Australians are taking a pay cut due to slowing wage growth and rising inflation
The cost of living is skyrocketing – but what many Australian workers may not realize is that their incomes have actually gone down.
We all know the cost of living is skyrocketing these days, but it may come as a surprise to countless working people to find that their incomes have in fact technically gone down over time.
This is because wages have not kept up with soaring inflation, which means millions of us are currently worse off, even though our wages have increased slightly over the years.
Chris Richardson, Partner at Deloitte Access Economics, said news.com.au wages were the key to understanding what was next for inflation and interest rates.
“Wages, prices and interest rates are the three amigos – they move together and ultimately wages determine the other two,” he said.
“Over the last decade and a bit in Australia and around the world, wage growth has weakened, so inflation has weakened and interest rates have come down.
“It was bad economic news because of weak wage growth, but good economic news because of lower interest rates.
“Now we are entering the next phase…wage growth, prices and interest rates are rising, which is good news for wages and bad news for interest rates.”
But according to Mr Richardson, things did not go according to the script, because it was the cost of things not directly impacted by wages – such as petrol and shipping – that jumped so much. significant, following the invasion of Covid and Russia. Ukraine and the uncertainty these factors have created.
The pandemic has also caused demand for some items to skyrocket while others have plummeted.
“It’s a crazy situation we’re in, so inflation jumped ahead of wages,” Richardson said.
“What is difficult for people to understand is that this is a temporary phase. You don’t get continuous inflation from things that aren’t wages – at the end of the day, you need wages to be the driving force.
He said things “would have to keep getting dumber” – like new wars in oil and food producing regions – to keep things going on the current trajectory.
“There’s a tendency to be too fearful of what happens next with inflation,” he said.
He added that Treasury estimates called for inflation to move away from the current peak as oil prices and shipping costs decline.
Australia’s “mind blowing” trend
Meanwhile, Mr Richardson pointed to a “breathtaking” new trend in Australia.
“Walk past virtually any store in Australia right now and you’ll see ‘help wanted’ signs. We know the unemployment rate is officially within reach of a half-century low, and we know vacancies are staggering in Australia at around 400,000,” he said.
“We’ve got employers scrambling for workers, and that’s giving workers more power than they’ve had in a long, long time, so wage growth is going to pick up, and that’s already the case.
“But it picked up at one of the slowest rates we’ve ever seen, below inflation, and even with inflation falling, it will take time for wage growth to pick up. more, in part because we’re different from other parts of the world, with salaries set in a legalistic way with big agreements that cover two to four years, national salary cases and award systems.
“Wage growth in Australia is a supertanker – it’s turning slow, and it’s improving, but not roaring. And it won’t roar, it will continue to improve steadily for some time to come.
A perfect example of the wider Australian situation can be seen in Western Australia.
“WA can rightly claim to be one of the strongest economies in the world; it’s done very well against Covid it sells things the world wants like iron ore and gas and that massive commodity boom has had an impact and yet wage growth in WA last year in the private sector was 2.1%, and this is below the national average. So it’s a long way to accelerate from where we are,” Mr. Richardson said.
“We’ve had the best jobs news in half a century, but it will take some time before it’s properly reflected in wages.
“And what’s good news for jobs is good news for a handful of people, because a lot of people are quite happy in their jobs and a lot of people aren’t looking… so the proportion of adults who get jobs is quite weak.
“It’s a really wonderful story…but the good news is only good for a handful, while wages and what happens with them is what’s important to just about everyone, and there’s still has bad news for prices.”
How you took a pay cut and didn’t realize it
By now many of us are painfully aware that inflation is soaring while wages have stagnated – but what many of us may not have realized is that this means millions of workers have effectively taken a pay cut as a result, with a cost of living exceeding the amount of money in our accounts.
But according to Mr. Richardson, there is now a golden opportunity to change that.
“It’s the same with mortgage rates and how much you pay for internet – once in a while you get a better deal if you shake the cage, and go to the bank or your internet service provider and ask them if they can do better,” he said.
“Globally we talk about ‘the great resignation’, but in Australia we are still the ‘Great Rusted On’.
“Job mobility in Australia has been down for a long time…we are keeping our jobs longer and that comes at a cost.
“If we like who we are with, that’s wonderful, but we’re not exploring all of our options and it’s only now that Australians are really starting to look at job vacancies.
“It’s part of improving wages, we’re starting to see people taking new jobs with pay raises, or asking their existing employers what they can do.”
Is the budget a big lie?
For decades, governments, the Reserve Bank and economic pundits have been guided by the theory of the unemployment rate without accelerating inflation (NAIRU).
In a nutshell, the NAIRU is the lowest unemployment rate that can exist without skyrocketing wages and therefore inflation, and for a long time the RBA assumed that this rate was 5%.
But the seasonally adjusted unemployment rate fell to 4% in February, the lowest since August 2008, according to the Australian Bureau of Statistics, and wages have not risen or inflationary pressures eased as many expect. were waiting.
This has caused some to fear that the old model is dead and therefore the budget may be based on a lie.
But according to Mr Richardson, the theory is not broken – the NAIRU has simply changed.
“I wouldn’t say it doesn’t work…we just don’t know what that unemployment rate is,” he said.
“It took a long time for people to realize, hang in there, it’s not working anymore, it’s changed, and we don’t know the reasons – maybe it’s because of technology, or maybe it’s because of the technology, or the saving gigs or all sorts of things.
“But now that we’ve brought unemployment down, it will drive up wages… The Treasury used to think (a rate of) 4.75 would do, then it fell below that and it went to 4.25.
“Unemployment would be below 4% right now and wage growth is up, so it’s not broken.
“The Reserve Bank has been wondering aloud whether the rate should be 3 points something, and that’s at the heart of some pretty big issues.”
Mr Richardson said the RBA has warned that it will be some time before wage growth takes off.
“The Reserve Bank needs to deliver on its promise to bring inflation to 2% or 3%…the Reserve Bank has failed to keep inflation high enough for long enough, and they really want to know where the rate is unemployment which pushes up wage growth. in Australia because ultimately we need higher wage growth to deliver on that promise,” he said.