As we know, Australia is enjoying the best labour market in generations with unemployment (3.9%) at its lowest level since 1974 and underemployment (6.1%) tracking at its lowest level since 2008:
Australia’s participation rate and employment-to-population ratio are also tracking a whisker below record highs.
However, while the labour market is undoubtedly booming, Australian wage growth remains lackluster, growing only 2.35% in the year to March 2022 – essentially taking it back to sluggish pre-pandemic levels:
This soft wage growth is unusual given the strength in the labour market. Historically, a labour underutilisation rate of 10% would be associated with annual wage growth of around 4%, as illustrated in the next chart (latest observation in red):
Jim Stanford from the Centre for Future Work claims the usual forces of ‘supply and demand’ in wage setting outcomes are broken due to “de-unionisation, insecure work, and deregulation of the wage-setting process [which] have shifted the balance of power away from workers”. In addition, “greenfield enterprise agreements, which lock in predetermined pay rates for years”, have embedded inertia in the wage setting process, since changes in supply and demand take years to be reflected in new agreements.
Another factor contributing to the sluggish wage growth is the 0.5% lift in the compulsory superannuation guarantee (SG) last July, which according to RBA and Grattan modelling would have subtracted around 0.4% (i.e. 80% of the increase) from wage growth. Given the SG is legislated to rise by 0.5% every 1 July for the next four years, it will necessary act as a constant headwind to wage growth.
Based on the above factors, Australian wage growth should continue to rise if the labour market remains tight. But it will also lag well behind historical experience.
Australia also risks losing wage momentum if mass immigration is rebooted, or if the economy is pushed into an unnecessary recession by overly tight monetary policy.