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  • Writer's pictureCrest Economics

Decline in Real Wages- February 2023

Money trees may no longer be the perfect place for shade seeing as Australia has just experienced their largest decline in real wages on record. With recent wage price index figures revealing a modest 3.3% increase in nominal wages (2022), these numbers not only sit below expectations of 3.5% growth but well below current inflationary pressures of 7.8%. Thus, adjusted for inflation, our real wages have declined by 4.5% over the past year. Further concerns surround the inability of public-sector wages to rise (2.5%, in comparison to private sector wages being up 3.6%), due to wage caps, further placing downward pressure on wages.

Despite the RBA’s close monitoring of wage increases for signs of a wage-price inflation spiral, it must be acknowledged that it is not workers’ wages driving current inflationary pressures, but rather rising prices and profits from businesses (i.e Woolies). Hence, as the data shows fears of a wage-price spiral being a ‘speculative fantasy’, attention must shift towards reducing inflation and its impacts on the real value of wages. With annual inflation at 7.8%, theoretically our wages need to be growing at the same rate to maintain purchasing power and current living standards. As David Bassanese (Chief BetaShares Economist) claims, ‘the lift in inflation reflects a range of non-wage costs factors’ and the ease with which businesses have been able to pass these costs on to consumers. Thus, this indicates that consumer sentiment is still high (further evidenced in a sustained decrease in the household savings ratio to just slightly above pre-pandemic levels) but also points towards a lack of competition in various areas of the economy (opportunity for microeconomic reform).

Nonetheless, despite the RBA’s concerns of wages growth feeding into inflation, business lobby groups and the Albanese government are taking credit for this achievement. With wages growth statistically at their highest since the end of 2012, Andrew McKellar (Chief Executive of Australian Chamber of Commerce and Industry) claim ‘employers continue to see significant pressure on wages and can expect further wage increases’ in the future. That said, with peak tightness in labour market conditions already dropping (placing downward pressure on wages) due to increased migrants, expectations of the RBA implementing rate hikes at its next three meetings may further detriment already sluggish wages.

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