Wages growth in Australia at record lows

Last week was a very busy data release week and so I am still catching up. Last Wednesday (August 12, 2020), the Australian Bureau of Statistics (ABS) released the latest- Wage Price Index, Australia – (June-quarter 2020). The ABS reported that the June-quarter result was “the lowest annual growth in the 22-year history of the WPI”. Private sector grow was just 0.1 per cent and public sector growth was 0.6 per cent. The overall WPI growth was just 0.2 per cent. With annual inflation in the June-quarter recorded at -0.3 per cent, real wages grew. But the inflation result was distorted the federal government decision to offer free child care in the early period of the pandemic (now rescinded). The reality is better reflected in the core inflation rate (excluding volatile items) of 0.4 per cent. Taking that measure, real wages fell overall in Australia in the June quarter. Further, over the longer period, real wages growth is still running well behind the growth in GDP per hour (productivity), which has allowed profits to secure a substantially increased share of national income.

The summary results (seasonally adjusted) for the June-quarter 2020 were:

  • The Wage Price Index grew by 0.2 per cent in the June-quarter 2020, and 1.8 per cent over the previous 12 months – slowing.
  • The growth for the private sector was 0.1 per cent in the December-quarter and 1.7 per cent over the year – slowing.
  • The growth for the public sector was 0.6 per cent in the December-quarter and 2.1 per cent over the year – slowing.
  • The largest quarterly wage rises occurred in Electricity, gas, water and waste services (0.6 per cent), Education and training (0.5 per cent) and Financial and Insurance Services (0.4 per cent).
  • Wages declined in Other Services (-0.9 per cent), Professional, scientific and technical services (-0.5 per cent), Construction (-0.5 per cent), Wholesale Trade (-0.1 per cent), Accommodation and food services (-0.1 per cent), and Rental, hiring and real estate services (-0.1 per cent).
  • The annual CPI inflation rate was -0.3 per cent in the 12 months to June 2020. But as I explain below, the figure is distorted by the administrative decision of the federal government to offer free child care in the early period of the pandemic (now rescinded).
  • Labour productivity growth (output per hour) grew by 1.1 per cent over that period.

Nominal wage and real wage trends in Australia

The ABS Media Release – said that:

After a steady period of wage growth over the previous 12 months, wages recorded the lowest annual growth in the 22-year history of the WPI … The June 2020 quarter was the first full period in which COVID-19 social and business restrictions were captured in the WPI …

The June 2020 quarter rise was mainly in the public sector (0.6%). Private sector wage growth eased to 0.1 per cent as businesses adjusted to changes in the Australian economy.

The inflation in the June-quarter was reported at -0.348 per cent, driven by the decision by the Federal government to offer free child care in the early period of the pandemic to ensure the centres remained solvent.

The other inflation measures, which the Reserve Bank of Australia uses when assessing underlying movements, for the June-quarter were:

1. Core inflation excluding volatile items: 0.4 per cent per annum.

2. Weighted median: 1.3 per cent.

3. Trimmed mean: 1.2 per cent.

Which means that irrespective of the inflation measure used, there was a modest real wage increase overall for both public and private employees, which reversed the zero real wages growth in the March quarter (negative for private workers).

The wage series used in this blog post is the quarterly ABS Wage Price Index. The Non-farm GDP per hour is derived from the quarterly National Accounts.

Productivity data available via the RBA Table H2 Labour Costs and Productivity.

The ABS Information Note: Gross Domestic Product Per Hour Worked – says that:

In Australian National Accounts: National Income, Expenditure and Product (cat. no. 5206.0) and Australian System of National Accounts (cat. no. 5204.0) the term ‘GDP per hour worked’ (and similar terminology for the industry statistics) is generally used in preference to ‘labour productivity’ because:

– the term is more self-explanatory; and

– the measure does not attribute change in GDP to specific factors of production.

On price inflation measures, please read my blog – Inflation benign in Australia with plenty of scope for fiscal expansion – for more discussion on the various measures of inflation that the RBA uses – CPI, weighted median and the trimmed mean The latter two aim to strip volatility out of the raw CPI series and give a better measure of underlying inflation.

The first graph shows the overall annual growth in the Wage Price Index (public and private) since the December-quarter 2000 (the series was first published in the December-quarter 1997).

I also superimposed the RBA’s core annual inflation rate (red line). The blue bar area above the red line indicate real wages growth and below the opposite.

The following graph shows the annual growth in private sector real wages since the June-quarter 2005 to the June-quarter 2020. The Core inflation measure excluding volatile items is used.

The June-quarter result is an outlier – given the temporary government decision to offer free child care (now rescinded).

Throughout 2017 and into 2018, real wages growth was negative. But then there were several quarters of modest real wages growth. The trend, however, is towards zero real wages growth.

The aggregate data shown above hides quite a significant disparity in quarterly wage movements at the sectoral level, which are depicted in the next graph.

6 out of the 18 industrial sectors experienced wage cuts in the June-quarter 2020.

With the temporary negative inflation rate (courtesy of free child care) it doesn’t make sense to produce my usual sectoral real wages graph.

The ABS also reported that:

Private sector businesses reported genuine market-based reductions in jobs paid by individual arrangement to ease financial pressures. These agreements are more sensitive to labour market conditions …

June 2020 quarter WPI reported a higher proportion of wage reductions for Manager and Professional roles than for other occupations.

At an industry level, the Professional, scientific and technical services, Construction and Rental, hiring and real estate services industries had the highest proportions of wage reductions.

In other words, some workers took serious pay cuts – the most affected occupational group – Manager and Professional roles – around 13 per cent.

These cuts were for workers with ‘individual agreements’ while those on enterprise agreements and award based jobs were able to resist the pay cuts.

Workers not sharing in productivity growth

It is one thing for real wages to be rising but that doesn’t mean that the share of worker wages in national income is constant.

Real wages growth means that the rate of growth in nominal wages is outstripping the inflation rate, another relationship that is important is the relative growth of real wages and productivity.

Historically (for periods which data is available), rising productivity growth was shared out to workers in the form of improvements in real living standards.

In effect, productivity growth provides the ‘space’ for nominal wages to growth without promoting cost-push inflationary pressures.

There is also an equity construct that is important – if real wages are keeping pace with productivity growth then the share of wages in national income remains constant.

Further, higher rates of spending driven by the real wages growth then spawned new activity and jobs, which absorbed the workers lost to the productivity growth elsewhere in the economy.

Taking a longer view, the following graph shows the total hourly rates of pay in the private sector in real terms (deflated with the CPI) (blue line) from the inception of the Wage Price Index (December-quarter 1997) and the real GDP per hour worked (from the national accounts) (green line) to the June-quarter 2020.

It doesn’t make much difference which deflator is used to adjust the nominal hourly WPI series. Nor does it matter much if we used the national accounts measure of wages – I will deal with these nuances in a later blog post.

But, over the time shown, the real hourly wage index has grown by 15.3 per cent (although the most recent quarter is distorted by the free child care decision that temporarily reduced the inflation rate for the June-quarter), while the hourly productivity index has grown by 32.8 per cent.

If I started the index in the early 1980s, when the gap between the two really started to open up, the gap would be much greater. Data discontinuities however prevent a concise graph of this type being provided at this stage.

For more analysis of why the gap represents a shift in national income shares and why it matters, please read the blog post – Australia – stagnant wages growth continues (August 17, 2016).

So even though we should be happy to see real wages growth occurring, this does nothing much to redress the massive loss of income that workers might have otherwise enjoyed had real wages kept pace with productivity growth over the stretch.

Where does the real income that the workers lose by being unable to gain real wages growth in line with productivity growth go?

Answer: Mostly to profits.

One might then claim that investment will be stimulated.

At the onset of the GFC (June-quarter 2008), the peak Investment ratio (percentage of private investment in productive capital to GDP) was 23.3 per cent.

It peaked at 24.3 per cent in the June-quarter 2013. But in recent quarters it has steadily fallen and in the March-quarter 2020 (most recent data) it stood at 17.6 per cent.

Some of the redistributed national income has gone into paying the massive and obscene executive salaries that we occasionally get wind of.

Some will be retained by firms and invested in financial markets fuelling the speculative bubbles around the world.

Now, if you think the analysis is skewed because I used GDP per hour worked (a very clean measure from the national accounts), which is not exactly the same measure as labour productivity, then consider the next graph.

It shows the movements in the wage share in GDP (at factor cost) since the March-quarter 1960 to the March-quarter 2020.

The only way that the wage share can fall like this, systematically, over time, is if there has been a redistribution of national income away from labour.

I considered these questions in a more detailed way in this blog post series:

1. Puzzle: Has real wages growth outstripped productivity growth or not? – Part 1 (November 20, 2019).

2. 1. Puzzle: Has real wages growth outstripped productivity growth or not? – Part 2 (November 21, 2019).

And the only way that can occur is if the growth in real wages is lower than the growth in labour productivity.

That has clearly been the case since the late 1980s. In the March-quarter 1991, the wage share was 56.6 per cent and the profit share was 22.2 per cent.

By the March-quarter 2020, the wage share had fallen to 52.5 per cent and the profit share risen to 29 per cent.

The relationship between real wages and productivity growth also has bearing on the balance sheets of households.

One of the salient features of the neo-liberal era has been the on-going redistribution of national income to profits away from wages. This feature is present in many nations.

The suppression of real wages growth has been a deliberate strategy of business firms, exploiting the entrenched unemployment and rising underemployment over the last two or three decades.

The aspirations of capital have been aided and abetted by a sequence of ‘pro-business’ governments who have introduced harsh industrial relations legislation to reduce the trade unions’ ability to achieve wage gains for their members. The casualisation of the labour market has also contributed to the suppression.

The so-called ‘free trade’ agreements have also contributed to this trend.

I consider the implications of that dynamic in this blog post – The origins of the economic crisis (February 16, 2009).

As you will see, I argue that without fundamental change in the way governments approach wage determination, the world economies will remain prone to crises.

In summary, the substantial redistribution of national income towards capital over the last 30 years has undermined the capacity of households to maintain consumption growth without recourse to debt.

One of the reasons that household debt levels are now at record levels is that real wages have lagged behind productivity growth and households have resorted to increased credit to maintain their consumption levels, a trend exacerbated by the financial deregulation and lax oversight of the financial sector.

Real wages growth and employment

The standard mainstream argument is that unemployment is a result of excessive real wages and moderating real wages should drive stronger employment growth.

As Keynes and many others have shown – wages have two aspects:

First, they add to unit costs, although by how much is moot, given that there is strong evidence that higher wages motivate higher productivity, which offsets the impact of the wage rises on unit costs.

Second, they add to income and consumption expenditure is directly related to the income that workers receive.

So it is not obvious that higher real wages undermine total spending in the economy. Employment growth is a direct function of spending and cutting real wages will only increase employment if you can argue (and show) that it increases spending and reduces the desire to save.

There is no evidence to suggest that would be the case.

The following graph shows the annual growth in real wages (horizontal axis) and the quarterly change in total employment (vertical axis). The period is from the December-quarter 1998 to the June-quarter 2020. The solid line is a simple linear regression.

Conclusion: When real wages grow faster so does employment although from a two-dimensional graph causality is impossible to determine.

However, there is strong evidence that both employment growth and real wages growth respond positively to total spending growth and increasing economic activity. That evidence supports the positive relationship between real wages growth and employment growth.

Noting that we should not draw causality from two-dimensional cross plots.

Conclusion

Australia recorded its lowest rate of wages growth on record (in terms of the Wage Price Index – available since the September-quarter 1997) in the June-quarter.

While the nominal wage increase of 0.2 per cent meant that real wages improved in the June-quarter, that was only because of the negative inflation rate arising from the federal government decision to offer free child care in the early period of the pandemic (now rescinded).

The reality is better reflected in the core inflation rate (excluding volatile items) of 0.4 per cent.

Taking that measure, real wages fell overall in Australia in the June quarter.

Further, over the longer period, real wages growth is still running well behind the growth in GDP per hour (productivity), which has allowed profits to secure a substantially increased share of national income.

6 out of the 18 industrial sectors experienced wage cuts in the June-quarter 2020.

That is enough for today!

(c) Copyright 2020 William Mitchell. All Rights Reserved.