Stagnant Wage Growth to Continue into 2020

Do you feel like your wages have been going farther? Or the opposite?

Australians’ pay packets may be growing in pure numerical terms. But once you factor in interest, you can see that wage growth has been steadily declining since the 1970s.

So it comes as no surprise that on Wednesday the Australian Bureau of Statistics (ABS) announced that wages had only increased by 0.6% in the last quarter of 2017. And they’ve risen 2.1% overall for 2017. And while it was the first increase above 2% in 18 months, 1.9% of the 2.1% growth was due to inflation.

ABS Chief Economist, Bruce Hockman, tried to put a positive spin on how small wage growth has been, despite the jobs boom:

The annual rate of wage growth has increased for the second consecutive quarter reflecting falling unemployment and underemployment rates, and increasing job vacancy levels.

However, no matter how hard you try and spin in, there doesn’t seem to be any relief in sight for Aussie workers. The Reserve Bank of Australia (RBA) has warned workers that they may be waiting quite some time with 2020 likely to be the earliest for any real wage hikes for Australians.

Luci Ellis, the RBA assistant governor, said she believes that there is just too high an unemployment rate — or ‘spare capacity’ in the labour market — for there to be much wage growth.

Spare capacity doesn’t just include the official unemployment rate. It also includes under-employment and people who aren’t in the workforce at the moment. Such as those who have given up actively looking for work.

Arguably, spare capacity is a much more accurate measurement than the official unemployment figures. Those make for good headlines, especially when a politician is seeking re-election, but exclude too much information to be really useful.

Spare capacity and unemployment are at 5.5%. The RBA doesn’t believe there will be a wage hike until it is under 5%.

And it isn’t expected to hit 5% or lower anytime soon. The RBA makes predictions regarding unemployment until June 2020, no further. Currently, they forecast that the unemployment rate will sit at 5.25%. Although there is no guarantee that will be the result in 2020. 

These claims were further backed by Callum Pickering, economist at job site Indeed. He stated:

‘…economy-wide there remains a high degree of slack in the labour market.

Any improvement in wage growth will be gradual and it could take a number of years before wage growth gets back to 3 per cent.

Anyone hoping for a wage breakout will unfortunately be disappointed.’

As you can see in the graph below, wage increases have been declining for some time now. Especially in the private sector.

Australia Wage Price Index 24-02-18

Source: Business Insider

[Click to open new window]

And with stagnant wage growth, increasing consumer inflation, high electricity prices, a housing affordability crisis and high household costs, it is becoming increasingly difficult for Australians to keep their heads above the water.

According to The Guardian, ‘The number of employed Australians seeking help for homelessness has jumped by almost 30% in three years…

Further proof that the lack of rising wages, combined with growing household debt is pushing hard working Aussies to the edge.

The Councils to Homeless Persons organisation, based in Victoria, conducted an analysis showing that from 2016–2017, 20,302 people pursued homelessness support. Close to 5,000 more than the years 2013–2014.

And according to The Guardian:

 ‘The council has blamed the rise on a combination of sluggish wage growth and extreme housing costs.’

With wages only growing by 2.1% last year while housing costs increasing by 3.4% in the same period, it’s not surprising that many Australians are struggling.

Without increases in wages, you have to find alternative ways to keep up with rising costs. Sam Volkering of Australian Small-Cap Investigator has recently released new research into the legal marijuana mega-trend sweeping global markets. You can find out all the details here.

This week in Money Morning

Bond yields are important as they are backed by the government. In Monday’s Money Morning, Harje discussed the increase in rates the US is set to make. The US Federal Reserve has the ability to buy and sell as many bonds as it likes. Now, the price and yield of US bonds can be affected by anyone, as long as they have a large enough amount. And one country does…China. China is the second largest buyer and seller of US bonds. That puts them in a position to have a massive influence on global markets. To find out more, click here.

Continuing with the theme of China, in Tuesday’s Money Morning Harje deliberated on the new ‘Silk Road’ China is building. The initiative is called ‘One Belt One Road’. The initiative will include 65 countries. It’s an expensive task, with China intending to build rail networks, roads, ports and bridges. With such a large task ahead for China, Aussie construction businesses may be the beneficiaries of this project. To read more about the One Belt One Road initiative and how it may impact Australia, go here.

In Wednesday’s Money Morning, Harje took a look at small and microcap stocks and their volatility. This all stems from how Warren Buffett managed his most successful period of investing. Harje looks into fund managers planning to open up their funds to the same sector. To find out more about small and microcap funds, click here.

On Thursday, Harje looked into the difference between struggling businesses and successful ones. He looked at a feature of successful companies that lets them continue to grow and succeed.. To find out more, go here.

In Friday’s Money Morning, Harje looked at the topic of retirement. Australia has one of the largest hoards of retirement savings in the world. But all may not be well with superannuation. The solution may come from the upcoming meeting between US President Donald Trump and Prime Minister Malcolm Turnbull. To find out what’s on the table between the two leaders and what it could mean for your retirement, click here.


Alana Sumic,
Editor, Money Weekend

Alana Sumic is part of the editorial team here at Money Morning. She contributes to bringing you Money Morning each day, along with all of Fat Tail Investment Research’s many other publications.

As the Editor of the weekend edition of Money Morning Alana brings you a summary of the news for the week, and her own take on the week’s most important story in markets. She is also a writer and editor for Fat Tail Investment Research’s political publication, The Australian Tribune.

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