Real wages a case of for richer, for poorer

While today’s jobs data for April will be solid, it will not be able to offset the disappointment in yet another quarter of weak wages growth which has left millions of Australian workers even further behind the inflationary curve.

The jobs report is expected to show another 20,000 new positions were created last month, according to market surveys, with the jobless rate around 4% or just under that level.

That will not be a disappointment, unlike the March quarter’s Wage Price Index on Wednesday which showed a tiny improvement on the very weak December quarter reading.

The Australian Bureau of Statistics said that seasonally adjusted, the Wage Price Index (WPI) rose 0.7% in March quarter for the second consecutive quarter.

The rate of annual wage growth was 2.4%, up from 2.3% last quarter and the highest annual rate recorded since December quarter of 2018.

Michelle Marquardt, head of Prices Statistics at the ABS, said in a statement with the data, “The annual rate of wage growth has risen for each of the last five quarters from a low point of 1.4 per cent in December quarter 2020.”

Wage rises in the private sector were the main driver of growth over the quarter, rising 0.7% for March quarter and at an annual rate of 2.4%.

“Regular annual wage and salary reviews drove wage growth for the sector, with a small number of larger increases paid to retain and attract in-demand skilled workers,” she said.

Public sector wages grew 0.6% for March quarter 2022 and annually, 2.2%.

But despite the hints of a rise in wage growth for the quarter, the stark reality is that with headline consumer prices rising by 5.1% in the year to March, millions of workers have gone backwards again in real terms (after inflation) for another quarter.

And they have gone backwards even when compared to core inflation, which was up an annual 3.7% in the year to March.

On a quarter basis, headline consumer prices rose 2.1% in the quarter and core inflation rose 1.4% – both measures much faster than the 0.7% rise in the WPI in the three months to March.

And the comparison with the core inflation reading is highly misleading because it ignores two of the major cost imposts in the quarter and the past year – higher petrol and food costs – which have hit households hard in the past few months.

The WPI data is another embarrassment for the Morrison government which had been forecasting faster growth and for the Reserve Bank which had claimed in the minutes of the May monetary policy meeting that wages were rising.

“[The Reserve] Bank’s liaison program, had indicated that labour costs were rising at a faster pace and that this was likely to continue. Liaison indicated that many firms were having difficulty hiring workers with the right skills. Given the tight labour market and increase in job mobility, more firms were having to pay higher wages to attract and retain staff, and labour costs were picking up at a faster rate than over the preceding year,” the minutes claimed.

“Looking ahead, growth in the Wage Price Index (WPI) was forecast to be around 3¾ per cent by the end of the forecast period, which would be the fastest pace since 2012.”

That forecast is now highly unlikely and the minutes also contained another observation from the bank:

“Domestically, there was uncertainty about how household spending would respond to the erosion of real wages, as wages have not kept pace with consumer prices. There is no contemporary experience as to how labour costs and prices in Australia would behave at an unemployment rate below 4 per cent.”

In other words, the RBA is saying ‘we don’t really know about the impact of falling real wages and falling unemployment’.

And why is this important? Because the household consumption, economic growth and jobs in 2022-23 financial year and calendar 2023, will depend more heavily on household incomes, especially with rising interest rates.

There are few signs that falling real wage growth is going to disappear in 2023, meaning more pressure on companies exposed to household spending – banks, retailers, car dealers, clothing and building and construction.

Households still have high levels of savings, but they will be quickly locked up if consumers see their wages are not growing.

Saturday’s federal election complicates matters as well, so the economic outlook will not be clearer until the polls are decided, especially in the Senate, which will be sometime in June.