Should you be expecting a wage rise soon?

Ross Greenwood speaks to Cheif Economist at Capital Economics Paul Dales about why poorest wage rise in two decades has wage growth ‘stuck in the mud’

Introduction: Should you be expecting a wage rise soon?

Ross Greenwood: Let’s now go to wages, just how they’re going. We know they’ve been sluggish in recent times. Well, the wage price index in the last quarter has risen by 0.5%. That was after 0.5% in the December quarter. If you sit there and annualized it out, it basically means about 2.1% a year. Now, what’s happened is that bonuses seem to be a bit better, according to some of the numbers out there. Then, also if you go and look at industries with the fastest wages growth, health care, and social assistance, 2.7%. Arts and recreation, 2.5%. Then, you’ve got manufacturing and public administration and safety, 82.2%.

The slowest annual wage growth, mining 1.4%, retail 1.5%, rental hiring and real estate services 1.6%. Let’s try and make head or tail of this, especially after what we saw in the budget last week, where there are forecasts going out, that eventually wages will grow by 3%, 3.5% and then 3.75%%, which means at some stage there’s got to be some pressure coming on because of the weight of the jobs being created. Paul Dales, of course, is with Capital Economics, the Chief Economist in Australia and New Zealand there. Paul, many thanks for your time.

Interview with: Paul Dales, Chief Economist, Capital Economics

Paul Dales: My pleasure.

Ross Greenwood:  Can you just interpret this for me. There’s no real sign, at this stage, that there’s any immediate pick up in wages as the government would be hoping?

Paul Dales: No. I’m afraid its very much a case of wage growth appears to be stuck in the mud at just above 2%, which is only slightly above the record low we saw in 2016, ’17 at 1.9%. Unfortunately, I don’t think it’s going to rise much over the next few years either. It might be stuck below 2.5% perhaps until 2020.

Ross Greenwood:  There’s a weird thing here, Paul that I can’t work out because company profits have risen to record highs. The stock market is now close to a 10 year high. Clearly, there are some companies in the community right now that are going okay. Either you’ve got technology, which is actually taking the if you like the demand for labor out of the whole workforce, which is contributing partly, you’ve got productivity improvements. There’s something going on here because 400,000 jobs created last year would imagine there should be some pressure at least on that demand for labor.

Paul Dales: Well, that’s right. There will be some upward, cyclical pressure on wage growth from the strength of the labor market over the next year or two. The bigger issues you’re talking about there, Ross are the long-term structural forces that have held wage growth down in lots of advanced economies. Essentially that’s things like globalization and technology innovation, that has essentially reduced employees bargaining power. Firms can now increase output, increase profits without really having to increase their workforce that much. Employees just don’t have as much bargaining power as they used too.

Ross Greenwood:  It’s interesting to note, the Westpac-Melbourne Institute Survey of Consumer Sentiment, that came out today. That was down by 0.6% to 101.8, Now, just to explain that. It basically remains above its long-term average but only just. The fact is that people are neither hot nor cold, they’re just pretty much lukewarm about their prospects right now.

Paul Dales: Yes. That is a bit of an issue. The surprising thing was, that there was a bit of a boost to confidence from the budget. That’s what the responses showed that came in after last week’s budget. Their underlying trend seems to be weakening. I think that’s probably due to a combination of low wage growth, falling house prices and perhaps even concerns over the Royal Commision that is currently having a bit of a dampening effect on consumer confidence. It’s not a disaster but it does mean that perhaps people aren’t going to go out and spend quite as much as they would otherwise have done if they were in a cheerier mood.

Ross Greenwood:  Throw your head out by 12 months. Does any of this change really? Is it still that we’re going to be talking about a relatively subdued interest rate, subdued wage price indexes in 12 months time as well?

Paul Dales: Well, I certainly think it confirms those views, yes. We don’t think the RBA will raise interest rates until late in 2019. If wage growth stays pretty close to 2%, then its really going to struggle to do that because consumer consumption growth won’t rise as much as it expects and nor will inflation.

Ross Greenwood:  Tell you what. Good to have you on the program as always. Paul Dales is the Chief Economist for Australasia at Capital Economics. As I say, those wage growth numbers, they still look pretty sluggish there is no doubt. [Music] I want to take your calls on that subject 131873. Especially if you’re a worker and you’re coping a pay rise or you’re not, or indeed if you are an employer. What are you doing? What’s your policy in regards to wages? Are you looking at these numbers and saying to your workers, “Look, nobody else is getting one. You’re not getting one.” Or do you have to do it according to the industry?

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