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These 3 Charts Explain Why You Aren't Paid More

Is there anything positive to say about wage ‘growth’ in Australia?

Over the past year, the charts and analysis have suggested that everything was looking up.

Except that it wasn’t. It still isn’t. And it probably won’t be anytime soon.

Check out this chart:

Wage growth 2001–2017

Wage Growth 2001-2017 12-02-2018

Source: Trading Economics
[Click to enlarge]

With the first Reserve Bank of Australia (RBA) February meeting out of the way, all eyes are now fixed on the most important data dump to start the year.

On 21 February, we’ll find out if the 400,000-odd jobs added in 2017 had any impact on wages.

I’m not convinced we are going to see any meaningful increase in wages. Generally, when employment rises, wages also tend to rise.

But look at this chart:

Record Low Wages 12-02-2018

Source: Business Insider; UBS
[Click to enlarge]

This chart from UBS shows the widening disparity between employment and wage growth.

Over the past five years, average wage growth has fallen from 3% per annum to 1%. Meaning that each pay rise is smaller than the one before. Even a 3.3% minimum wage increase in July 2017 couldn’t boost the wage price index. That’s noteworthy, as around 20% of Aussies work for minimum wage.

However, as you can see, the real disconnect between employment and wage price growth began in early 2014.

The problem is, in spite of every ‘uptick’ in the employment rate, wage growth has failed to follow.

If anything, it’s continued to trend down.

The lack of wage growth has even encouraged RBA governor Philip Lowe to proclaim that workers should demand pay rises from their employers: ‘The crisis really is in real wage growth. Western workers feel like they cannot get a pay rise.

The fact that people are working fewer hours, too, probably doesn’t help wage growth. Lowe has said he doesn’t believe this is a problem, and that it is ‘probably a good thing’. But there’s more to the story than that, which I’ll tackle tomorrow.

Anyway, in spite of what we freethinkers like to think — that market forces are the reason overall wage increases are minimal — if the research by UBS is anything to go by, that may not be the case.

Perhaps it’s not the casualisation of the workforce that’s hurting wage price growth. It could be the local unions.

Unions spoiling it for the rest of us

According to UBS analysts George Tharenou and Carlos Cacho, there is a direct correlation between new Enterprise Bargaining Agreements (EBAs) and falling wage growth.

Many powerful industrial unions are keen supporters of these EBAs. Especially in the construction industry.

Typically, employers and employees using EBAs agree to a fixed salary increase each year for 3–4 years.

Isn’t that fantastic? You know upfront for a set period exactly what your pay increases will be.

The problem with it is that you get the exact amount as the bloke slacking off next to you.

It doesn’t really create an incentive to work harder, does it? After all, if you’re going to get the same pay rise as everyone else, there’s no point busting a sweat on the job.

Either way, Tharenou and Cacho refer to the chart below to explain exactly what these EBAs are doing to wage increases.

EBAs and Wage Increases 12-02-2018

Source: ABS; Department of Employment; UBS; Business Insider
[Click to enlarge]

Roughly 36% of Australians are signed to EBAs. It turns out that, with each new EBA agreement signed, wage increases are getting smaller.

In other words, collective bargaining agreements are returning less and less annually for the people who sign them.

Let that sink in for a second.

According to Tharenou and Cacho, there is no indication that this correlation is about to end yet:

New EBA’s struck in [the June quarter of 2017] showed a disappointing further fall to a new record low of 2.6% annual rate, well down from the prior trend of 3–3.5%.

There is a similar trend across both the private sector at 2.6%, and public sector at 2.5%.

Indeed, even construction — which remains the strongest industry — dropped back to a 24-year low of 3.7%.

While wages have now troughed, they rose to only 2.0% year-on-year in [the September quarter of 2017] and the continued fall in EBAs suggests underlying wage pressure has weakened further.

The most recent EBA — struck in the second quarter of last year — dropped even lower than the prior quarter.

This tells you that there is a very small chance of wage growth jumping higher next week.

Collective bargaining agreements were supposed to protect people’s wages. Yet the outcome appears to be the opposite.

However, they are proving to be a useful tool when it comes to predicting wage patterns — that is, that people negotiating salaries in large groups are getting smaller pay rises year-on-year.

So in next week’s data dump, don’t be surprised when the wage growth index barely moves.

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