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<\/p>\nWith 2018 now underway, many Australians may have noted \u2018pay increase\u2019 in their new years\u2019 resolutions list. While the economic conditions over the past few years may not been ideal for having successful conversations with your boss around remuneration, MLC\u2019s Senior Economist Bob Cunneen explains how changing economic factors could lead to an improving environment for pay rises.<\/p>\n
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Nominal wages growth is the slowest it\u2019s been in 20 years. This is despite a number of strong economic indicators in the past year including a dramatically improved Australian labour market and employment growth running at its fastest pace since 2008 with 3.3% annual growth.\u00a0 Also, the unemployment rate has fallen to 5.5% which is the close to its lowest level since 2013. So why are pay rises as common as finding a Tasmanian tiger barking in the bush?<\/p>\n
There has been a shopping list of explanations given for this \u201cwages woe\u201d by commentators and economists. The most frequently cited reasons are the elevated level of unemployment which is also known as \u201cspare capacity\u201d, \u201cjob insecurity\u201d and the longer-term challenges of \u201cglobalisation and technology\u201d.\u00a0 All three factors can be considered inter-related.\u00a0 If an individual is insecure about their job given the level of unemployment as well as globalisation and technology putting pressure on their job security, it doesn\u2019t provide much support for an increase in pay.<\/p>\n
Australia\u2019s nominal wages have been measured every which way with acronyms to astound and confound. Fortunately there is one standardised measure that Reserve Bank of Australia (RBA), Federal Government and financial markets focus upon. This is the \u201cWage Price Index\u201d. This Wage Price Index (WPI) measures nominal wages to ensure \u201ca constant quantity and quality of work performed\u201d. The Wage Price Index is adjusted for different levels of hours (\u201cquantity\u201d) and skills employed (\u201cquality\u201d).<\/p>\n
Australian wages growth<\/strong><\/p>\n The Wage Price Index has only recorded 2% annual growth in the year to September 2017. This is essentially the slowest pace for wage gains since this measure began in 1997. Wages growth is now lower than the experience during the Global Financial Crisis (GFC) from 2007 to 2009.<\/p>\n \u00a0The RBA Governor Dr Philip Lowe is concerned about this slow wages growth, calling it a \u201cmajor priority\u201d for understanding. Slow wages growth is a major contributor to both the \u201clow inflation\u201d and \u201chigh asset prices\u201d which is currently perplexing central bankers.1<\/p>\n Australia\u2019s unemployment rate is cited as a key measure of \u201cspare capacity\u201d in the labour market. The unemployment rate calculates the percentage of the available workforce that is out of work. As the theory goes, the more unemployed Australians, the less pressure on wages as people compete for available jobs.<\/p>\n Certainly Australia\u2019s current unemployment rate at 5.5% is higher than in 2007 prior to the GFC where the unemployment rate was 4.2%. So there is an additional 1.2% of the available workforce currently unemployed. However this does not fully explain the current slow wages growth. Even in 2009 when the unemployment rate was higher at 5.9%, wages growth was still at a solid 3% annual pace.<\/p>\n Actually the unemployment rate is a debateable measure of \u201cspare capacity\u201d. If you work for more than one hour, you are considered employed. So what happens if you are \u201cunderemployed\u201d. You could be a part time worker who would like to work additional hours but do not have the opportunity. According to the ABS, Australia has an underemployment rate of 8.3% at November 2017.<\/p>\n A potentially more accurate measure of Australia\u2019s \u201cspare capacity\u201d is the underutilisation rate. This combines both the unemployment rate (5.5%) and underemployment rate (8.3%) to arrive at a circa 13.7% underutilisation rate. This effectively means nearly 1 in every 7 potential workers are either unemployed or underemployed.<\/p>\n The underutilisation rate when turned upside down in the following chart (red line is inverted) is highly correlated with wages growth (black line). This suggests that the higher the percentage of Australians that are underutilised, then the slower the wage growth. Australian underutilisation vs wages<\/strong><\/p>\n \u00a0 Source: NAB Asset Management Services Limited, Australian Bureau of Statistics.<\/span> Fortunately there are encouraging signs that this underutilisation rate is starting to decline. The underutilisation rate peaked in November 2014 at 14.9% and since then has been making a choppy and gradual improvement to now stand at 13.7%. Clearly there needs to be a further sharp downward shift in this underutilisation rate to place upward pressure on wages growth, but at least the labour market\u2019s spare capacity is moving in the right direction by becoming \u2018less spare\u2019.<\/p>\n The RBA Governor, Dr Phillip Lowe, recently suggested that workers\u2019 concern over globalisation and technology may also be restraining wages noting the possibility that \u201cworkers feel a heightened sense of potential competition, either from advances in technology or from international competition\u201d in curbing their wage demands.<\/p>\n So has this \u2018brave new world\u2019 of integrated global supply systems and machines impacted on wage growth? Currently the evidence is more anecdotal than statistical, so the jury is still out. However let\u2019s briefly consider what can be called the \u201cRage against the machine at the checkout\u201d as a prime anecdotal example of both globalisation and technology weighing on wages growth.<\/p>\n The arrival of Germany\u2019s ALDI into the Australian supermarket industry shows globalisation at work. ALDI has become a key competitor to Coles and Woolworths and uses its lower-price model as a differentiator. The \u201cadvances in technology\u201d are also now evident in the recent introduction of \u201cself-checkout\u201d scanning machines by Coles and Woolworths.\u00a0 Now consider yourself a cashier employee in any Australian supermarket. Do you have the bargaining power for higher wages given the greater competitive pressures and technological advances that now prevail?<\/p>\n \u00a0Since the GFC began in August 2007, the spectre of job cuts has loomed like a black cloud over the workforce.\u00a0 Both the corporate and public sectors have been seeking \u201cefficiency dividends\u201d from employees. Given this plague of management euphemisms about \u201ccost control\u201d, \u201cdownsizing\u201d, \u201crebalancing\u201d and even \u201crightsizing\u201d, it would be rational for employees to worry about their jobs.<\/p>\n While \u201cjob insecurity\u201d may not be exactly measurable, the Melbourne Institute conducts a survey that canvases consumers\u2019 expectations for unemployment. Notably unemployment expectations has seen some sharp movements over the past decade, as seen in the chart below.<\/p>\n The GFC witnessed a sharp spike in unemployment expectations (red line is inverted in chart) as consumers became anxious about their job prospects.\u00a0 While there was a brief recovery from 2010 to 2011, unemployment expectations then rose again from 2012 to 2015.\u00a0 Given this apparent correlation between unemployment expectations and wages growth, then \u201cjob insecurity\u201d seems to be a key contributor to Australia\u2019s wages woes.<\/p>\n Unemployment expectations vs wages<\/strong><\/p>\n \u00a0 Source: NAB Asset Management Services Limited, Australian Bureau of Statistics, Melbourne Institute.<\/span><\/p>\n Fortunately for those in the workforce there are some signs that unemployment expectations are now getting better, rather than deteriorating further into fear and loathing. The Melbourne Institute survey measure (previous chart) has now fallen to its lowest level since 2011. Another alternative measure is NAB\u2019s Consumer Anxiety Index which also shows that stress over job security has fallen to its lowest level for the past five years.<\/p>\n Indeed these diminishing survey responses for \u2018unemployment expectations\u2019 and \u2019consumer anxiety\u2019 suggest that employees are coming to terms with the challenges from spare capacity, globalisation and technology. We now seem to be becoming less fearful. Stronger jobs growth over the past year appears to be turning the tide in favour of more bargaining power for employees. This is a particularly welcome development for consumer spending as a moderate rising tide of wages growth should lift the economy\u2019s growth performance. So there are now some hopeful signs for wages growth and that elusive pay increase may not be as far away as you think.<\/p>\n 1\u00a0Reserve Bank Governor Dr Philip Lowe, \u201cSome Evolving Questions\u201d Address to the Australian Business Economists Annual Dinner Sydney \u2013 21 November 2017, https:\/\/www.rba.gov.au\/speeches\/2017\/sp-gov-2017-11-21.html \u00a0<\/p>\n![\"\"](\"http:\/\/internal.clientcommunity.com.au\/uploaded\/level\/moreimages\/2017_images\/Fin_Writers\/NABAM_Jan_chart1.png\")
Source: NAB Asset Management Services Limited, Australian Bureau of Statistics.<\/span><\/p>\nSpare capacity<\/h3>\n
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\u00a0<\/p>\nGlobalisation and technology \u2026.<\/h3>\n
Job insecurity (is falling)<\/h3>\n
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But there is light on the horizon<\/h3>\n