It seems wages can’t grow any slower – and no rebound is in sight | Greg Jericho

The latest wages growth data suggest the bottom over low growth has been reached. That’s the good news. The bad news is there is little sign of any rebound – with growth remaining at historic lows and showing virtually no improvement at all in real wages.

After an over four years run of slowing wages growth, in the past 12 months we have seen growth improve. Whereas in the 12 months to June, wages grew just 1.9%, in the 12 months to September growth improved all the way to 2.0%.

So it would seem we have hit the bottom, but to be honest, it would have been almost impossible for wages to grow any slower, and as it is, it’s not like there is any great rebound occurring.

In the September quarter, private sector wages grew by just 0.48% in both seasonally adjusted and trend terms. It means that it has now been two and half years since private sector wages have grown by more than 0.5% in any quarter.

And while the public sector saw slightly stronger growth – its September quarter growth of 0.54% was the lowest on record:

The result was somewhat of a disappointment – with the market expecting that the June decision to raise the minimum wage by 3.3% might produce a bit of a bounce. Instead the low growth figures saw the value of the dollar fall by 0.6% as they provided yet more evidence that there is little need for the Reserve Bank to raise interest rates.

The sector to see the biggest growth in September was the accommodation and food services industry. As is always the case, due to the high prevalence of workers on the minimum wage there was a spike in wages growth in the quarter, but in annual terms, the industry’s wage growth of 2.1% was slower than observed in the 12 months to June:

The growth of private sector wages was lowest in the mining industry, but here at least there has been some clear improvement.

Six months ago, wages in the mining industry were growing by a record low 0.6%; now they are up to 1.2% – still easily the slowest growth of any industry, but at least a sign that things are not getting worse:

Not getting worse is also about the best you can say about real wages. In September, inflation grew by 1.83% both according to the official CPI figure and the RBA’s core inflation measure of the “trimmed mean”.

It means real private sector wages in the past year grew by just 0.02%:

This continues an utterly dreadful four year period of next to no real wages growth.

From 2002 to the GFC hitting in 2008, real wages grew each year on average by 0.9%. From March 2010 until March 2013, real wages grew by 1.2% each year, but since then they have grown on average by just 0.03%:

Real wages are now just 0.1% above where they were in March 2013.

And the real worry is where this is all heading.

One of the biggest problems with ongoing low wages growth is it can create a structural shift such that lower wages growth becomes expected in conditions that previously would have seen higher wages.

We have seen this most obviously in the relationship between unemployment and wages growth. The “Phillips curve”, which normally sees wages growth increase as the unemployment rate falls has become utterly broken in the past three years.

Despite improving unemployment we have seen falling wages growth – something that is not meant to occur:

The past year has seen a slight return of the relationship, but at a completely different scale. Whereas in the past a shift from 5.8% unemployment to the current level of 5.5% would have seen an expected improvement in wages growth from 3.2% to 3.4%; now the shift is from 1.9% to 2.0%.

The worry is the relationship has effectively shifted down such that wages growth will be lower for each level of unemployment than it was before.

If this occurs, not only will it mean workers can get used to low wages for a long time to come, it also would blow a big hole in the government’s budget figures.

The May budget predicted that by June next year wages would be growing at 2.5% and would improve to 3.0% by June 2019:

Already this means that wages to grow on average by 0.7% in each of the next three quarters – something that hasn’t occurred in any one quarter since March 2014.

So while we are no longer talking about record low wages, we continue to talk of ongoing low wages growth, with little sign of improvement around the corner. It suggests weaker income tax revenue than the government hopes, and weaker growth of real wages than any of us would wish.