Real wages start to fall

In January’s predictions for this year, we commented one shock for average Australians will be “income growth or rather the lack thereof” (2014: The year the world is taken off life support):

The other shock will be income growth or rather the lack thereof. Treasury’s chief economist David Gruen told a conference in November last year, “Our estimates say that if we achieve productivity growth similar to its long run average, the next decade will see the slowest income growth in Australia for half a century by a lot.” This comes from an expected decline in Australia’s terms of trade and is consistent with views from the International Monetary Fund (IMF) and the Australian Productivity Commission. (Slowest living standards growth in ‘our lifetimes’ – SMH)

Late last year an Organisation for Economic Co-operation and Development (OECD) report (House prices, labour costs leave economy vulnerable: OECD – AFR) showed Australia had the largest appreciation in relative unit labour costs in the OECD effectively putting Australia at a competitive disadvantage to the world. This coupled with the high cost of living and constrained discretionary spending from Australia’s housing bubble (High housing costs make Australia’s economy uncompetitive – ABC) and household debt overhang is expected to see unemployment continue to accelerate this year.

As hinted at last year (Holden closure confirmed; Has Australia’s housing bubble played a role?), Toyota announced the closure of its Australian manufacturing plants earlier this month, signalling the closure of the entire Automotive industry in Australia. But the job loses continue to escalate, with Alcoa announcing yesterday 1,000 jobs will go in the closure of its Point Henry aluminium smelter and two rolling mills. Today Sensis announced 800 jobs will go from its phone directory business. But for every high profile announcement hitting the media headlines, many more jobs are silently lost.

Other businesses are negotiating pay freezes, for example the much publicised SPC Ardmona at Shepparton.

For individuals, the lack of job security has made many reluctant to ask for pay rises.

Today, data released from the Australian Bureau of Statistics show annual wage growth is at the lowest level since records started in 1997 – even lower than during the depths of the Global Financial Crisis. In the December 2013 quarter, wages rose just 0.7 percent – and 2.6 per cent for the year. The wage growth is so weak, it has fallen below inflation meaning we now have real wage deflation.

While sustained real wage deflation will cause a fall in living standards and provide headwinds for those hoping wage inflation will help quickly erode their mountains of accumulated household debt, it will – albeit slowly – start to make Australia competitive again. And this is a good thing.

» ABS figures show annual wages growth slowest on record – The ABC, 19th February 2014.
» Sensis to shed 800 jobs in digital refocus – The ABC, 19th February 2014.
» Shepparton SPC workers agree to wage freeze as modernisation plan gets financial backing – The ABC, 14th February 2014.
» Alcoa to shut down Point Henry aluminium smelter at Geelong in August – Herald Sun, 18th February 2014.




7 Comments

  1. 2% increase over 6 & half years. No bonus. The line about ” no pay rises due to current conditions” has been pushed about since 2008. And I’m surprised that I have less & less each month? Nah, must be my imagination!

  2. Does not bode well in terms of supporting the 5Trillion Dollars worth of property assets and related debt as we go forward.

  3. I don’t think either of the two major parties realise how angry the electorate is going to get if unemployment continues to rise, wages continue to fall WRT inflation and property prices continue to increase due to foreign investment. Foreign investors cannot vote but unemployed people do.

  4. Yep- my $100 note 10 years ago now only gets me $70 worth of non-discretionary ‘stuff’ and not a solitary pay increase to make up the difference. In another 10 it will be $50 or so- can’t wait!

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