Annual wages growth has stalled at 2.2 per cent. Annual wages growth has stalled at 2.2 per cent.
Finance Finance News Odds are your wages just shrunk – and will again Updated:

Odds are your wages just shrunk – and will again

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One more time for the dummies: the 2.2 per cent annual pay rise is no rise at all. After tax and inflation, it’s a big fat 0 per cent.

That’s a fact that government and employers are either ignorant of or don’t dare admit. It seems average workers don’t grasp it either, even while feeling the impact of declining living standards.

And it’s actually worse than zero growth for many people. The interaction with our transfer system – family tax benefits, tax rates and such – means many households went backwards. Their real take-home pay shrank.

Depressingly, most folk in the forecasting business think this will remain the case for years to come.

Thursday’s Australian Bureau of Statistics’ labour force numbers reversed the previous month’s dip in the unemployment rate, taking it back up to 5.3 per cent. The underutilisation rate climbed from 13.4 to 13.9 per cent of the workforce.

Wages won’t really increase until that number is substantially lower. Not even the Pollyannas in the federal Treasury or Reserve Bank can see that happening.

What’s more, the present policy mix means that while wages slaves go nowhere or backwards, those who already have substantial assets are enjoying the fruits of asset price inflation brought on by loose monetary policy.

In particular, interest rate cuts push up top-end housing prices proportionately more than cheaper and average housing, according to a new Reserve Bank research paper.

Those who’ve already had a good go, get an even better go while the rest go nowhere.

The only (partial) relief on the horizon is the next round of legislated income tax cuts, but that is not until the 2022-23 financial year. And even after the third planned round of tax changes in 2024 – the flattening of our progressive tax scale by having a 30 per cent tax rate from $40,000 all the way to $200,000 – only the top 20 per cent of tax payers will have a cut greater than bracket creep.

Our biggest problem

The coronavirus notwithstanding, stagnant or worse real take-home wages are our biggest domestic economic problem, the main cause of our weak consumption growth, an indicator of failing to improve living standards.

That wage rises are too low to provide a lift in real purchasing power is a fact that escaped all the coverage of Wednesday’s December quarter wage price index announcement, with the exception of The New Daily.

The Australian Financial Review’s print edition didn’t even manage that much. In my coffee shop copy, I didn’t see a story on what is one of the most important ABS releases each quarter.

Maybe a page was missing, maybe my eyesight isn’t what it used to be, or maybe the print edition wasn’t missing much, as the online AFR report tried to put a positive spin on a poor aspect of already poor news for the December quarter:

“The positive surprise was that for the first time since 2012, private sector wages grew at a faster rate than the public sector. Private wages rose 0.5 per cent in seasonally adjusted terms while public sector wages grew 0.4 per cent.”

There’s nothing positive about that at all. Private sector wages growth was only higher because public sector wages growth fell, reflecting government efforts to suppress real wages growth.

The quarterly private sector hourly rate of pay growth remains stuck around 0.5 per cent. And that public sector fall was despite a big one-off lift in Victorian healthcare workers’ pay.

Cheering the federal government’s consumption-suppressing two per cent cap on wages growth in the present climate is nothing short of weird.

What a 2.2 per cent ‘rise’ really means

At best, the odd commentator noted there wasn’t much difference between 2019’s 2.2 per cent wage price index (WPI) growth and the 1.8 per cent rise in the consumer price index last year.

In the December quarter, inflation at 0.7 per cent was actually higher than the 0.5 per cent WPI.

As I’ve explained on these pages before, a 2.2 per cent pre-tax wage rise rounds down to a 1.8 per cent after-tax rise whether someone is on the median wage of about $60,000 a year or $100,000.

That’s the very simplistic version. Add in the complications of our transfer system and it gets worse, as various means tests and higher tax rates are triggered.

David Plunkett, a former senior public servant, has the time, expertise and patience to delve into this labyrinth. His accompanying graph still keeps it relatively simple, but even for a single person, a 2.2 per cent wage rise after tax and inflation is positive only for a minority.

Do the same exercise for a couple with children of various ages collecting family tax benefits and it can be much worse again.

The point of all this is that employees, employers and governments need to realise we are trapped in a vicious cycle that is keeping the economy weak and threatening to make it weaker.

Economists who should know better sometimes don’t understand the damaging impact of wage rises of “about 2 per cent” because they forget the effect of our tax system on disposable income.

Employees and their representatives need to understand the simple mathematics involved when negotiating wages agreements, otherwise they are accepting reduced living standards.

The current debate about increasing the compulsory superannuation guarantee levy (SGL) includes the assertion that most of any increase in the SGL will be at the expense of wages growth.

The RBA’s February board minutes included this prediction:

“Wages growth was expected to be largely unchanged over the following couple of years because mild upward pressure on growth in the wage price index would likely be offset by downward pressure from the increase in the superannuation guarantee from mid 2021.”

That might be as credible as the RBA’s woeful track record for forecasting wages growth.

The bank’s liaison with business last year found the vast majority intended to keep wages growth unchanged without any reference to the SGL.

The bank also hasn’t explained why it would think there would be upward pressure on wages anyway when it expects no significant drop in the underutilisation rate in the forecast period.

The challenge for labour will be to at least hold the line on the existing 2.2 per cent norm if employers and government try to use the SGL as a reason to trim wage increases next year.

I’ve been among those willing to think the government could well use the pending retirement incomes inquiry as an excuse to ditch the legislated SGL increase. The lobbying to do so has been intense.

But the government reportedly is sticking with the stepped increase from the current 9.5 per cent to 12 per cent.

“The Morrison government has shut the door on calls to stop the compulsory super guarantee rising to 12 per cent, in the belief that it would be picking a fight it could not win,” according to the AFR.

On the other hand, the same story only reported that “Treasurer Josh Frydenberg said the government had ‘no plans’ to stop the legislated increase”.

Given the government’s devotion to weasel words, having “no plans” is a long way short of guaranteeing the scheduled increase.

What the future holds

Ahead of that test of resolve in 2021, the outlook for real after-tax wages growth remains abysmal.

Previous advice from the RBA and Treasury is for workers to switch jobs in search of more money, but that’s not easy in uncertain times.

Another way of getting a rise is to get a promotion, but the RBA has found that employers collectively are even reducing the percentage promotions they give as part of their cost cutting mantra.

The danger now is that labour has become so used to stagnation, it expects no better, something the RBA minutes has joined The New Daily in reporting:

“Members noted that a number of factors had contributed to the slowdown in consumption growth since mid 2018. The downturn in the housing market had reduced households’ wealth, and the extended period of weak growth in household income had probably lowered expectations of future income growth.

“Members observed that the prolonged period of slow growth in income was expected to continue to weigh on consumption over coming quarters. Furthermore, recent data had suggested that households were directing more income to saving and reducing their debt.”

Only “coming quarters”? We should be so lucky. Try “coming years”.