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Wages growth: nothing to see just yet

Last week’s Wage Price Index (WPI) release for the March 2021 quarter confirmed what most people speculated – that wages growth in Australia remains missing in action. Wages increased by 0.6% over the quarter, with annual wages rising 1.5% (still nearly the slowest annual increase since the series began).

Wages growth had already been weak for some time, but when the pandemic hit, we saw a tale of two sectors. In June 2020, wages fell hard in the private sector as many businesses were forced to freeze (or cut) wages in a bid to survive the recession (by September 2020 annual private sector wage growth fell to just 1.2%). But come late 2020 – as economic conditions improved – these temporary pay cuts were getting unwound

Despite showing greater resilience, the public sector also hasn’t been immune to the weakening wage trend. Wage freezes and limits saw wages expand at the slowest annual rate on record (1.5% in the 12 months to March 2021).  

The wages story has also varied across industries. Education, utilities, health care, finance and professional services have all experienced above average wage growth in the past year (1.9% on average across the five industries), compared to real estate services, arts, admin support, wholesale trade and telecommunications, which all fared much worse (growing just 0.9% on average over the past year).

In part, this reflects wage agreement structures but, more broadly, it also reflects skills shortages within the labour market. According to the National Skills Commission there are 75,300 more online job advertisements in Australia now than was seen pre-COVID, and more than 10,000 job vacancies for each of general-inquiry clerks, sales assistants, ICT professionals, carers, medical practitioners and nurses, and hospitality workers.

For wages growth to have a meaningful upward impact on people’s incomes, wages need to rise faster than prices (what we call ‘real wage growth’).

Key to driving faster wage growth is lowering both unemployment and underemployment. Even with Australia’s remarkable jobs recovery to date, we are still a long way off the point at which bargaining power falls back into the employee’s hand in a broad sense.

In fact, no one exactly knows at what point this will happen. But as a rule of thumb, the federal government believes the unemployment rate will need to have a ‘4’ in front of it (currently unemployment sits at 5.5%). However, pre-pandemic evidence from other developed nations suggests that this target figure may need to be even lower.

So, not much to see yet on the wage front, and likely still some time before there is in an aggregate sense. In fact, Deloitte Access Economics expects wage growth to remain below pre-pandemic rates until mid-2024.

That said, a modest overall rate of wage growth may mask several areas of the labour market where there is significant wage pressure. With growing evidence of skill shortages, it is likely wage growth is going to be much more lopsided than we have previously experienced, with in‑demand occupations likely to reap the benefits.