John Hewson on wage stagnation

There is growing concern about weak or stagnant wages.

Recent increases in wages have been the lowest on record, at less than 2 percent annually. The recent Budget assumed that their rate of increase would almost double over the next couple of years.

But how? And what if they don’t?

This has occurred at a time when the labour market has also been changing significantly, with something of a collapse in full-time jobs and a marked pick up in casual work.

Although the unemployment rate has fallen to about 5.5 percent, the ‘underemployment rate’ (that is, people not being able to get as much work as they may want) has been rising significantly, approaching double the unemployment rate.

With wages rising less than inflation, and many key household costs rising quite rapidly (electricity, gas, communications, rents and rates, school and childcare fees, and so on), many households are finding it increasingly difficult to make ends meet, while carrying, in many cases, large mortgage and credit card debts, so they are also fearful of any future increases in interest rates.

It was clear from the recently released March quarter growth numbers that households have curtailed much of their discretionary spending, and even some evidence that they are running down their savings to meet the rising costs of day-to-day living.

There are, of course, many reasons for weak wages, not the least of which is the general weakness of our economy.

In fact, our quarterly GDP growth numbers have only been positive in recent quarters (indeed, one recent quarter was indeed negative) because of a ‘one-off’ strength in a particular component – a bunching of government defence expenditure, a strong trade number, an unexpected build up in inventories, and so on – there has been no consistency or uniformity.

Other factors are probably a weakening in union influence as membership has waned, especially in the private sector.

It may also be due to automation and the globalisation of the supply chains for many products. It is hard to see any of these trends reversing in the near-term – indeed, they will probably continue, if not accelerate.

Obviously the budget surplus assumed by the government for 2020/21 depends heavily on the wage assumption, so if wages don’t increase as assumed, then the tax revenues will be significantly less, and the surplus will not be achieved.

But what if we are in for a longer period of stagnant wages, and significant underemployment. What if, despite the political promise of ‘Jobs and Growth’, that there aren’t enough jobs to go around?

Are we going to have to face the fact that, as a society, we may need to address the need to provide an increasing number of people with a ‘living wage’? This would certainly call for a significant rethink of government priorities and, in particular, attitudes to our social security system.

Right now, the level of the base pension and the Newstart allowance, for example, are well below most accepted estimates of the ‘poverty line’, but government doesn’t have the capacity under existing tax arrangements, and given other priorities, to fund the necessary increases.

Many people are already struggling financially. Shouldn’t there be a greater sense of urgency by our governments to do some longer-term strategic thinking and planning?

Shouldn’t a base case, or even worst case, scenario recognize the possibility of stagnant wages?