Cost-of-living woes will probably linger in Australian economy for years, but there’s a secret sauce to sustainable wage growth
Nobody likes to go backwards financially, and last week Chancellor of the Exchequer Jim Chalmers got some pretty bad news on that front.
A two-year period in which wages rose faster than inflation ended in December. The annual wage increase was 3.8 percent, below the inflation rate of 3.4 percent.
While Chalmers pointed out that wage growth has been above 3 percent for more than three years, he said any decline in “real” or inflation-adjusted wages was unwelcome news for the government. Especially a Labor government that has promised to tackle the cost of living crisis with stronger wage increases.
Yet the economy is too complex a beast to be summed up in a few simple numbers, and when you look more closely at the trajectory of household incomes, the reality is more complex than “we are all going backwards.”
For example, Reserve Bank governor Michele Bullock also told a parliamentary hearing this month that broader measures of household income, which take into account more than wages, tell a more positive story about how real incomes have grown since Covid-19.
“We’re looking at a metric of how much people are actually being paid. That’s not very clear either, but it’s above where it was pre-COVID,” he said.
Or if you look at how many customers are behind on their mortgages, things are getting better, not worse. Indeed, the real surprise in the latest round of bank profits was that so few borrowers were unable to repay their loans.
So how can one get such different impressions about the cost of living crisis? Are all workers’ incomes really going backwards after inflation, as these wage figures show? Or are things not that bad?
One reason for the conflicting narratives about the cost of living is technical: It depends on what you measure. There is a wide variety of data and statistics about the economy, and each can tell a different story. Even something you think would be simple like household income can be measured in a variety of ways.
For example, last week’s wage price index may not reflect a perfect picture of most people’s income over time. The index tracks hourly pay in a “basket” of jobs, but it doesn’t measure what happens when someone gets a pay raise after being promoted or how their pay changes when they move to a new employer. This is a significant gap, given that many of us change jobs or roles over the years.
Without going into too much detail, the RBA is also looking at a different, broader measure with the cumbersome name of average earnings from national accounts (AENA). It includes bonuses, overtime and pay rises from promotions, and the RBA says it is a “more comprehensive measure” of labor earnings in the economy.
This broader measure is higher than the wage price index released last week, but is also more volatile. AMP economists say AENA is up 42 percent since December; This rate is more than double the increase in wages in that period.
This suggests that the reality for many households is that recent declines in real wages are not as bad as you might think.
But in the long term, there is no getting around the fact that real wage growth has not been a strong point for the Australian economy over the last 15 years.
Wage growth was abysmal for much of the 2010s, and then the post-COVID surge in inflation dealt a massive blow to our spending power, from which we are still trying to recover.
AMP deputy chief economist Diana Mousina said inflation had risen by 23 percent since the end of 2020, while wages had increased by less than that, at 18 percent.
While the media will always pay great attention to quarterly movements in the consumer price index and wage price index, this long-term hit from inflation is probably more important to our daily perception of the cost of living. That’s because most of us don’t think about the latest inflation figures when we’re in the shops, but we do notice that things in the supermarket are a lot more expensive than they were five years ago.
Moreover, Mousina says, it could take years for wages to catch up with inflation and offset that hit, so “cost-of-living concerns are unlikely to go away.”
What can we do about this?
The RBA uses interest rates to push inflation back into its range; This will ultimately indirectly help “real” wages by reducing the pace of price increases.
But it’s far from ideal. The RBA’s weapon, high interest rates, is blunt (it slows down the entire economy) and somewhat arbitrary: it harms people borrowing money to buy homes, especially new buyers, while protecting others.
The more important long-term goal is what every business type and economist is concerned about, and that is to improve our poor productivity performance. This may sound dry, but it has a direct link to inflation and workers’ ability to achieve sustainable wage increases.
Why is productivity so closely linked to wages and inflation? Essentially, if a business can get its employees to produce more output per hour, it should be able to give them larger pay increases without needing to raise their prices too much to cover the higher wage bill. If many businesses could do this – raise wages without increasing prices as much as they otherwise would – this would help “real” wage growth.
This is the secret sauce of capitalism and the reason why material living standards rise over time.
None of this makes it easier to increase productivity; but that’s why so many people are demanding Chalmers take action in this year’s federal budget.
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Clancy Yeates is deputy business editor. He covered banking and financial services and was previously a national business correspondent in the Canberra bureau.Connect with: X or email.
