Falling real wages

Tue, 08 Jul 2014  |  

This article first appeared in the Melbourne Review on 6 June 2014. https://www.melbournereview.com.au/commentary/article/falling-real-wages

It is rare in Australia to see falls in real wages but in the last six months the annual rate of inflation has been higher than the rate at which wages are increasing.

This loss of purchasing power for households, plus a hopelessly mismanaged and poorly framed budget, is driving consumer confidence sharply lower, towards levels not seen since the Global Financial Crisis was threatening to plunge the world economy into an economic depression.

Falling real wages are a sign of slack in the labour market. In other words, real wages are weak or actually fall when there is a sufficiently large pool of unemployed workers for potential employers to trim wage levels to entice people into a job. This wage moderation then filters through to those in employment and the path to real wage weakness in entrenched at least until the economy grows more rapidly and demand for labour increases with it.

While it would appear that Australia does not have a significant unemployment problem at the moment, several years of slightly below trend economic growth has seen the unemployment rate drift up from under five percent to now be around six per cent. At the same time, the workforce participation rate has been falling, suggesting a significant and increasing degree of slack in labour market conditions.

The fact that real wages are falling in response to these market pressures means that there is a high degree of flexibility in the setting of wages and the industrial relations structure more generally. Wages are adjusting, in real terms, to this period of softer economic growth and softening of growth in demand for labour and this low wages growth is, in turn, helping to keep inflation in check.

The Reserve Bank of Australia has identified this phenomenon. In the minutes to the May board meeting, the RBA noted, "the demand for labour remained subdued and was likely to remain so for some time. This had led to lower wage growth which in turn had seen inflation decline for non-tradable items whose prices were more sensitive to labour costs."

With low wages growth helping to dampen inflation pressures, the RBA has been able to keep monetary policy very stimulatory as it attempts to support the economy and lock in growth at an acceptable pace.

There is a problem if wage levels remains too low for too long. It holds back or even oppresses growth in consumer spending. The household sector needs steady real income growth if it is to maintain a solid growth rate in consumption spending. While borrowing and a run down in savings can temporarily underpin higher spending, more fundamentally sound and sustainable increases in spending rely heavily on household income growth.

Making matters more problematic at the moment are other negative influences on household incomes that result from the budget. The Medicare co-payment, the indexation of petrol excise and the two percent income tax increase on high-income earners will all dampen disposable incomes as money is taken from potential consumption and directed towards government revenue.

This suggests that household spending growth is vulnerable to some headwinds in the months ahead. Already consumer confidence is down and there is a solid correlation between consumer optimism and spending. While Australians are very wealthy with recent house price and stock market gains, these two drivers of wealth have recently stalled with house prices down and the stock market growth so far in 2014 underwhelming. The list of negative factors is slowly, but surely, growing.

About the only upside of low wages growth in the current flexible labour market climate is that the real cost of labour has fallen. When the economy does register stronger growth, employers will be inclined to increase their hiring due to these subdued labour costs. The low wages growth bodes well for further employment on the critical caveat that the economy can get to and then sustain above trend economic growth.

From a macroeconomic perspective, it is best if there is moderate but sustained growth in real wages. This generally underpins a solid rate of consumption spending and facilitates hiring as the economy grows.

At the moment, falls in real wages are threatening to undermine economic growth which could well be problematic if mining investment continues to fall and the recent stalling in the housing expansion turns into a downturn. What looked to be a strong start for the economy in 2014 is now faltering. The question is whether it is a temporary blip or something more sinister.

comments powered by Disqus

THE LATEST FROM THE KOUK

The RBA has the tools to fix the economy, but is reluctant to use them

Thu, 05 Dec 2019

This article first appeared on the Yahoo Finance web site at this link: https://au.finance.yahoo.com/news/rba-tools-reluctant-042742904.html

-----------------------------------------

The RBA has the tools to fix the economy, but is reluctant to use them

The Reserve Bank of Australia has made a range of serious policy errors over the past few years, and the Australian economy is weaker because of those mistakes and misjudgments.

Not only is the RBA on track to miss its inflation target for six years, and perhaps longer, the persistently high unemployment rate in concert with record low wages growth is the result of the RBA’s tardiness in cutting interest rates because of its textbook obsession with house prices and household debt.

It is a mistake that has cost the economy tens of billions of dollars in lost output; employment is many thousands of people below what could have been achieved; and all the while wages growth hovers near record lows undermining the wellbeing of the workforce. What’s worse, the RBA seems to have thrown in the towel on trying to meet its inflation target, even though that target was confirmed a month ago in the recent update of the Conduct of Monetary Policy between the RBA and Treasurer.

In this context, Deputy Governor of the RBA, Guy Debelle, gave a fascinating speech earlier this week on the topic of employment and wages.

Household wealth is booming: What this means

Mon, 25 Nov 2019

This article first appeared on the Yahoo website at this link: https://au.finance.yahoo.com/news/household-wealth-booming-200022930.html 

------------------------------------------

Household wealth is booming: What this means

$500,000,000,000.

In other words, half a trillion dollars.

That is approximately the amount Australian household wealth has increased since the start of July 2019, with house prices surging, the Australian stock market moving higher, and savings increasing.

The bulk of the gains have occurred via rising house prices, which according to CoreLogic, are up over 5 per cent in less than five months. This move in house prices has added around $360 billion to the value of housing and is driving the rebound in wealth. At the same time, the level of the ASX has risen by around 2 per cent with a further $40 billion being paid out in dividends. This allows for the recent pull back on prices as new banking scandals are exposed.

In these conditions of rising wealth, the household sector is getting a serious financial reprieve, despite the ongoing weakness in wages and the still very high level of unemployment and underemployment which afflicts almost 14 per cent of the workforce.

The good news is that this wealth creation is likely to spark a rise in household spending growth once the gains are widely acknowledged in the community and then feed into consumer sentiment. This is most likely to show up in the first half of 2020, after the usual lags work their way through the economy. History shows that when we consumers experience growth in our wealth, we are more inclined to lift our spending.

Earlier this year, RBA researchers Diego May, Gabriela Nodari and Daniel Rees found that:

“When wealth increases, Australian households consume more. Spending on durable goods, like motor vehicles, and discretionary goods, such as recreation, appears to be most responsive to changes in household wealth”.

We saw this, in the reverse, in the period from the middle of 2017 to the middle of 2019 when Australia-wide house prices fell by 10 per cent, crunching wealth levels. It was no surprise that during this period, household spending growth slumped. The retail sales component fell to its weakest since the early 1990s recession. Consumer spending and confidence was not helped by the coincident weakness in wages growth and the policy mistake of the RBA which refused to cut official interest rates, even though the economy was mired in a low inflation, low growth and falling wealth climate.

Thankfully, common sense has since prevailed at the RBA and it has cut interest rates three times since June.

Demand for housing has also lifted with shrewd first home buyers taking advantage of favourable affordability and investors also stepping back in after the May election saw the return of the Coalition government and the demise of Labor’s proposal to reform negative gearing tax laws. The current wealth surge unfolding now is occurring at a time when there is also a sharp decline in the debt-servicing burden as interest rates fall. This has the dual effect of freeing up cash flows for some consumers and allows other to accelerate their debt repayment.

For the moment, the labour market remains weak and wages are still stuck in the mud. These will constrain any near term lift in household spending, but the wealth lift will be vital for sparking a pick-up in consumption, probably in the new year when the effect is more widely observed and entrenched.

It adds to the scenario where 2020 is looking like a better year for the economy with bottom line GDP growth set to hit 3 per cent in the second half of the year.  If the wealth effects build further over that time and business investment and infrastructure spending continues to lift, the economy in 2020 just might register its strongest growth rate in a decade.