Stagnant wages drag down the economy

It’s not only union officials who are worried about persistent low wage growth.

Australia has a new economic problem: profits are surging but wages are stagnant or barely keeping pace with living costs.

Last year, company profits grew by 22 per cent – the second fastest annual growth in the past 30 years.

 However, total wages and salaries grew by just 1.4 per cent – the slowest growth outside of a recession or the Global Financial Crisis.

The average Australian household now has less disposable income in real terms than when the Liberal/National Coalition took power in 2013, The Guardian newspaper reports.

The major reason, it says, is persistent low wages growth.

“In a period where the cost of living for essential items such as energy and health have skyrocketed, workers’ wages have grown at record low levels,” The Guardian said.

“It is an issue that sees households, despite living in a country in its 26th year without a recession, with a living standard no better than seven years ago.”

Wages in Australia traditionally grew in line with the strength of the overall economy.

That relationship saw wages rise from 1998 through to the end of 2012 at an average of around 3.5 per cent each year.

That amounted to a 1 per cent annual increase in real wages, after taking inflation into account.

However, as The Guardian noted, Australia has not seen average wages growth of 3.5 per cent since September 2012 – “and worse, no one thinks we will see it for a very long time yet”.

Low wage growth leads to other economic problems

A Sydney Morning Herald editorial last month described a lack of wage growth at a time when businesses are doing well as “the main problem currently exercising the minds of economists and
central bankers”.

Even Reserve Bank governor Philip Lowe has said higher wages would benefit the whole economy.

He talked of low wage growth as a “crisis” and said he hoped relatively low unemployment would re-energise workers to demand higher wages.

“At some point, one imagines that’s going to lead to workers being prepared to ask for larger wage rises,” he said. “If that were to happen it would be a good thing.”

Mr Lowe said low wages growth was now a “distinguishing feature” of the Australian economy and at the heart of many of the problems the Reserve Bank was currently grappling with, including a boom in house prices and dangerous, record debt levels.

“Low growth in wages means low inflation, which means low interest rates, which means high asset valuations.”

He said low wages were also hurting many businesses by depressing consumer confidence.

Companies had shown a “laser-like focus on containing costs” by holding down wages and cutting allowances.