Pressure on real wages – November 2022
As inflation continues on its upward trajectory, real wages are an area of the economy talking a large hit. The September quarter came with the highest inflation rate seen since Q2 1990 at 7.3%. Comparatively, nominal wages as represented by the wage price index rose a modest 3.1%. The two-speed nature of both indicators have placed pressure on real wages, which reflects the true purchasing power of wages. This widens the gap between inflation and nominal wages to 4.2 percentage points, dwarfing the previous quarter where the difference came in at 3.6 percentage points.
So why is this concerning? For one, we expect this to erode the purchasing power of incomes for workers in the short-run. At the same time, the current inflationary figures suggest further rate hikes are on the table. This is certain to dampen consumption and borrowing activities in the near future. What’s arguably more worrisome is the institutionalisation of high inflation expectations. For the first time in over 30 years, we’re seeing a distinct deviation from inflationary norms, previously marked by low and stable inflation throughout the great moderation. What current inflationary trends threaten is a destabilisation of low inflationary expectations. Central to anchoring prices in the past have been stable expectations of medium-term adjustments to inflation by central banks. The current environment has given rise to greater uncertainty in this regard, which undermines policy credibility.
Current limitations to wage hikes have been bargaining fatigue and inaccessibility. Proposals to alleviate this constraint have included a new industrial relations bill, with supported stream for workers to negotiate better pay and working conditions. Nonetheless, wages are certainly not sluggish, only lagging. ABS reported quarterly growth in hourly wages was the fastest since 2012, along with private sector wages rising by 1.2%. Revisions in award agreements by the FWC and improved tightness in labour markets have facilitated stronger wage growth in certain sectors, such as retail and real estate services. Certainly, wage pressures are slowly coming to a boil; they’re simply masked by inflation.