Household real wages aren’t rising

Paul Dales, Chief Australian and New Zealand Economist at Capital Economics, talks about why the slowdown in households’ real wages will see consumption growth slow.


Introduction: Household real wages aren’t rising

Ross Greenwood: One of the big issues coming out this week are going to be employment numbers. They are out tomorrow. The employment rate is expected at 5.6%, so very steady. Now in normal circumstances, a 5.6% unemployment rate would mean that we got reasonable employment levels around the country, so you would imagine with some pressures of employment, that wages would start to rise, but it’s not happening right now. In fact today out of the Australian Bureau of Statistics confirmation that wages growth is at a record low of 1.9%. The other part of this is, you can actually say that in the private sector, it’s much more difficult.

You’ve actually got a situation where those people in the private sector are really stuck with very low wages. Those people in the public sector are doing not much better but at least somewhat better. Listen now, I got Paul Dales, who is the chief Australian and New Zealand economist for Capital Economics. He’s online. Many thanks for your time Paul.

Interview: Paul Dales, Chief Australian and New Zealand economist for Capital Economics

Paul Dales: It’s my pleasure.

Ross Greenwood:  Okay. Tell me why you read it the way it is terms of very low wages, but at the same time having these relatively low unemployment rate in Australia?

Paul Dales:  Well, the difference there is that the unemployment rate doesn’t tell you everything you need to know. So it attempts to measure the gap between supply and demand in the labor market. But actually, the better measure is what the other economists handily call the underutilization rate. Now that includes those people who have a job, but who would actually like to work longer so part-time workers, temporary employees, so that’s a better measure of how the gap between demand and supply in the labor market.

And because there are plenty of people who would like to work longer at the moment, this is one of the things that is keeping the wage growth to a record low despite the unemployment rate itself actually being not too high.

Ross Greenwood:  Okay. What do you make of the rating between the private sector and the public sector here? The public sector wages over the past year up by 2.4%, which is around about the inflation rate, as compared with the private sector, which is the larger employer, where the wages growth as only 1.8%?

Paul Dales:  I’m more worried about the private sector really because that’s a better barometer of the upward pressure or otherwise on wage growth that the economy is generating. So it better captures any cyclical effect, so if the economy is doing better, then the private sector tends to respond more with higher wage growth, and if the economy is doing worse, then the private sector interest bumble with lower wage growth. So the public sector doesn’t vary as much. So at the moment with the private sector suffering from the lowest wage growth, that to me is a sign that the economy just isn’t strong enough to generate much higher wage growth.

Ross Greenwood:  So this must be a genuine drag on households, therefore, the ability for those households to spend especially on discretionary items, and this is where we hear about the struggles that people have got not withstanding that the broad economic numbers in Australia look good, when you actually dig down deeper into the family situation, into individual businesses, there is clearly a bit of a struggle going on.

Paul Dales:  That’s fine. I think this goes a long way to explaining why consumer confidence in Australia is at 15-month low even though the economy isn’t doing too badly enough and that simply because household aren’t seeing their wages go up much. This is a special case when you think about what’s happening to the change in consumer prices or inflation. So at the moment, the annual rate of wage growth at 1.9% is exactly the same as the annual rate of the change in consumer prices, so inflation of 1.9%.

That essentially means that households real wages have not increased at all over the last year. So household can’t buy any more goods and services now than they could a year ago. so there’s literally no progress there and I think that’s what’s holding household consumption back.

Ross Greenwood:  And the real answer to this is for business to start to invest, and to grow and they have more confidence, but for some of the largest employers in this country and in particular, the retail sector that actually need the confidence from the consumer before they can grow. So it’s almost a circular argument, isn’t it?

Paul Dales:  There is a lot of that, yes. What you really want to solve the problem is we need a stronger economy. We need economic growth to be stronger that generates more employment. That puts upward pressure on wage growth because businesses will then know if they don’t pay their employees more, they will just jump ship and move to another company. At the moment we’re not getting that boost in economic growth. You could argue how to generate it whether you need lower interest rates, whether you need a weaker Australian dollar, or whether you need fiscal stimulus. But at the moment it’s not happening, so unfortunately I think we need to get used to the idea that the wage growth in Australian is going to stay close to 2% for probably a couple of more years yet.

Ross Greenwood:  Whatever, good to have you in the program as always. Paul Dales is the Chief Australia and New Zealand Economist for Capital Economics and that is the reason why you might be feeling the pinch right now, many thanks for your time Paul.

Paul Dales:  Thanks Ross.

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