Why Lousy Aussie Wages are the Union’s Fault

wages growth slow in australia

 

According to Australian Bureau of Statistics (ABS) data, three quarters of all Australians that want to work are employed.

Roughly 400,000 new jobs were added to the economy last year — four times the amount in 2016. According to the ABS, the unemployment rate is now sitting at 5.5%.

Roy Morgan Research, however, suggests the unemployment rate is 9.8%. In my view, Roy Morgan’s assessment is probably far more accurate, ignored as it is by policymakers.

Nonetheless, central bankers make decisions based on official data.

With the strong official employment data, the bets are on for when the RBA will start hiking rates.

Commonwealth Bank of Australia senior economist Gareth Aird recently noted that, with more people working, it’s likelier wages would grow. Aird says this would lead to rising inflation, adding ‘…a first rate rise since 2010 looks probable this year.

Probable yes. But unlikely.

Here’s why:

A favourite tool of central banks for analysing wage growth and inflation is the Phillips curve.

The theory behind the Phillips curve is simple: Unemployment and inflation have an inverse relationship. That is, when unemployment falls, inflation rises. More people are working, therefore they have more money to spend. Ultimately leading to higher consumer prices.

Problem is, the economy isn’t unfolding in the way traditional economic models suggest it should.

Granted, more people are working than in the past two years. However, don’t expect that to lead to sudden wage growth. Or a sudden rise in inflation.

Wage increases in Australia have been falling since 2012. As you can see below, each year the pay increases are smaller:

Australia Annual Changes in Annual Rate of Pay 2008–18

Australia Annual Change In Hourly Rates of Pay - 24-01-2018


Source: Trading Economics
[Click to enlarge]

Over the past six years, annual take-home pay increases have fallen from 4% in 2012 to 1.9% today. That’s marginally above the ABS’ official current inflation rate of 1.8%. Put simply, it means that your wages are rising at the same rate as consumer prices.

Now, the consensus is that the Reserve Bank of Australia is looking to wage growth as the excuse to lift rates.

Well, they aren’t going to get their wish. 

Unions ‘protecting the people’ are actually hurting our wages

It all comes down to collective wage arrangements, often called Enterprise Bargaining Agreements (EBAs), something which industrial unions are big supporters of.

EBAs allow you to get the same wage increase every year. Regardless of how hard you worked.

Yet what if you worked harder than the person next to you? Should someone who puts in less effort be rewarded the same as you when you put in more effort?

These questions are debatable. Either way, though, the problem is that collective wage haggling may not be working out for the Aussie economy. And I have the chart to prove it:

EBA fell further in Q2 to a record low, suggesting weak wages ahead - 24-01-2018


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

As you can see, the unions that ‘protect the people’ with wage increases each year are actually ending up with smaller increases annually.

According to analysis from George Tharenou and Carlos Cacho at investment bank UBS, there is a direct correlation between new EBAs and falling wage growth.

And if their analysis is right, wage growth is about to fall even further, despite the uptick in new jobs created. Tharnou and Cacho note:

We keep banging on about EBAs because they provide an accurate indicator of turning points in the Wage Price Index.

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.

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%.

The flow of new EBAs is below the average of the stock outstanding by the largest margin in history.’

UBS says that EBAs cover 36% of Australian employees. Meaning that roughly one third of Aussie workers are covered by one. Yet it could very well be that these people are actually the canary in the coalmine when it comes to future pay rises.

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

People negotiating salaries in large groups are getting smaller pay rises year-on-year. It turns out that they are probably the most useful indicator when it comes to predicting salary outcomes for Aussies.

Perhaps the market commentators should be watching the EBAs for wage price growth. If the pattern between falling EBA wage increases continues to match up with falling wage price growth, Aussie salary increases are going to be ‘less for longer’.

Kind regards,

Shae Russell,
Editor, Markets & Money

 

Publisher’s note: Markets & Money is focussed primarily on stock markets, the economy and, as the name suggests, money. We typically avoid political news, except where it touches upon markets. But our sister publication, The Australian Tribune Port Phillip Publishing’s political newsletter and website, has no such restriction.

If you’re fed up with reading sanitised, politically correct dogma cut and pasted from one mainstream source to another, then The Australian Tribune for you. And it’s absolutely free.

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The Greens and a small minority of Australians are intent on labelling Australia Day as “Invasion Day”.

What they overlook is that if the British First Fleet hadn’t arrived with its convict colonists on 26 January 1788, some other fleet would have taken its place.

Perhaps they would have been French, or Spanish, or Dutch. And perhaps they would not have come for a few more years. But there was no way 18th century Aboriginal society could have withstood the concerted colonisation efforts underway by the western powers of that time…’

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Shae Russell

Shae Russell

Drawing on her extensive experience, Shae is an editor of Markets & Money. Each day, Shae looks at broad macro trends developing around the world, combining them with her distaste for central banks and irrational love of all things bullion.

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