No one likes going backwards financially, and last week Treasurer Jim Chalmers received some pretty grim news on this front.
A two-year period in which wages rose more quickly than inflation came to an end in December, when the annual pace of wage growth was 3.4 per cent, below the inflation rate of 3.8 per cent.
While Chalmers pointed out wage growth has been above 3 per cent for more than three years, any decline in “real”, or inflation-adjusted, wages is unwelcome news for a government. Especially a Labor government that’s vowed to fight the cost-of-living crisis with stronger pay rises.
Even so, the economy is a complex beast that is hard to sum up with a few simple figures, and when you look more closely at how household incomes are faring, the truth is more complicated than “we’re all going backwards”.
For example, Reserve Bank governor Michele Bullock also told a parliamentary hearing this month that broader measures of household income – which take into account more than just wages – tell a more positive story about how real incomes have grown since COVID-19.
“We’re looking at a measure of what people are actually being paid. It’s not shooting the lights out either, but it is above where it was pre-COVID,” she said.
Or, if you look at how many customers are falling behind on their home loans, things have been getting better, not worse. Indeed, the main surprise in the latest round of bank profits was the very low number of borrowers unable to repay their loans.
So, how is it possible to get such different impressions about the cost-of-living crisis? Are all workers’ incomes really going backwards after inflation, as those wage figures suggest? Or are things not quite so bad?
One reason for the conflicting narratives on the cost of living is technical: it depends what you’re measuring. There’s a huge range of data and statistics on the economy, and each can tell a different story. Even something you’d think would be simple, such as household incomes, can be measured in various ways.
Last week’s wage price index, for example, is not necessarily a great picture of most people’s income over time. The index tracks hourly pay across a “basket” of jobs, but doesn’t measure what happens when someone gets a pay rise from being promoted, or how their pay changes when they move to a new employer. Given that most of us do change jobs or roles over the years, that’s a significant gap.
Without getting too far into the minutiae, the RBA also looks at a different, broader, measure with the clunky name of average earnings from the national accounts (AENA). It includes bonuses, overtime and pay rises from promotions, and the RBA says it’s a “more complete measure” of labour earnings in the economy.
This broader measure has been higher than the wage price index that was released last week – though it’s also more volatile. AMP economists say AENA is up 42 per cent since December, which is more than twice as much as the increase in wages over that time.
This suggests the reality for many households is not quite as bad as the recent decline in real wages would have you believe.
Over the longer term, however, there’s no getting around the fact that real wage growth has not been a strong point for the Australian economy over the past 15 years or so.
Wage growth was miserable for much of the 2010s, and then the surge in post-COVID inflation landed a major blow to our spending power, from which we are still recovering.
AMP deputy chief economist Diana Mousina says inflation has risen by 23 per cent since the end of 2020, while wages have risen less than that, at 18 per cent.
While the media will always make a big deal about quarterly movements in the consumer price index and the wage price index, this longer-term hit from inflation probably matters more to our everyday sense of the cost of living. That’s because most of us aren’t thinking about the latest inflation numbers when we’re at the shops, but we do notice that things at the supermarket are a lot more expensive than they were five years ago.
What’s more, Mousina says it could take years more for wages to catch up to inflation and make up for that hit, so “concerns about cost of living are unlikely to go away”.
What can we do about it?
The RBA is using interest rates to try to get inflation back in its range, which in a roundabout way would eventually help with “real” wages by lowering the pace of price rises.
But it’s far from ideal. The RBA’s weapon, higher interest rates, is blunt (it slows the whole economy) and somewhat arbitrary: it hurts people who have borrowed to buy a home, especially more recent buyers, while sparing others.
The more important long-term objective is what every business type and economist is on about, and that’s improving our poor productivity performance. This sounds dry, but it has a direct link to inflation and the ability of workers to get sustainable wage rises.
Why is productivity so closely linked to wages and inflation? Basically, if a business can get its workers producing more output per hour, it should be more able to give them a pay rise without needing to raise its prices as much to cover the higher wages bill. If many businesses can do that (give out pay rises, without raising prices as much as they would otherwise), that helps “real” wage growth.
It’s the secret sauce of capitalism, and the reason material standards of living have risen over time.
None of this makes improving productivity easy – but it’s why so many people are demanding Chalmers take action in this year’s federal budget.
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Clancy Yeates is deputy business editor. He has covered banking and financial services, and was previously national business correspondent in the Canberra bureau.Connect via X or email.