Wages growth subdued

June 19, 2015

The RBA this week released a report showing that Australian wage growth has declined in recent years. The rate of annual growth is now running around the pace of inflation, 2-3 per cent.  The current period of low wage growth which commenced in 2012 is the longest since the 1990’s.

A number of factors have been attributed to the slowing in wages growth. There has been an increase in spare capacity in the labour market, employment contracts have become more flexible, wage bargaining is being based on lower inflation expectations and businesses are facing increased competition from across the globe and thus do not have the profitability to pay above consumer price index wage increases.

The current subdued wages environment has improved Australia’s cost competitiveness against other advanced economies. Had wage growth not slowed over recent years employment growth may have been lower, resulting in higher unemployment and lower consumer demand. Wages growth is not expected to change significantly in the near term. A further contraction in wages growth would mean a fall in real wages, with a corresponding negative impact on worker morale and productivity.