The payrise mystery: Why so few of us have received a wage increase
Australia's jobless rate is at historic lows, so why are our wages not going up?
Records are being broken all over the economy. Unemployment is at historic lows, prices are rising at a record pace, interest rates keep climbing at a rate rarely seen, and mortgage payments are set to soon be the highest on record as a share of income. So, what’s going on with wages?
The pace at which our pay is going up is frustratingly middling. Even a pay rise of 3.5 per cent is way below the rate of inflation, so, in inflation-adjusted terms, we’re going backwards.
Now, this is good news in a macroeconomic sense because the one thing the Reserve Bank (RBA) fears most is the so-called “wage-price spiral”- where the intertwined dragons of higher prices and higher wages pursue each other relentlessly higher, each spurring the other on until they become a blur, a whirling helix that could potentially destroy our economy in a haze of triple-digit price rises.
But, in real-life terms, it sucks. Insipid wage growth makes the dull life of working feel even more pointless. Wishing that wages rise in line with inflation so we don’t continually get poorer doesn’t sound like too much to ask.
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When unemployment was high, low wage growth made some sense. But now that unemployment is low, and has been so for months, we still don’t have strong wages growth, as the next chart shows. It does seem unfair.
So why doesn’t it happen? What’s the reason for the sluggish wages? And will wages ever catch up to prices?
The answers to these questions make a lot of sense if you ask the right person, And the right person in this case is University of Melbourne labour market expert Professor Jeff Borland.
One big reason wages had stagnated, Borland explained, was that they were often locked in years ahead these days. A lot of nurses, teachers, etc are on enterprise bargaining agreements (EBAs) that don’t change when the economy changes. The union locked in 3 per cent per year back in 2022, for example, when that looked like a great deal. Now, the workers are stuck with it, even though they’re going backwards.
Sure enough, workers in industries where enterprise bargaining or award pay rates are rare have seen better pay rises than workers in industries where it is common – almost twice as high.
Secondly, the private sector is also paying much better than the public sector at this time – public sector wage caps mean public servants are pocketing pay rises of just 2.5 per cent a year while private sector workers are getting nearly 4 per cent pay boosts.
No wonder teachers are fleeing the industry – pay is rising much better in the non-government sector.
A third reason: we’re measuring wages wrong, Borland explains. This one is good news. The chart above shows the wage price index (WPI). Now, usually, that’s fine. It’s a good way of measuring how much people are getting paid. But, at the moment, employers are slinging around a lot of bonuses. And WPI excludes bonuses because it tries to measure basic pay.
So, the actual amount people are taking home could be sneaking up more quickly than the chart above suggests.
“Periods of stronger employment growth tend to be associated with a larger gap between WPI growth, including and excluding bonuses,” Borland said.
If your boss is paying you a bonus, huzzah! But also, beware. There are lots of ways employers are trying to hang onto their staff without locking in pay rises that will mean they have to pay out higher salaries year after year.
Borland said employers worried about the longer term. Employers might be waiting “to see if a return to the pre-COVID labour market - for example, involving the return of international students and working holiday makers - allows them to solve the labour-shortage problem without needing to pay higher wages".
With loads of backpackers and foreign students about to jump on a plane to Australia, it may make sense to pay workers a bonus now, or run on a skeleton staff, rather than lifting their base rate of pay, which would set an expensive precedent.
But, for the workers of Australia, an expensive precedent might be the difference between going backwards and getting ahead.
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