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Why is Queensland wages growth so low at present?

The question on many people’s lips at present is why is Queensland’s wage growth so low at present?  This is great question but we need to be wary of the end game as to why many are asking it.

For example there is mounting rhetoric from unions that Australia’s workplace relations system is now broken, the rules need to change and Government intervention is required to boost wages growth.  However these sentiments are ignoring basic ‘economics 101’ and would be damning beyond belief for the Queensland economy.  This week's blog tells us why.

Wages growth in Queensland is at a historic low with the Wage Price Index growing by just 1.9 per cent over the past twelve months (compared to long term trend growth of 3.3 per cent) and real wages growth (after adjusting for inflation) in the Sunshine State is effectively stationary. 

The implications of this are profound threatening living standards for workers as wages represent the largest source of household income.  It is not only of concern to unions and employees but also to the Reserve Bank of Australia due to its impact on household consumption and spend across the broader economy.

However what we need to remember is that wages growth has always varied in tandem with the business cycle. At present, the Queensland economy is experiencing a period of below trend economic growth and lower wages growth should be reasonably anticipated.

The Reserve Bank of Australia best mounts the case for the current low growth and why wages are pinned to the overall level of demand for labour.  The RBA writes:

Lower wage growth is associated with higher rates of unemployment.  Firms experiencing subdued demand for their goods and services will seek to contain costs, including labour costs ……… firms initially seek to contain their labour costs by laying workers off, reducing hours or reducing hiring.   As slack in the labour market rises employees become more anxious about their job security and become willing to accept lower wage growth as there are fewer opportunities for alternative employment and more competition for any given job vacancy.

The Wage Phillips Curve that describes the inverse relationship between demand for labour (as measured by the unemployment rate) and wages growth in Queensland is very interesting.

The solid green line above represents the inverse relationship that exists between the unemployment rate and wages growth (ie a rise in the unemployment rate of one percentage point leads to a decline in WPI growth of around two thirds of a percentage point).  Accordingly we could reasonably conclude that if Queensland wants wages growth back up over 3.5 per cent then we need to reduce our State’s unemployment rate to below 5.5 per cent.

What is fascinating though to my mind (apart from the moving average line looking incredibly like a T-Rex dinosaur) is that effectively since the GFC the decline in wages growth appears to have been unusually large relative to the increase in the unemployment rate. Based on the historical relationship WPI growth has declined by more than three times as much as would have been expected (that is wage growth is considerably lower for a given increase in unemployment than in the past).

Any good economist would ask why and this certainly appears to add some credence to Union calls for Government intervention. 

Recent evidence as to why wages growth is so low in addition to spare capacity in the labour market relate to two other reasons.  Firstly there are at present lower inflationary expectations and employees are focusing more on the purchasing power of their wages in terms of the goods and services they can buy rather than the dollar quantum (i.e. they are concerned about their real as opposed to nominal wages).

Secondly business output prices are also no doubt influencing wages at present.  With significant import competition and fierce domestic competition to attract and retain customers output prices are also historically low.  This absence of growth in prices is likely to be imposing a major constraint on the capacity of employers to pay higher wages.

However I think there is now a newer and bigger influencer and its called underemployment.  Historically reducing unemployment had big impacts on wages growth but underemployment is now according to the RBA having a greater impact on wages than is unemployment.

And the numbers for Queensland are startling as confirmed in my recent blog with 215,000 Queenslanders wanting more hours of work (now far surpassing the 163,000 who are officially classified as unemployed).  The RBA has recently suggested that workers who are after more hours of employment (underemployed) would prefer to take them rather than a pay rise. So firms are now giving more hours to existing workers without needing a pay rise to entice or retain them.

In summary there are a range of factors that explain why Queensland currently has the lowest wage growth on record including below-average economic growth; spare capacity in the labour market; low expectations for inflation; and lower output price rises due to greater competition.

However what I wish to highlight is that the decline in wages growth has been central to the successful adjustment of the Queensland economy post GFC and mining boom.  If wages growth had not fallen then the number of both unemployed and underemployed persons would be dramatically higher further compounding the difficult economic state of play in the Sunshine State.

None of the factors that have caused low wage growth can be expected to moderate quickly and furthermore Queensland’s exposure to international trade and globalisation (where overseas countries have lower wage rates) mean that wages growth in the Sunshine State is reasonably anticipated to be on a permanently lower trajectory.

The one thing for sure in this new norm is that if we want stronger wages growth we still need stronger economic growth. Government cannot at the stroke of a pen fix this challenge, it can only execute enabling policy settings to grow the economy thereby creating demand for labour that in turn gives rise to wages growth.

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