Why Low Wage Growth Is Here To Stay

Why Low Wage Growth Is Here To Stay

Sick of being broke? Not being paid enough?

Here’s how you get more money…

Just walk into your boss’s office and demand a raise!

See, simple.

Of course, it’s not. If only it were.

Yet that didn’t stop the Governor of the Reserve Bank of Australia (RBA) suggesting something along those lines…

Around June last year, Philip Lowe noted that Aussies are in the middle of a ‘crisis of low pay’. He suggested the pressures in the labour market would ‘energise workers to overcome these fears of competition and uncertainty and start putting their hands out for more money’.

In normal people speak, ‘pressures in the labour market’ means falling unemployment. The problem is, falling unemployment isn’t leading to higher wages for Aussies.

Traditional central bank models tell us that if more people are working, it should create ‘pressure’ on firms to pay people more.

The theory goes like this. Fewer people are unemployed, making it harder to find both staff and skilled labour. Therefore, to get the best people for the business, companies must offer higher wages to bring on — and keep — new staff.

Except this isn’t playing out the way the Reserve Bank thought it would.

In fact, since 2014, Australian wage growth has fallen from 2.5% to today’s 2.1%. In other words, each year our pay rises are getting smaller.

This is odd. Because according to the Australian Bureau of Statistics (ABS), the unemployment rate has remained under 6% for the entire time.

In the past, the equation has been simple. Falling unemployment data leads to higher wages.
However, for the past four years, this hasn’t happened.

And wages are set to remain weak even if the official unemployment figure continues to fall.

Let me explain why.

Last week, the ABS released the Wage Price Index (WPI) for the December quarter. On the surface, it looked like Philip Lowe may have got his wish.

The results surprised most data watchers. Wages grew 0.6% for the December quarter, giving us year-on-year growth of 2.1%. This means wages were up 0.1% for the year overall.

I’m sure you won’t be surprised to learn that public sector wage growth led the way; it was up 2.4% for the quarter. Meanwhile, the private sector only saw a 1.9% bump.

Private vs Public Sector WPI

Source: ABC News

That’s it! Wages have turned a corner. The dark days of low wages are over. Whew.

Hang on. Sure, a pay rise is good news. But there’s so much more to the surprise increase. Like all things too good to be true, the devil is in the detail.

Roughly 400,000 new jobs were created last year. That’s more than four times the number of new jobs in 2016. All these new ‘jobs’ helped bring the current unemployment rate down to 5.5%.

Yet, the rosy figures don’t look like they’ve got staying power when you start going through the details.

Half of the jobs created in 2017 were government roles. And of that, three quarters were for the health sector. And of those health sector jobs, a fair chunk of them were associated with the nationwide rollout of the National Disability Insurance Scheme (NDIS).

This tells us that the significant boost to jobs last year may be a one-off.

Which brings the Reserve Bank back to the question: Why is falling unemployment not translating into higher wages, especially as we approach ‘full employment’?

Now, ‘full employment’ is a fancy-pants economic term that means everyone in Australia who wants work, and can work, is in fact working.

Meaning we’re only half a percentage away from reaching full labour capacity.

Even though we’re within a hair’s breadth of ‘full employment’, wages aren’t responding the way the RBA wants.

The cause of low wages is deep.

Just one of the reasons why you’re not getting a pay rise this year is because of underemployment.

Unemployment (black line) versus underemployment (grey line)

Private vs Public Sector WPI

Source: Australian Bureau of Statistics

Underemployment is where someone has a job, but wants to work more hours.

In spite of falling employment figures, underemployment has been rising since 2003. And the underemployment rate is steady at 8.7%. In other words, it hasn’t gone up or down for many months. It is simply stuck at that level.

One of the key reasons for a rising underemployment rate is the casualisation of the workforce. More and more jobs are becoming casual part-time. While more people are working, there’s a whole bunch of us who want to work more.

Official data tells us more Aussies are employed this year than last. Yet the much-overlooked underemployment figure tells me there’s an awful lot of spare capacity in the labour market. A massive pool of workers. Odds are they may work for less pay, if it means more hours.

Unemployment is decreasing at a snail’s pace. But underemployment isn’t budging.
Without underemployment falling significantly, it’s highly unlikely that wages will start increasing anytime soon.

There is good news though. Without any wage price growth, there’s no way the Reserve Bank of Australia will raise rates.

If rates stay down, the appeal of the stock market to investors should stay strong. My colleague, Callum Newman, says the best place to hunt for investment ideas is the small-cap sector.

To find out where to start, go here.

Kind regards,

Shae Russell Signature

Shae Russell,
Co-editor, The Daily Reckoning Australia