Wage growth stalls – Paul Dales Capital Economics

Paul Dales, the Australian Chief Economist for Capital Economics talks  about wages growth stalling, and consumer confidence

Introduction – Wage growth stalls

Ross Greenwood: Welcome back to money news right around Australia. Great to have your company this evening. I’ll tell you what? If you feel as though the cost of living is catching up with you. Even though grocery prices have gone down for almost the last four years, even though you can buy a car for the same price that you could buy it brand new almost 20 years ago. Even though the price of travel is lower than it’s been, probably at any time in history, especially international travel.

The fact is, most Australians right now are struggling. Notwithstanding the fact that we’ve got close on record-low interest rates. The reason is that wages are stuck. In fact, for the very first time in quite a long time, the wages growth in Australia is less than the inflation rate. That means that your wages are going backwards in real terms, that’s a problem. To try and explain exactly what’s going on here, let’s got to Paul Dales. Paul Dales

is the head of economics, Chief Economist at Capital Economics based in Australia and New Zealand. Paul, many thanks for your time as always.

Interview with Paul Dales

Paul Dales: Thank you very much.

Ross: Okay, Just explain it for me. What is the problem with declining real wages in Australia’s economy?

Paul Dales: The issue here is that all of us work hard, we get paid money for it. What we want to use that money for is buying more goods and services, whether that, more trips to the cinema, more trips to restaurants or better TVs, but, with wage growth so low, the money we’ve earned extra in the last year has not even paid for the increase in the price of those things. We can’t actually buy as much as many goods and services as we could a year ago.

Ross: The problem also is that many of the basic items that people incur in their lives, Health Insurance, electricity bills, gas bills, these types of things keep on rising, yet wages continue to be close to all time record or recorded lows since the late 1990. Annual wage of wage growth on average up by just 1.9%. If you go to, say the private sector, the private sector 1.8%. If you’re in the public sector, if you’re working for the government, it’s a bit better, 2.4% but overall, with inflation at 2.1% at the moment, it makes it very difficult.

Paul Dales: Yes, that’s exactly right. You raise a good point about the items that are rising in price. Those are the items that’s hard to avoid. They’re the items that we have to consume. Things like petrol, food, health insurance. It’s not like we can say, “Well, okay, that’s rise in price, I’m going to consume less petrol, less insurance.” We’re essentially having to pay more for the essentials in life, while the luxuries aren’t rising in prices as much. You could say the squeeze on real wages is perhaps even worse than it looks, because you’ve got no choice. You have to buy these things, you can’t just not buy them.

Unemployment risks

Ross: Let’s go to the reason as to why it is in the private sector especially, employers don’t feel as though they’ve got to hand out more generous wage increases. There is an issue of underemployment. We see the unemployment numbers come out tomorrow, but if there is underemployment in our community and there is surplus stock of labour, that means that the employers, the private sector employers don’t feel as though they necessarily need hand out wages increases.

Paul Dales: That’s exactly right, the bargaining power is very much held by the employers rather than the employees, because the employers know that if someone demands a very big wage increase, then they can just ask someone else to do their job instead. They’ll probably do it at the low wage, because they’re not working enough at the moment or don’t have a job at all. The issue here is that the economy is simply not strong enough at the moment to use up all the excess supply of labour. Until that happens, then employers are going to have the upper hand in most bargaining decisions. The wage growth will probably remain fairly low.

Ross: Okay, a week ago, I read that budget very closely. I know that even though it predicted that wages growth would be just about 2% in this year, moving forward the wages growth would continue to accelerate, eventually, would get out beyond 3 1/2%, almost 3 3/4% by 2020. Given the fact that economic growth is not going to take off, given the fact that there is this surplus capacity of labour or of workers who want more hours in our economy, I can’t quite see what is going to push the wages back up to these higher levels. Given the fact that the government collects half of its taxes from PAYE workers, I can’t quite see where the money is going to come from. Can you?

Economic wage growth will remain low

Paul Dales: Economy wage growth will remains lower than the treasury suggests. We think it’ll probably stay around its record low of close to 2% this year, just maybe edge up to 2 1/2%, not next year, the year after. I think the Treasury’s forecasters are wildly optimistic. I mean two or 3% wage growth doesn’t sound too low when you look back at history. But the problem is, we’re in a different world now, because of big issues like globalization, technological change, the flexibility of the labour market, that means that wage growth is going to be lower forever more than it was, say for example 20 years ago. I think that the treasury’s been very hopeful there. I think it’s optimism will probably blow a bit of a hole in the budget.

Ross: There you go, Paul Dales from Capital Economics. Always good to have him on the program. Just to let you know that hospitality workers are doing it worst right now in the March quarter. Their pay rose just point one of a percent in that quarter. Over the year, public servants, health care workers and teachers had the best pay increases on average, up by 2.3%. Paul, we appreciate your time as always.

Paul Dales: Thank you very much.

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