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What The RBA Gets Wrong About Wages
BY SHAE RUSSELL - 15/02/2018 | VIEW MORE ARTICLES BY THE DAILY RECKONING

I’ve spent the past two days talking about wage growth in Australia.

And today will be no different.

The issue of stagnant wage increases is finally getting the attention it deserves, both in the mainstream and from the Reserve Bank of Australia (RBA).

The trend of smaller quarterly pay rises began in early 2014. However, the trend wasn’t fully formed until the end of that year. But the decline in wage growth went largely unnoticed.

Next week the Australian Bureau of Statistics (ABS) will release the wage price index (WPI) data. The RBA is hoping to see some bump in the numbers. As it stands, the WPI currently sits at 2%. That means, across Australia, incomes on average are rising at 2% per annum.

That’s barely above the current inflation rate of 1.9%.

Since 2015, there’s been an optimism at the RBA that as long as employment picked up, wage increases would follow.

The problem is, we are entering the fourth year now of dismal wage growth.

As I explained on Monday, RBA governor Philip Lowe implored all Australians last year to demand a pay rise from their boss. If only it was that easy…

Last year was when the RBA began to take the weak wage growth issue seriously. And this year it remains a crucial reason as to why the RBA won’t be raising the cash rate anytime soon.

At the end of its February monetary policy meeting, a brief statement from the RBA showed their concern over the smaller pay rises:

Notwithstanding the improving labour market, wage growth remains low. This is likely to continue for a while yet, although the stronger economy should see some lift in wage growth over time.

The ‘stronger economy’ reference could either refer to the absurdly optimistic gross domestic product (GDP) forecast of 2.5–3% for this year. Or it could be referring to how the unemployment rate fell to 5.5%.

Point is, the RBA isn’t very clear on this.

A week after the policy meeting, the Statement of Monetary Policy showed that there is plenty of concern regarding wage growth:

There is considerable uncertainty about whether the future demand for labour will be met by people entering the labour market, by people who are currently unemployed or by employed people working more hours.

If wage growth does not pick up as expected, and households start viewing lower income growth as being more persistent, consumption growth could be somewhat lower than forecast.

However, the problem here for the RBA isn’t just that people are too scared to ask their employer for a pay rise. As I noted yesterday, the bigger problem is that large corporations are demanding a tax cut in order to give their employees a pay rise.

Adding to the lack of wage growth for Aussies is the two-decade-long restructure of how we work. The official unemployment rate considers anyone who works at least one hour per week to be employed. So with unemployment sitting at 5.5% — what economists consider ‘full employment’ — everyone that wants to work is supposedly working.

Yet analysing this data alone leaves out two other important numbers: underemployment and underutilisation. The current underemployment rate from the ABS sits at 8.7%. Underemployment is where people have work but want to work more hours.

The underutilisation rate, meanwhile, was at 14.2% in September last year. The underutilisation rate is the unemployment and underemployment data combined.

While rarely mentioned, the underutilisation rate tells you that, even by sketchy official figures, there are still many Australians that want work more.

We need to change the way we work

The large amount of ‘spare capacity’ in the labour force can go a long way to explaining why wage growth isn’t picking up. People are less likely to push for higher wages when they know there’s someone in the shadows willing to work for less.

But perhaps the biggest contributor to weak wage growth is how we work.

Last year research firm The Australia Institute discovered that ‘labour exploitation’ is on the rise. People are more willing to take on unpaid overtime. They found full-time employees on average did 5.1 hours of unpaid work a week. So not only were they working longer hours, full-time workers are effectively working for a smaller hourly rate overall.

In addition, The Australia Institute noted that even casual and part-time workers were averaging 3.79 hours of unpaid overtime each week.

Finally, there is the impact of the casualisation of labour. More and more people are working part time. Philip Lowe reckons we all should be happy about this:

This distinction between part-time and full-time employment is old fashioned — there are a lot of people who work part-time who actually want to work part-time.

The fact that we’re working a few less hours on average is probably a good thing, not a bad thing or a sign of weakness.

For those that want the flexibility, this is a good thing.

But not everyone wants fewer hours.

Consider this:

30 years ago, you were more likely to find the man of the house as the sole earner in the family. They were probably working a 40-hour week.

Fast forward to today and chances are that, in a two-person household, both people work. Yet what if both partners have part-time jobs but work 20 hours each per week? Technically, they are making a full-time wage. And, technically, they are considered to be employed.

However, both are working significantly less than they’d like. And there is the risk that because they are part-time workers, the take-home pay is much less than they’d like. This is what the underutilisation rate looks like.

Statistically speaking, if they are all working, everything should be rosy.

But more people are working part time. And, despite Lowe’s claim, they aren’t all happy about it.

Finally, the fewer hours that people work in part-time roles, the less income they have to spend in the economy. And part-time employees are likely the last to receive a pay rise. After all, given the underutilisation of labour, a business will just find someone to pick up their shifts.

The case for ongoing weak wages is getting bigger — not smaller.



View More Articles By The Daily Reckoning

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