• News

More money in the pocket

Australia is rapidly approaching a new inflationary moment. When the clock ticks over to 1st July, the amended and broader-based Stage 3 Tax Cuts will kick in. That will put money into the hands of the many (but not all) and adding a little to spending power and the prospects of a slight lift in inflation. Meantime, back in the world of wages, latest data already shows there has been steady growth in wages, a matter of genuine interest.

Because it involves Government, public debate, politics and has a broad application, taxation policy is always going to get more airtime than a humble, whole of economy upwards movement in wages.

However, the immediate interest ought lie with the Wage Price Index data. It shows wages growth in the December quarter of 4.2% on an annualised basis. That sees wages moving at a faster pace than inflation, with both trending in directions that could see the next years’ experience include wages growing quite a bit faster than prices.

Interestingly, in releasing the data, the ABS commented:

“While wages growth in the private sector eased slightly to 4.2 per cent for the year to December quarter 2023 (from 4.3 per cent in September quarter 2023), the public sector had the highest wage growth since March quarter 2010 at 4.3 per cent.”

Two factors appear to have influenced this re-emergence of the importance of the public service, according to the ABS.

First, wages growth for the December quarter of 2023 saw a higher contribution from employment covered by enterprise agreements than has normally been recorded for December quarters.

Second, the higher public sector wages growth was primarily due to newly implemented enterprise agreements for essential workers in the Health care and social assistance and Education and training industries, following changes to state-based wages policies.

From an economy wide perspective, both these factors are positive. The argument goes that collective agreement increases are scheduled, planned and can be afforded by the vast majority of employers that enter into them. They are, in short, predictable and can thus be forecast.

Improving the wages of those who are often lowest paid and in caring and service industries is a social good and encourages people to take up work in those sectors. No complaints there!

However (in economics, there is ALWAYS an however), there is another side to the data.

In this case, wages have certainly moved ahead of inflation and support the RBA’s strategy around working to achieve the much-vaunted and desired ‘soft landing’ (represented by the grey area in the chart above). But the repair work on living standards has only just commenced. Assisting households with the cost-of-living challenges is a work in progress and to play their part in that, real wages have a long way to go.

Greg Jericho, commenting in the Guardian, noted:

“As it stands, we have a very long way to recover our lost real wages. This recent increase only puts the level of real wages back to where they were in September 2011: It also means that the average wage still buys about 5% less than it did in March 2020.”

In that light, the RBA has been quite muted about real wages growth. It has suggested there needs to be caution by those signing up to new collective agreements, but it has not been so bold as to suggest they would overcook the economy by unleashing a new round of inflation.

Wages increases that are still trying to catch up with where spending power used to be will not overheat the economy. Tax cuts could be a different matter, especially as they have exactly no anchor point to the conditions applicable in the economy.

Posted Date: March 12, 2024

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