Magical wage growth underpins the budget forecasts

by Matt Grudnoff, Senior Economist

Wage growth is at record lows in Australia and has been for many years. There are large parts of the population who are actually seeing their real wages go backwards. So it might come as a shock to most Australians to know that the budget is predicting big increases in the near future. Is it time to break out the champagne?

Unfortunately no. We have seen these magical predictions before. In fact last year when we reported on this we called it the wage growth unicorn.

If we look at all the wage growth predictions for this government we can see a depressing pattern. Big wage growth predictions followed by flat or falling wages.

According to the budget, wages are predicted to increase from slightly over 2% to 3.5% in three years’ time. If it happened it would be a massive turn around. Given the government’s previous efforts in wage growth prediction you could be forgiven for being highly sceptical. And yet it is these predictions that largely underpin the small surpluses predicted in the out years.

So why are wages so low and when will they increase? Wage rises occur when workers have bargaining power. Because of a concerted effort by multiple governments over the years, the power of workers has been eroded and now they simply don’t have the bargaining power to demand higher wages.

The government has claimed that higher jobs growth will make workers scarcer and when this happens businesses will have to start paying them more. The government regularly points to record growth in employment and has been promising wage rises for some time.

But a quick glance at the number of unemployed people shows that while more jobs are being created this is not leading to a shortage of workers. There has been no decrease in the number of unemployed. This is in large part because the growth in employment is just keeping up with new entrants into the labour market.

The figure below shows the number of unemployed since the election in 2013 of the current government and the red line is the period of jobs growth that the government is so proud of.

So: little bargaining power coupled with no decrease in the number of unemployed means that wages growth has stagnated.

For wages growth to increase we would need to see real changes to industrial relations laws that tilted the rules back in favour of workers. This is highly unlikely from a government that fought the last election on changes that would reduce the power of workers.

The other way would be if we saw a massive increase in employment which led to a fall in the number of unemployed and a big drop in the unemployment rate. So does the budget predict this? The budget actually shows a big drop in employment growth. Employment growth almost halves from a current rate of 2.75% this year to 1.5% next year. The unemployment rate is also expected to remain largely flat falling slowly over the next four years from 5.5% to 5%.

Neither of these predictions justifies a big pick up in wages. The final result will likely be missed targets in the out years and less revenue collected. Revenue the government is trying to spend on company and income tax cuts.

From all of the team at The Australia Institute, thanks for reading.
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