Interest Rates Likely to be Low for Years because Wage Growth is Low

The RBA has been crystal clear in its communication to investors and the market that it will not raise interest rates until consumer price index (CPI) inflation is within the target band of 2% to 3%.  The primary reason CPI inflation is low is wage growth is also low which means workers are not getting more money to spend each year.  Wage growth in turn is low as unemployment and under-employment are too high and above the NAIRU (Non-Accelerating Inflation Rate of Unemployment) which means wages are unlikely to rise until the NAIRU (estimated by the RBA to be somewhere under a 5% unemployment rate) is reached and even then there will be a lag effect.

The latest data on Australian wage growth was dismal.  Wages in the December quarter increased by 0.6% and 1.4% over the whole year.  This is the lowest figure since records began.  CPI Inflation in the Australian economy rose at 0.9% over the December quarter and 0.9% over the full year, so wages are barely keeping pace with inflation whereas a “healthy” wage growth is roughly the rate of GDP growth plus inflation so wages are maintaining their overall percentage contribution to the overall GDP of the Australian economy.

Wage growth has been stagnant for many years, even prior to the pandemic that has only exacerbated issues with the RBA reporting 60% of Australian businesses have wage freezes in place or planning to implement them.  The curtailment or scaling back of JobKeeper in March is unlikely to help.

There has been a structural shift through the pandemic.  Many jobs in the public sector have been protected and have not been eligible for JobKeeper, but this has also come hand in hand with low public sector wage growth of 0.3% over the quarter or 1.6% over the year; the lowest on record.  The prevailing sentiment is public sector workers are lucky to have jobs compared with the private sector that has been hardest hit.  This is partially reflected in the award wages increases (or lack thereof) since the pandemic started as per the graph above.

Recruiters in the private sector report many workers had their hours reduced (consistent with the rise in under-employment) and/or had their wages reduced to the JobKeeper amount.  This effect is responsible for the June quarter figures in the graph where individual bargaining arrangements produced negative wage growth – “we can’t afford to keep you on so either we let you go or you need to work for the JobKeeper amount”.  While this situation is now reversing, the power still seems to rest with employers looking to set wages lower or not offer increases to save costs in businesses that have seen severe hits to profitability and economic viability throughout the year.

To drive consumer inflation higher, wages need to be growing consistently by at least 1% per quarter. As per the graph, there is very little to suggest this rate of wage growth is going to be attained in the near term as there were few pressures prior to the pandemic and the pandemic has probably set things back several years at best.

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