inflation to rise by 2.3% annually over the next two years – a level lower than market economists predict:
And so our wages continue to grow meekly, and the IR system continues to work as those who value a flexible system would wish it to.
The question for the future is thus not whether a wages blowout is about to come, but will wages respond to improved employment growth and hours worked? Or has the “flexibility” in the system really just ingrained low wages for the foreseeable future?
