tag:theconversation.com,2011:/fr/topics/wage-price-index-46264/articleswage price index – The Conversation2022-06-16T07:37:50Ztag:theconversation.com,2011:article/1849292022-06-16T07:37:50Z2022-06-16T07:37:50ZAn extra 60,600 Australians found work in May. Here’s why wages aren’t moving much<figure><img src="https://images.theconversation.com/files/469187/original/file-20220616-20-ilh27c.png?ixlib=rb-1.1.0&rect=269%2C59%2C3215%2C1958&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>The rate of unemployment remained steady at <a href="https://www.abs.gov.au/statistics/labour/employment-and-unemployment/labour-force-australia/may-2022">3.9%</a> between April and May.</p>
<p>That Australia has now managed to keep a rate of unemployment below 4% for three consecutive months is extraordinarily good news.</p>
<p>It gets better. While the unemployment rate didn’t improve, the labour market did, substantially.</p>
<p>The number of Australians in jobs climbed by 60,620 between April and May – a very large 0.5%. The proportion of the working age population in employment climbed to a new record high of 64.1%.</p>
<p>Hours of work also grew strongly, by 0.9%. What makes that growth especially noteworthy is that it happened at the same time as a much larger number of workers than usual were off work with COVID and flu.</p>
<h2>More sick leave, yet more hours worked</h2>
<p>In May, an outsized 780,500 workers spent reduced time on the job due to illness, injury or sick leave, compared to an average of only 373,000 in the same month over the previous five years. About half of the extra workers taking time off in 2022 didn’t work at all in the survey week.</p>
<p>Which raises an interesting question. With such an unusually large number of jobs created, why didn’t the unemployment rate fall? </p>
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<a href="https://theconversation.com/how-we-invented-unemployment-and-why-were-outgrowing-it-183545">How we invented 'unemployment' – and why we're outgrowing it</a>
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<p>The reason is that the number of people wanting to work also rose, pretty much exactly in line with the rise in employment. Strong employment drew more people into the labour force.</p>
<p>On average, an extra 45,000 people have found work per month over the past six months.</p>
<p>The proportion of the population in work is now not only ahead of where it was before COVID, but also ahead of where it would have been had the pre-COVID trends continued.</p>
<h2>Most wages don’t get adjusted often</h2>
<p>Another interesting question is why, if things are so good, wage growth has scarcely lifted. The wage price index grew just <a href="https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/wage-price-index-australia/mar-2022">2.4%</a> in the year to March, up from 2.3% in the year to December.</p>
<p>One answer is that Australia’s wage-setting institutions create a built-in delay between labour market changes and wage changes. </p>
<p>Workers covered by awards, whose pay is adjusted via the Fair Work Commission’s minimum wage decision, make up 23% of all employees. </p>
<p>Workers whose pay depends on multi-year enterprise agreements make up 35.1%.</p>
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<p>As happened <a href="https://theconversation.com/this-5-2-decision-on-the-minimum-wage-could-shift-the-trajectory-for-all-workers-185117">this week</a>, award wages are adjusted to reflect labour market conditions, but only once a year; and other wages less often.</p>
<p>Another answer is that after a decade of not needing to pay wage increases to hire and retain staff, employers may be finding it difficult to adjust to changed conditions. </p>
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Read more:
<a href="https://theconversation.com/this-5-2-decision-on-the-minimum-wage-could-shift-the-trajectory-for-all-185117">This 5.2% decision on the minimum wage could shift the trajectory for all</a>
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<p>Contributing to this might be uncertainty about whether – in an environment where shortages in some occupations are due to low immigration – there’s much point in paying more, given that borders will reopen.</p>
<p>The low rates of wage growth over the past decade, and especially since COVID, have come with a substantial cost – to equity and to the living standards of workers.</p>
<h2>Silver lining</h2>
<p>There is, however, a silver lining. Australia’s low wage growth places us in a much better situation to avoid stagflation – the double-whammy of high inflation and high unemployment.</p>
<p>The onset of high inflation in Australia has caused policy-makers to seek to restrain economic activity – as evidenced by the Reserve Bank’s decision at its June meeting to lift its cash rate 0.5 points. </p>
<p>There is a risk these moves will push unemployment back up.</p>
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Read more:
<a href="https://theconversation.com/theres-one-big-reason-wages-are-stagnating-the-enterprise-bargaining-system-is-broken-and-in-terminal-decline-183818">There's one big reason wages are stagnating: the enterprise bargaining system is broken, and in terminal decline</a>
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<p>Our low wage growth though should make it easier to bring inflation under control. With the need to restrain economic activity therefore being lessened, we have a better chance to avoid higher unemployment.</p>
<p>This is a much better situation than in the US, where both price and wage inflation have taken off.</p>
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<p>In the US, leading commentators now believe there is <a href="https://www.nber.org/papers/w29910">little chance</a> inflation can be tamed without a substantial rise in unemployment.</p>
<p>Things are also very different to the last time Australia faced the challenge of stagflation, during the 1970s and early 1980s. </p>
<p>Back then, wage inflation was a major source of price inflation – initially through large wage increases granted to workers in the early 1970s, and then via a system of quarterly wage indexation which linked wages directly to increases in prices in near real-time. Things are different today.</p>
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Read more:
<a href="https://theconversation.com/australia-isnt-experiencing-the-great-resignation-yet-but-there-has-been-an-uptick-184384">Australia isn't experiencing the great resignation yet, but there has been an uptick</a>
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<p class="fine-print"><em><span>Jeff Borland receives funding from the Australian Research Council.</span></em></p>Even with an unemployment rate of 3.9%, wages aren’t adjusted often.Jeff Borland, Professor of Economics, The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1832262022-05-19T07:56:24Z2022-05-19T07:56:24ZAt 3.9%, Australia’s unemployment rate now officially begins with ‘3’<figure><img src="https://images.theconversation.com/files/464168/original/file-20220519-12-7to7r9.png?ixlib=rb-1.1.0&rect=1166%2C237%2C1006%2C618&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>Early in the election campaign, on April 14, we learned that Australia’s unemployment rate had slipped below 4% in March, to <a href="https://theconversation.com/technically-unemployment-now-begins-with-a-3-how-to-keep-it-there-181242">3.95%</a> – the lowest rate in 48 years.</p>
<p>But the Coalition was denied the bragging rights that would flow from an unemployment rate beginning with “3” because of a Bureau of Statistics convention of quoting the rate to only one decimal place, which meant the rate was presented as “4.0%”, the same as the month before (when it was actually 4.04%).</p>
<p>Thursday’s figure, for the month of April, has broken the barrier. Officially 3.9% (and actually <a href="https://www.abs.gov.au/statistics/labour/employment-and-unemployment/labour-force-australia/latest-release">3.85%</a>), it is clearly below 4% for the second consecutive month (because the March figure has been revised downwards to also round to 3.9%).</p>
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Read more:
<a href="https://theconversation.com/technically-unemployment-now-begins-with-a-3-how-to-keep-it-there-181242">Technically unemployment now begins with a '3'. How to keep it there?</a>
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<p>It means the unemployment rate has decisively broken out of the band of 5-6% it has been in or near for the past two decades and slipped below 4%.</p>
<p>It has fallen to where it was a half-century ago when (in the days the survey was quarterly) it jumped from 3.7% to 5.4% between November 1974 and February 1975.</p>
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<p>Of course, 3.9% is an average. Over the country, the unemployment rate ranges from lows of 2.9% in Western Australia and 3.1% in the Australian Capital Territory, to highs of 4.5% in Queensland and South Australia.</p>
<p>For women, the rate is an almost half-century low of 3.7%, less than the 14-year low of 4.0% for men.</p>
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<p>Australia <a href="https://data.oecd.org/unemp/unemployment-rate.htm">isn’t alone</a>. The unemployment rate is below 4% in the United States, the United Kingdom and New Zealand; and below 3% in Japan, Germany and Korea.</p>
<p>Further declines are expected. The Reserve Bank is forecasting unemployment of <a href="https://www.rba.gov.au/publications/smp/2022/may/pdf/forecast-table-2022-05.pdf">3.6% by 2023</a>, a few points less than the Treasury, which is forecasting <a href="https://budget.gov.au/2022-23/content/bp1/download/bp1_bs-1.pdf">3.75%</a>.</p>
<p>But the Bank is modest about its forecasting ability. It only claims to be 90% confident that by mid-2024 the rate will be somewhere between 2% and 5%.</p>
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<p>At a press conference to release Labor’s <a href="https://cdn.theconversation.com/static_files/files/2108/ALP_Election_Costing_2022_FINAL_-_Copy.pdf">election policy costings</a> hours after the employment numbers were released, Labor treasury spokesman Jim Chalmers held out the prospect of more optimistic forecasts in Labor’s first budget as a result of the net $7.4 billion of extra spending it is proposing.</p>
<p>He said he would work with the Treasury if elected to ensure the dividends of Labor’s investments in childcare, training and energy were reflected in those forecasts.</p>
<h2>The improvement is real</h2>
<p>Sometimes the unemployment rate can be misleading. It can fall because people have left their jobs and are too despondent to search for new ones, meaning they are classified as “<a href="https://theconversation.com/forget-the-election-gaffes-australias-unemployment-rate-is-good-news-and-set-to-get-even-better-by-polling-day-181141">not in the labour force</a>” rather than unemployed.</p>
<p>And it can fall even though people are less fully employed, working fewer hours than they did (in accordance with an international convention, <a href="https://twitter.com/Bjorn_Jarvis/status/1513991565760376834">one hour per week</a> is all that’s needed to be “employed”).</p>
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<a href="https://theconversation.com/forget-the-election-gaffes-australias-unemployment-rate-is-good-news-and-set-to-get-even-better-by-polling-day-181141">Forget the election gaffes: Australia's unemployment rate is good news – and set to get even better by polling day</a>
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<p>But in these figures the share of the working age population in work remains at an all-time high of <a href="https://www.abs.gov.au/statistics/labour/employment-and-unemployment/labour-force-australia/mar-2022#">63.8%</a>, well above the 62.4% before the COVID crisis and the hundreds of billions of dollars spent in response from March 2020.</p>
<p>The number of hours worked rose in April to a record 1,833 million hours.</p>
<p>Underemployment – the proportion of people working fewer hours than they would like – fell to a fresh 14-year low of 6.1%.</p>
<h2>Wages missing out</h2>
<p>Australia’s steadily falling unemployment rates have to date had little effect on wages growth. The figures released on Wednesday showed wages grew <a href="https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/wage-price-index-australia/mar-2022">2.4%</a> in the year to March, up only marginally on the 2.3% in the year to December.</p>
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Read more:
<a href="https://theconversation.com/are-real-wages-falling-heres-the-evidence-182171">Are real wages falling? Here's the evidence</a>
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<p>The Reserve Bank says its <a href="https://www.rba.gov.au/monetary-policy/rba-board-minutes/2022/2022-05-03.html">business liaison programme</a> is giving it a more positive picture, with firms telling it they are having to pay to attract and retain staff.</p>
<p>The Bank is forecasting annual wages growth of <a href="https://www.rba.gov.au/publications/smp/2022/may/pdf/forecast-table-2022-05.pdf">3%</a> by December and 3.5% by December 2023, but it concedes its wage growth forecasts have been overoptimistic in the past, producing higher numbers than eventuated in most of the <a href="https://www.rba.gov.au/speeches/2021/sp-gov-2021-07-08.html">past ten years</a>.</p>
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<p>The Bank remains hopeful. Previous dips in unemployment, in 2008 and 2010, boosted wages growth. </p>
<p>A recent study by two of its economists finds that in the locations where unemployment fell <a href="https://www.rba.gov.au/publications/rdp/2021/2021-09/full.html">below 4%</a> in the decade before COVID, wages grew the most.</p>
<h2>Higher rates in store</h2>
<p>The most immediate impact of Thursday’s very welcome news on unemployment will be confirmation within Reserve Bank HQ that the economy can withstand further increases in interest rates. </p>
<p>The next increase is likely a fortnight after the next government takes office, following the Bank’s June board meeting on Tuesday June 7.</p>
<p>Only if it gets clear evidence that wages aren’t climbing as it expects is it likely to consider changing course.</p><img src="https://counter.theconversation.com/content/183226/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>John Hawkins was formerly a senior economist in the Reserve Bank of Australia and the Australian Treasury.</span></em></p>The share of the population in work has hit an all-time high as the share of the workforce underemployed has hit a 14-year low. The fresh low in unemployment will bring higher interest rates, and perhaps higher wages.John Hawkins, Senior Lecturer, Canberra School of Politics, Economics and Society and NATSEM, University of CanberraLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1833432022-05-18T09:34:02Z2022-05-18T09:34:02ZReal wages are shrinking, these figures put it beyond doubt<figure><img src="https://images.theconversation.com/files/463854/original/file-20220518-26-sbqv4y.png?ixlib=rb-1.1.0&rect=940%2C736%2C3041%2C1455&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock/The Conversation</span></span></figcaption></figure><p>Every three months the Bureau of Statistics releases the lesser-known cousin of the consumer price index. It’s called the <a href="https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/wage-price-index-australia/mar-2022">Wage Price Index</a> (WPI) and it records changes in the overall level of wages, in the same way the price index records changes in the overall level of consumer prices.</p>
<p>Rarely does it generate headlines, but coming three days before an election and showing the worst performance ever compared with the consumer price index, it has provided concrete evidence that the buying power of wages is shrinking.</p>
<p>Contrary to hopes that lower unemployment would spark <a href="https://www.rba.gov.au/media-releases/2022/mr-22-12.html">higher wages growth</a>, the WPI barely budged in the year to March: climbing 2.4%, up from 2.3% in the year to December.</p>
<p>The consumer price index for the year to March grew twice as fast, by 5.1%</p>
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<p>It means <a href="https://www.indeed.com/career-advice/career-development/nominal-wage-vs-real-wage">real wages</a> (the buying power of wages) shrank 2.7% over the year to March in aggregate - one of the fastest and steepest declines ever.</p>
<p>Since March, during the election campaign, <a href="https://theconversation.com/rba-governor-philip-lowe-is-hiking-interest-rates-worst-case-itll-mean-an-extra-600-per-month-on-a-500-000-mortgage-182241">interest rates have been pushed up</a>, further adding to the cost of living.</p>
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<a href="https://theconversation.com/are-real-wages-falling-heres-the-evidence-182171">Are real wages falling? Here's the evidence</a>
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<p>Coming right at the end of the campaign, the news reinforces a traditional Labor concern (living costs) and diminishes a traditional Coalition selling point (superior economic management).</p>
<p>And it’s a full frontal challenge to conventional economics. </p>
<p>Here are just three of the conventional thoughts it has thrown into doubt.</p>
<h2>Wages are determined by supply and demand</h2>
<p>Conventional economics treats the price of labour like the price of any other commodity (such as fruit at a market), determined by supply (if there’s too much the price will fall) and demand (if a lot of people want it the price will rise).</p>
<p>That is held to mean that, even if there is still some unemployment, wages will grow faster if employers find it hard to find workers (as they are now) and slower if workers find it hard to find jobs (as was the case when unemployment was higher).</p>
<p>There is said to be a special unemployment rate – the Non-Accelerating Inflation Rate of Unemployment, NAIRU – below which wages will start to grow quickly, entrenching accelerating inflation.</p>
<p>The problem is that the NAIRU can’t easily be observed, and moves around. </p>
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Read more:
<a href="https://theconversation.com/despite-record-vacancies-australians-shouldnt-expect-big-pay-rises-soon-180416">Despite record vacancies, Australians shouldn't expect big pay rises soon</a>
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<p>The Treasury and Reserve Bank once believed NAIRU was close to 7%, then 6%, then <a href="https://treasury.gov.au/publication/p2021-164397">5%</a> or lower. Now they are
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<p>With unemployment well below the rates they once believed would push up the growth rate, there is growing doubt about whether it can.</p>
<p>Part of the reason is that unlike the market for fruit (or pork bellies or flat whites), institutions and bargaining power affect what happens to wages in addition to supply and demand. De-unionisation, insecure work, and deregulation of the wage-setting process have shifted the balance of power away from workers.</p>
<h2>Labour markets are flexible</h2>
<p>Decades of changes to Australia’s wage-setting system were sold as allowing labour markets to respond more smoothly to changes in supply and demand, ensuring workers were more closely paid in accordance with what they produced (productivity).</p>
<p>But a lot of (anti-worker) rigidity remains. One source is punitive public sector pay caps, which even the <a href="https://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22committees%2Fcommrep%2Feea5d0b8-72e9-4b5e-acf8-52ed46888ced%2F0001%22;src1=sm1">Reserve Bank</a> says are contributing to weak wage growth.</p>
<p>Another is <a href="https://www.fwc.gov.au/greenfields-agreement">greenfield enterprise agreements</a>, which lock in predetermined pay rates for years.</p>
<h2>Inflation originates in the labour market</h2>
<p>Anthony Albanese sparked an <a href="https://www.smh.com.au/politics/federal/albanese-sparks-political-storm-by-backing-wage-rise-to-match-inflation-20220510-p5ak48.html">important debate</a> when he said wages should at least keep up with inflation. </p>
<p>Scott Morrison said this would be like “<a href="https://www.abc.net.au/news/2022-05-11/morrison-hits-back-on-labor-inflation-pay-rise-push/101055134">throwing throwing fuel on the fire</a>” of inflation. But Wednesday’s figures seem to indicate that inflation has a life of its own. It is soaring while wages growth is not.</p>
<p>And after adjusting for productivity growth (which has been surprisingly resilient, averaging 2% per year for the past two years), unit labour costs have grown the slowest in years, by just 1.5% per year since 2019. </p>
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<p>Whatever is causing inflation, it isn’t firms passing on higher wage costs to their customers. Some are passing on higher profit margins. If anything, what we are experiencing is more like profit-price inflation than wage-price inflation.</p>
<p>During the COVID crisis, profits climbed to a record high as a share of GDP while labour compensation (mainly wages) fell to its <a href="https://assets.nationbuilder.com/theausinstitute/pages/4033/attachments/original/1652197383/Wages_Crisis_Revisited_Formatted.pdf?1652197383">lowest point in postwar history</a>.</p>
<p>While economic truisms are being reassessed, voters are in the process of coming to grips with what stubbornly low wages growth means for them. Many more of them make their living by selling their labour than by taking profits.</p><img src="https://counter.theconversation.com/content/183343/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jim Stanford is a member of the Australian Services Union</span></em></p>The buying power of wages shrank a record 2.7% over the year to March, calling into question assurances about the link between low unemployment and high wage growth.Jim Stanford, Economist and Director, Centre for Future Work, Australia Institute; Honorary Professor of Political Economy, University of SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1804162022-04-03T20:00:21Z2022-04-03T20:00:21ZDespite record vacancies, Australians shouldn’t expect big pay rises soon<figure><img src="https://images.theconversation.com/files/455733/original/file-20220401-30473-ue3s19.png?ixlib=rb-1.1.0&rect=159%2C99%2C2502%2C1560&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Ron Lach/Pexels</span>, <a class="license" href="http://creativecommons.org/licenses/by-nc/4.0/">CC BY-NC</a></span></figcaption></figure><p>Something extraordinary has been happening for Australians seeking jobs in the past few months.</p>
<p>The number of vacant jobs on offer has soared to a new all-time high. </p>
<p>Figures released in budget week show there were almost twice as many jobs available in February this year – 423,500 – as in February 2020, before COVID arrived on our shores. And the number of Australians satisfying the ABS that they were “unemployed” was just 563,300, the lowest in 13 years.</p>
<hr>
<p><strong>More job vacancies for each unemployed person than ever before</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/455459/original/file-20220331-17-sx8jy2.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/455459/original/file-20220331-17-sx8jy2.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/455459/original/file-20220331-17-sx8jy2.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=307&fit=crop&dpr=1 600w, https://images.theconversation.com/files/455459/original/file-20220331-17-sx8jy2.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=307&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/455459/original/file-20220331-17-sx8jy2.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=307&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/455459/original/file-20220331-17-sx8jy2.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=386&fit=crop&dpr=1 754w, https://images.theconversation.com/files/455459/original/file-20220331-17-sx8jy2.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=386&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/455459/original/file-20220331-17-sx8jy2.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=386&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Seasonally adjusted.</span>
<span class="attribution"><a class="source" href="https://www.abs.gov.au/statistics/labour/jobs/job-vacancies-australia/feb-2022#media-releases">ABS labour force, job vacancies</a></span>
</figcaption>
</figure>
<hr>
<p>What this means is that in February 2022 there were only 1.3 unemployed people chasing each vacant job, the smallest ratio on record — down from three unemployed people for each vacancy in 2020, five for each vacancy in 2000, and seven in 1990.</p>
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<p><strong>Number of unemployed people for each vacancy</strong></p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/455912/original/file-20220403-95703-z9o4wp.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/455912/original/file-20220403-95703-z9o4wp.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=273&fit=crop&dpr=1 600w, https://images.theconversation.com/files/455912/original/file-20220403-95703-z9o4wp.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=273&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/455912/original/file-20220403-95703-z9o4wp.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=273&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/455912/original/file-20220403-95703-z9o4wp.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=343&fit=crop&dpr=1 754w, https://images.theconversation.com/files/455912/original/file-20220403-95703-z9o4wp.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=343&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/455912/original/file-20220403-95703-z9o4wp.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=343&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">February, seasonally adjusted.</span>
<span class="attribution"><a class="source" href="https://www.abs.gov.au/statistics/labour/jobs/job-vacancies-australia">ABS Job vacancies, Labour force</a></span>
</figcaption>
</figure>
<hr>
<p>The unemployment rate is now just 4%, and is budgeted to fall to <a href="https://public.flourish.studio/visualisation/9168575/?utm_source=embed&utm_campaign=visualisation/9168575">3.75%</a> within months, taking it to a five-decade low.</p>
<h2>Our wages aren’t keeping up</h2>
<p>Yet wages growth in Australia remains astoundingly low. Now <a href="https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/wage-price-index-australia/latest-release">2.3%</a>, it has been below 2.5% for seven years. </p>
<p>The Reserve Bank says it is targeting wages growth of “<a href="https://www.rba.gov.au/speeches/2021/sp-gov-2021-11-16.html">three point something</a>”. It has failed to achieve it for the best part of a decade.</p>
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<p>The low wage growth, compared with unusually high price growth, means wages growth has slipped 1.2% below price growth over the past year. That means what Australians are earning isn’t keeping up with rising prices.</p>
<h2>Budget forecasts that don’t make sense</h2>
<p>The budget anticipates price growth of <a href="https://budget.gov.au/2022-23/content/bp1/download/bp1_bs-1.pdf">4.25%</a> in 2021-22 alongside wages growth of 2.75%, meaning Australians’ buying power will shrink even more, by 1.5%.</p>
<p>In the Budget year, 2022-23, it predicts an uptick in wages growth to 3.25% alongside a dip in price growth to 3%, meaning wages would claw back 0.25% of the buying power they lost.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/why-theres-no-magic-jobless-rate-to-increase-australians-wages-176538">Why there's no magic jobless rate to increase Australians' wages</a>
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</em>
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<p>And here’s where this year’s budget forecasts don’t make sense.</p>
<p>It forecasts that what we’re seeing right now – price rises outstripping wages growth – is suddenly going to flip: that we’re about to see a slowdown in price inflation, alongside an acceleration in wages growth.</p>
<p>Here’s the odd part of it. On one hand, the Treasury is telling us it expects the unemployment rate to fall further below the “<a href="https://cdn.theconversation.com/static_files/files/2059/NAIRU_Sensitivity_Budget_2022-23.pdf">non-accelerating-inflation rate of unemployment</a>” – which by definition means inflation would accelerate. Yet the budget predicts inflation will fall. </p>
<p>It’s a strange and unexplained departure from conventional forecasting.</p>
<h2>Employers get to pick what they pay</h2>
<p>If price growth merely stays at its current level of 3.5%, the budget’s forecast of 3.25% wages growth means real wages will fall. </p>
<p>And, given most of the budgets since 2014 have <a href="https://www.theguardian.com/business/grogonomics/2021/may/11/australia-federal-budget-2021-six-graphs-you-need-to-see-grogonomics-greg-jericho">overestimated wages growth</a>, it is worth considering what would happen if wages growth has been overestimated once again: real wages would fall still further.</p>
<p>Something weird is happening in the labour market.</p>
<p>With very few unemployed people available for each vacancy, employers ought to be offering higher wages to compete for workers.</p>
<p>But the concept of “<a href="https://obamawhitehouse.archives.gov/sites/default/files/page/files/20161025_monopsony_labor_mrkt_cea.pdf">monopsony</a>” gives us an idea why that’s not happening.</p>
<p>The core idea of monopsony is that employers can <a href="https://www.brookings.edu/research/a-proposal-for-protecting-low-income-workers-from-monopsony-and-collusion/">choose</a> (within constraints) the wages they pay their workers.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/can-do-capitalism-is-delivering-less-than-it-did-here-are-3-reasons-why-172376">'Can-do capitalism' is delivering less than it did. Here are 3 reasons why</a>
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<p>If this sounds obvious, I apologise, but it’s very different to the <a href="https://www.economicsonline.co.uk/business_economics/competitive_labour_markets.html/#:%7E:text=In%20a%20perfectly%20competitive%20labour%20market%2C%20where%20the,firm%20is%20perfectly%20elastic%20at%20the%20market%20rate.">perfect competition</a> model of the labour market once loved by economists, in which wages are set by bargaining in a two-sided market.</p>
<p>When employers offer low wages, they can pay the price with higher staff turnover, unfilled vacancies, absenteeism or poor product quality.</p>
<p>But they still feel they can get away with paying low wages, and leaving many vacancies unfilled. And other employers feel they are forced to keep wages low, due to <a href="https://press.anu.edu.au/publications/realities-and-futures-work">competing against low-price firms</a> and because their immediate customers (such as supermarkets) insist on low prices.</p>
<p>These employers are able to choose to pay lower wages than in the past because workers are less powerful and their collective bargaining power is less effective than it once was. </p>
<h2>Power imbalances keep wages in check</h2>
<p>Work is insecure. Many workers face casual employment, contracting, labour hire, franchising or underemployment. Trade union membership has plummeted.</p>
<hr>
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<p>Only 12.7% of male workers are in a trade union in their main job, down from more than 50% at the start of the 1980s. Just 15.9% of women are, down from 43%.</p>
<p>Industrial disputes are at record lows partly because industrial laws have changed, making it extremely difficult for unions to strike for higher wages, and easy for employers to get around them.</p>
<p>Don’t expect any surges in real wages, no matter how tight the labour market is, while this new structure remains.</p><img src="https://counter.theconversation.com/content/180416/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>David Peetz receives funding from the Australian Research Council and, as an academic, has undertaken research over many years with occasional financial support from governments in Australia and overseas from both sides of politics, employers and unions.</span></em></p>For the first time, there’s almost one job vacancy for every unemployed Australian. But that isn’t translating to better wages.David Peetz, Professor Emeritus, Griffith Business School, Griffith UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1665662021-08-24T04:50:53Z2021-08-24T04:50:53ZThe official figures say wages aren’t growing —
here’s why they’re wrong<figure><img src="https://images.theconversation.com/files/417538/original/file-20210824-19-4nqcvj.jpg?ixlib=rb-1.1.0&rect=13%2C41%2C3081%2C1754&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Peterfz30/Shutterstock</span></span></figcaption></figure><p>Have you heard about the latest wage figures? I hope not. They’re meaningless.</p>
<p>What the widely quoted measure of <a href="https://www.abs.gov.au/statistics/labour/earnings-and-work-hours/average-weekly-earnings-australia/may-2021">average weekly earnings</a> purports to show is that wages grew a mere 0.1% over the year to May. It’s not true. It’s not what happened. For most of us, wages grew by much more.</p>
<p>That’s not to say wage growth has been high — the best estimate is that private sector wages have climbed 1.9% over the past year and public sector wages a record low 1.3% — but both are still well above nothing, and generally well above our near-record low rates of consumer price inflation.</p>
<p>A check-in with reality would tell you that mid last year the Fair Work Commission lifted award wages <a href="https://www.fairwork.gov.au/about-us/news-and-media-releases/2020-media-releases/july-2020/20200701-awr-media-release-1-july-2020">1.75%</a>. Mid this year it lifted them <a href="https://www.fairwork.gov.au/about-us/news-and-media-releases/2021-media-releases/july-2021/20210701-annual-wage-review-2021-media-release">2.5%</a>.</p>
<p>So how could it be that the official figures, published by a trusted organisation, the Australian Bureau of Statistics, show average earnings static, climbing just 0.1%?</p>
<p>The first thing to say is that the bureau is probably embarrassed by the figures.</p>
<p>They are “not designed to produce movement in earnings data” it says on its website, before acknowledging that’s <a href="https://www.abs.gov.au/methodologies/average-weekly-earnings-australia-methodology/may-2021">exactly what they are used for</a>.</p>
<h2>‘Not designed’ to measure wage growth</h2>
<p>Australia’s pensions are adjusted twice a year in accordance with a formula that includes average weekly earnings. </p>
<p>The figure is built into private contracts. If it wasn’t published, many contracts wouldn’t work.</p>
<p>To create it, the bureau surveys about 5,130 employers every six months, asks what they are paying their workers, and uses the answers to calculate an average female wage, an average male wage, an average part-time wage, an average full-time wage, and a lot of other averages besides.</p>
<h2>The ‘average wage’ isn’t typical</h2>
<p>One problem is that averages are not representative. The survey suggests the average full-time wage is <a href="https://www.abs.gov.au/statistics/labour/earnings-and-work-hours/average-weekly-earnings-australia/may-2021#methodology">A$90,330</a>, whereas in reality six in ten earn less. </p>
<p>The mid-way (median) full-time worker earns <a href="https://www.abs.gov.au/statistics/labour/earnings-and-work-hours/employee-earnings-and-hours-australia/latest-release">$10,000 less</a>. The average is boosted by a few enormously high earners and can’t be taken seriously.</p>
<p>An entirely separate problem arises when you try to use averages to calculate growth. The average is only an average of what’s averaged, and that can change.</p>
<h2>When low-wage workers lose jobs…</h2>
<p>Here’s an example. What would happen if a recession caused everyone working only four hours per week to lose two hours? It would push their earnings down and push down average weekly earnings, which would be about right.</p>
<p>But what if each of those people lost a further two hours, taking their hours down to zero. Their low hours would no longer be included in the total to be averaged, and (without them in it) average earnings would climb.</p>
<h2>…the average wage goes up</h2>
<p>That’s what happened a bit over a year ago. The bureau says COVID restrictions “led to a large decrease in the number of jobs, people employed and hours worked, with lower-paid jobs and industries particularly impacted, including jobs in accommodation and food services, arts and recreation services”.</p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/417536/original/file-20210824-23-6e09hl.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/417536/original/file-20210824-23-6e09hl.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/417536/original/file-20210824-23-6e09hl.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=969&fit=crop&dpr=1 600w, https://images.theconversation.com/files/417536/original/file-20210824-23-6e09hl.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=969&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/417536/original/file-20210824-23-6e09hl.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=969&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/417536/original/file-20210824-23-6e09hl.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1218&fit=crop&dpr=1 754w, https://images.theconversation.com/files/417536/original/file-20210824-23-6e09hl.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1218&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/417536/original/file-20210824-23-6e09hl.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1218&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Unemployed catering workers pushed the average wage up.</span>
<span class="attribution"><span class="source">PK Studio/Shutterstock</span></span>
</figcaption>
</figure>
<p>The loss of those lower-paid and low hours jobs in catering, the arts and other industries “had the effect of increasing the value of average weekly earnings”.</p>
<p>Layoffs pushed the average wage up.</p>
<p>Fortunately, the bureau says by November many of the low-wage workers laid off got some hours back, depressing growth in the average wage (but not growth in any actual wages) resulting in recorded growth of just 0.1% in the year to May.</p>
<p>Many have probably since lost hours with this year’s renewed lockdowns, pushing average wages (but not actual wages) higher again.</p>
<p>It’s enough to make you think the legislation and contracts should switch from a measure that’s close to worthless to one that actually measures wage growth.</p>
<p>The bureau offers such a measure. It’s called the <a href="https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/wage-price-index-australia/latest-release">wage price index</a>, and the bureau has been trying to encourage people to switch to it since 1998.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/other-australians-dont-earn-what-you-think-59-538-is-typical-162251">Other Australians don't earn what you think. $59,538, is typical</a>
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<p>It is also built around a survey of employers, but rather than asking how much they pay each worker, it asks how much they pay for each job title and classification. The bureau calculates growth by comparing like with like, regardless of how many people were employed in each classification at the time.</p>
<hr>
<p><strong>Wage Price Index</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/435814/original/file-20211206-19-978iqs.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/435814/original/file-20211206-19-978iqs.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/435814/original/file-20211206-19-978iqs.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=247&fit=crop&dpr=1 600w, https://images.theconversation.com/files/435814/original/file-20211206-19-978iqs.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=247&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/435814/original/file-20211206-19-978iqs.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=247&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/435814/original/file-20211206-19-978iqs.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=310&fit=crop&dpr=1 754w, https://images.theconversation.com/files/435814/original/file-20211206-19-978iqs.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=310&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/435814/original/file-20211206-19-978iqs.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=310&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Annual growth in total hourly rates of pay excluding bonuses.</span>
<span class="attribution"><a class="source" href="https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/wage-price-index-australia/sep-2021">ABS</a></span>
</figcaption>
</figure>
<hr>
<p>The results are believable: private sector like-for-like wages climbed 1.9% over the past year, and public sector wages 1.3%.</p>
<p>But even they are not right when it comes to the wage growth of individuals.</p>
<p>Individuals get promoted, and (much less often) demoted. They change jobs, usually for better ones.</p>
<h2>People aren’t positions</h2>
<p>So if you were trying to use the recent like-for-like wage growth of around 2% per year as a guide to what will happen to your own wage (in order, for instance, to work out whether you could afford a mortgage) you would probably guess too low.</p>
<p>It’s why many Australians — those who’ve got not only regular pay rises but also promotions — wonder what the fuss about low wage growth is about.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/top-economists-say-cutting-immigration-is-no-way-to-boost-wages-165394">Top economists say cutting immigration is no way to boost wages</a>
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<p>A good measure of the actual wage growth of Australians doesn’t yet exist, although it might soon. The bureau is working on tracking individuals through the use of payroll data reported to the tax office.</p>
<p>In the meantime the (<a href="https://melbourneinstitute.unimelb.edu.au/hilda">HILDA</a>) Household, Income and Labour Dynamics in Australia survey that tracks 17,000 Australians over time finds that the actual wage growth of full-time workers is indeed higher than the like-for-like figure suggests (which might help explain soaring home prices) although it too is weakening.</p>
<p>Part time workers don’t seem to get the same benefit. </p>
<p>As <a href="https://pursuit.unimelb.edu.au/articles/is-wages-growth-really-as-weak-as-we-think">Mark Wooden</a>, director of the HILDA survey puts it, “Australians in full-time work are doing pretty well – provided they remain in employment”.</p><img src="https://counter.theconversation.com/content/166566/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Peter Martin does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>When low-wage workers lose jobs the average wage goes up. There’s a better measure, but we’re not using it.Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1218132019-08-15T07:46:17Z2019-08-15T07:46:17ZVital Signs: Amid talk of recessions, our progress on wages and unemployment is almost non-existent<figure><img src="https://images.theconversation.com/files/288114/original/file-20190815-136203-1c4uw87.jpg?ixlib=rb-1.1.0&rect=24%2C108%2C1965%2C730&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The ASX 200 slid 2.9% on Thursday amid less than completely encouraging news at home, and awful news from abroad.
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>Legend has it that, when asked by US President Richard Nixon in 1972 what he thought about the impact of the French Revolution, Chinese Premier Zhou En Lai replied: “it’s too early to say”.</p>
<p>Waiting for progress on wages and unemployment in Australia may not be a multi-century enterprise (the French Revolution was in 1789) but Reserve Bank Governor Philip Lowe’s <a href="https://rba.gov.au/speeches/2019/sp-gov-2019-08-09.html">testimony</a> to the House of Representatives Standing Committee on Economics on Friday was reminiscent of Zhou’s caution:</p>
<blockquote>
<p>In the central scenario that I have sketched today, inflation will be below the target band for some time to come and the unemployment rate will remain above the level we estimate to be consistent with full employment. </p>
<p>While this remains the case, the possibility of lower interest rates will remain on the table. The board is prepared to ease monetary policy further if there is additional accumulation of evidence that this is needed to achieve our goals of full employment and inflation consistent with the target. <strong>Time will tell</strong>.</p>
</blockquote>
<p>That was a week ago, but since then “<a href="https://youtu.be/VhkmB5OzvQ0">old man time</a>” has given us two less than completely encouraging pieces of information.</p>
<h2>Wage growth isn’t really climbing</h2>
<p>On Wednesday the Bureau of Statistics released the June quarter <a href="https://www.abs.gov.au/ausstats/abs@.nsf/mf/6345.0">Wage Price Index</a> which showed wages rising 0.6% for the quarter and 2.3% on the year.</p>
<p>It provides two things to worry about. </p>
<p>First, wage growth isn’t rising. Annual growth has remained unchanged for three quarters.</p>
<hr>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/288130/original/file-20190815-136208-8bizez.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/288130/original/file-20190815-136208-8bizez.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/288130/original/file-20190815-136208-8bizez.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=250&fit=crop&dpr=1 600w, https://images.theconversation.com/files/288130/original/file-20190815-136208-8bizez.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=250&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/288130/original/file-20190815-136208-8bizez.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=250&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/288130/original/file-20190815-136208-8bizez.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=314&fit=crop&dpr=1 754w, https://images.theconversation.com/files/288130/original/file-20190815-136208-8bizez.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=314&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/288130/original/file-20190815-136208-8bizez.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=314&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="attribution"><a class="source" href="https://www.abs.gov.au/ausstats/abs@.nsf/mf/6345.0">ABS 6345.0</a></span>
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<hr>
<p>Second, the growth that is there is driven more by the public sector (0.8% over the quarter) than the private sector (0.5%). </p>
<p>As the Bureau’s chief economist Bruce Hockman puts it</p>
<blockquote>
<p>Wage growth continues at a steady rate in the Australian economy on the back of strong public sector growth over the quarter. The most significant contribution to wage growth this quarter came from the public sector component of the health care and social assistance industry, where a number of large increases were recorded in Victoria under a plan to ensure wage parity with other states.</p>
</blockquote>
<p>Things might improve when and if the Reserve Bank interest rate cuts of June 5 and July 2 start changing the way consumers and employers think.</p>
<p>But the Reserve Bank cash rate has been at a record low of 1.5% since September 2016. All through those three years Governor Lowe has told us to be patient, that soon wage growth will climb and unemployment will fall.</p>
<p>We’ve had little progress on wages, and since January none on unemployment.</p>
<h2>Unemployment isn’t really falling</h2>
<p>On Thursday the bureau followed up with the latest <a href="https://www.abs.gov.au/ausstats/abs@.nsf/mf/6202.0">unemployment figures</a>. </p>
<p>Although job creation was strong in July – 24,600 jobs were added to the economy, 15,100 of which were full-time – the trend unemployment rate ticked up to 5.3%, from 5.2%.</p>
<p>The “trend” is a smoothed out extension of the way the way the Bureau of Statistics algorithm thinks the rate is going.</p>
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<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/288128/original/file-20190815-136186-f1ybgp.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/288128/original/file-20190815-136186-f1ybgp.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/288128/original/file-20190815-136186-f1ybgp.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=236&fit=crop&dpr=1 600w, https://images.theconversation.com/files/288128/original/file-20190815-136186-f1ybgp.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=236&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/288128/original/file-20190815-136186-f1ybgp.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=236&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/288128/original/file-20190815-136186-f1ybgp.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=297&fit=crop&dpr=1 754w, https://images.theconversation.com/files/288128/original/file-20190815-136186-f1ybgp.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=297&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/288128/original/file-20190815-136186-f1ybgp.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=297&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="attribution"><a class="source" href="https://www.abs.gov.au/ausstats/abs@.nsf/mf/6202.0">ABS 6202.0</a></span>
</figcaption>
</figure>
<hr>
<p>In part it is going up because more people not previously regarded as unemployed are looking for work (and not finding it).</p>
<p>It isn’t necessarily a bad thing, but it is also exactly what would be expected when wage growth was sluggish. Households are doing what they can to assemble more income.</p>
<h2>The world economy is in trouble</h2>
<p>Global economic conditions are concerning. This week Eurpoe’s second-biggest economy <a href="https://www.destatis.de/EN/Press/2019/08/PE19_304_811.html">Germany</a> announced that its economy shrank by 0.1% in the second quarter of 2019, putting it on track to meet what some people call the technical definition of a recession. </p>
<p>Figures out of China regarding industrial production were also worrying, with factory output climbing more slowly than at any time in the last 17 years.</p>
<p>The US stock market climbed 1.5% on Tuesday after the Trump administration announced it would delay some of its new tariffs on China, but slid twice that amount the next day on the news from Germany and China.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/are-trumps-tariffs-legal-under-the-wto-it-seems-not-and-they-are-overturning-70-years-of-global-leadership-121425">Are Trump's tariffs legal under the WTO? It seems not, and they are overturning 70 years of global leadership</a>
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</p>
<hr>
<p>The fall in stocks led to a flight to the relative safety of government bonds. This caused the yield on 10 year US government bonds to fall below that of the 2 year bonds, a so-called “inverted yield curve” of the kind usually seen before a recession. The last time the US yield curve inverted was before the US Great Recession of 2008.</p>
<p>None of this is good for Australia. With roughly 20% of our economy powered by exports, we need the countries we export to to be doing well. </p>
<p>As Reserve Bank deputy governor Guy Debelle put it in a <a href="https://rba.gov.au/speeches/2019/sp-dg-2019-08-15.html">speech</a> on Thursday</p>
<blockquote>
<p>Australia also has significant exports to China in both tourism and education. To date, these have been broadly unaffected by the slowdown in the Chinese economy. But a further significant slowing in the Chinese economy and household incomes would clearly pose a risk.</p>
</blockquote>
<h2>There’s no telling how low rates will go</h2>
<p>There have been plenty of <a href="https://theconversation.com/no-surplus-no-share-market-growth-no-lift-in-wage-growth-economic-survey-points-to-bleaker-times-post-election-110315">competing views</a> about the state of the Australian economy over the past few years. </p>
<p>Not long ago most economists who thought interest rates would move <a href="https://theconversation.com/no-surplus-no-share-market-growth-no-lift-in-wage-growth-economic-survey-points-to-bleaker-times-post-election-110315">thought they would rise</a>. The Reserve Bank governor suggested the same.</p>
<p>But its increasingly clear that <a href="https://www.afr.com/policy/big-project-spending-a-good-way-to-kickstart-stagnant-economy-20150819-gj2i7v">secular stagnation</a> is gripping advanced economies around the world. In response, the US Federal Reserve has recommenced cutting rates and markets predict it will cut <a href="https://rba.gov.au/speeches/2019/sp-ag-2019-08-13.html">another full percentage point</a> by this time next year. </p>
<p>Markets also expect the European Central Bank, Bank of Japan, and the Reserve Bank to cut rates significantly.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/vital-signs-if-we-fall-into-a-recession-and-we-might-well-have-ourselves-to-blame-118387">Vital Signs. If we fall into a recession (and we might) we'll have ourselves to blame</a>
</strong>
</em>
</p>
<hr>
<p>The Bank’s “<a href="https://theconversation.com/rba-update-governor-lowe-points-to-even-lower-rates-121690">house position</a>” on unemployment is that we can go down to 4.5% before worrying about triggering inflation (not that there’s much sign of that happening). </p>
<p>Another way to say that is that unemployment has to reverse course and get down to a barely-precedented 4.5% before there’s much hope of the Reserve Bank meeting the inflation target it is meant to be aiming for.</p>
<p>Perhaps the most important question facing the Australian economy is how aggressively the bank will act to attempt to get it there and to keep the economy afloat. Time will tell.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/rba-update-governor-lowe-points-to-even-lower-rates-121690">RBA update: Governor Lowe points to even lower rates</a>
</strong>
</em>
</p>
<hr>
<img src="https://counter.theconversation.com/content/121813/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Holden does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The progress we were making has been slowed or reversed, at exactly the wrong time.Richard Holden, Professor of Economics, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1005142018-07-26T19:56:59Z2018-07-26T19:56:59ZVital Signs: inflation misses again, so where does the RBA go next?<p><em>Vital Signs is a regular economic wrap from UNSW economics professor Richard Holden (@profholden). Vital Signs aims to contextualise weekly economic events and cut through the noise of the data affecting global economies.</em></p>
<hr>
<p>The disturbing trend of persistently low inflation continues, as <a href="http://www.ausstats.abs.gov.au/ausstats/meisubs.nsf/0/3CC57E983B1CF9BFCA2582D400151C6A/$File/64010_jun%202018.pdf">Wednesday’s data release</a> shows.</p>
<p>Headline inflation was 2.1% for the last 12 months. But the more relevant “underlying” rate came in at 1.9%. This is even below the 2.0% the RBA <a href="https://www.rba.gov.au/publications/smp/2018/may/economic-outlook.html">forecast in May</a>.</p>
<p>Given that the RBA’s <a href="https://www.rba.gov.au/inflation/inflation-target.html">target band</a> for inflation is 2-3%, and that inflation has barely touched the bottom of that band over a protracted period, there are implications for monetary policy. </p>
<p>But, before we get to that, the obvious question to ask is: why is inflation so low?</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/vital-signs-booming-jobs-numbers-but-dig-deeper-and-its-not-all-rosy-100159">Vital Signs: booming jobs numbers, but dig deeper and it's not all rosy</a>
</strong>
</em>
</p>
<hr>
<p>One strand of thinking involves the “<a href="https://www.investopedia.com/terms/p/phillipscurve.asp">Philips Curve</a>”. This basically says that low unemployment pushes up wages growth and hence inflation. </p>
<p>We could get into a long discussion of whether the current <a href="https://theconversation.com/vital-signs-booming-jobs-numbers-but-dig-deeper-and-its-not-all-rosy-100159">5.4% unemployment rate</a> is “low”. And whether the effective rate really is 5.4% given anecdotal evidence about “underemployment”, the impact of recent decisions on penalty rates and minimum wage rises, and the robot revolution as a backdrop to the whole labour market.</p>
<p>But we don’t need to go there. There is barely any evidence of the Philips Curve in the data over the past quarter century, so let’s just reject that theory and move on.</p>
<h2>Plausible factors keeping a lid on inflation</h2>
<ol>
<li><p><strong>Technology</strong>. The information technology and internet revolution has made lots of things much cheaper. Take music. Gone are the days of paying A$20-plus for a CD with maybe 16 songs on it. Streaming services like Apple Music and Spotify give access to literally millions of songs for a small monthly fee.</p></li>
<li><p><strong>China</strong>. The rise of Chinese manufacturing has led to everything from kids’ toys to cell phones being produced vastly more cheaply than if those things were manufactured with higher-cost labour.</p></li>
<li><p><strong>Globalisation and trade</strong>. The world has become radically more connected, and so have company supply chains. This not only allows access to lower-cost manufacturing but also leads to better specialisation through the principle of comparative advantage. This means that high-labour-cost countries like Australia can specialise in other components of goods and services, get better at producing those components, and reduce overall costs further.</p></li>
<li><p><strong>Wages</strong>. Wage growth has been subdued for a long time now. Since labour costs are an important component of many goods and services, this has served to tame inflation. One potential reason for low wage growth is that automation sits as a background threat to human labour. If labour costs get too high then processes get automated, which serves to keep wages in check.</p></li>
<li><p><strong>Leverage and consumer spending</strong>. A final factor is that given how heavily indebted Australian households are –largely through mortgage debt – they simply don’t have a lot of discretionary income. This limits consumer spending and makes price rises in the retail sector less likely.</p></li>
</ol>
<p>These factors don’t look likely to change any time soon – with the possible exception of trade due to the Trump trade war. But even if that escalates dramatically it will shrink economic activity, further depressing prices.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/explainer-why-some-economists-think-the-rba-should-drop-its-inflation-target-64265">Explainer: why some economists think the RBA should drop its inflation target</a>
</strong>
</em>
</p>
<hr>
<p>So we have long-run, persistently low inflation. Is that a problem?</p>
<p>The major concern is that it could turn into <a href="https://www.investopedia.com/terms/d/deflation.asp">deflation</a>, although that doesn’t look terribly likely right now. </p>
<p>If, however, there was another significant economic downturn then deflation is a very real prospect. That would raise the spectre of Japan’s <a href="https://tradingeconomics.com/japan/inflation-cpi">experience of the 1990s</a> where deflation caused people to hoard money, severely contracting economic activity.</p>
<p>But for now the real impact of low inflation is on the RBA. </p>
<p>Faced with inflation below its target band for an extended period, the standard response would be to cut interest rates. The RBA is clearly worried about doing this. </p>
<p>One reason is housing prices – <a href="https://theconversation.com/vital-signs-we-are-witnessing-a-slowly-deflating-property-bubble-for-now-98624">the RBA is worried</a> about further fuelling the bubble. </p>
<p>With housing prices easing, this may become less of a concern, although household debt levels remain extremely high. Not encouraging households to become further indebted seems like a reasonable concern.</p>
<p>A second reason the RBA may be nervous about cutting rates is that it doesn’t have very far to go with the cash rate at 1.50%. If there is another major economic downturn then the RBA wants to have some firepower left to respond. </p>
<p>If short-term rates were already near zero then the only tools available to the central bank would be non-standard measures such as quantitative easing. That would be uncharted territory for the RBA, which seems reticent to explore that territory.</p>
<p>So, as with economic growth and wage rises, the RBA response seems to involve crossing as many fingers and toes as possible and to publicly proclaim that things are looking good, but may take a while.</p>
<p>We will get a better look into how that strategy is going when wage price index figures are released mid-August.</p><img src="https://counter.theconversation.com/content/100514/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Holden does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>As with economic growth and wages, the RBA’s response seems to involve crossing as many fingers and toes as possible and publicly proclaiming that things are looking good.Richard Holden, Professor of Economics and PLuS Alliance Fellow, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/871822017-11-15T19:16:43Z2017-11-15T19:16:43ZIncreasing wages would make the Australian economy safer<figure><img src="https://images.theconversation.com/files/194746/original/file-20171115-19829-1ogp92h.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Slow wage growth is leading to over-indebtedness among those that can afford hosues. </span> <span class="attribution"><span class="source">shutterstock</span></span></figcaption></figure><p>Australian wages have <a href="http://www.abs.gov.au/ausstats/abs@.nsf/mediareleasesbyCatalogue/71b77142e6fdc370ca2581d700791977?OpenDocument">again</a> failed to meet expectations - rising by just 2% on an annual basis. This is bad not just for workers, but for the economy in general. Wages need to rise, especially for those on low to middle incomes. </p>
<p><a href="https://www.researchgate.net/publication/317703679_The_Balancing_Act_Household_Indebtedness_Over_the_Lifecycle?ev=prf_high">Research</a> shows that even a small increase in interest rates disproportionately harms borrowers who are on lower incomes, and especially those at the start of the debt repayment process. </p>
<p>The Bank of England <a href="http://www.bankofengland.co.uk/publications/Pages/news/2017/007.aspx">recently raised interest rates</a> for the first time in a decade. The US Federal Reserve and European Central Bank will eventually follow suit. And as interest rates rise across the developed world, Australia will also be forced to follow. </p>
<p><a href="http://www.abs.gov.au/ausstats/abs@.nsf/Lookup/by%20Subject/6523.0%7E2015-16%7EFeature%20Article%7EHousehold%20Debt%20and%20Over-indebtedness%20(Feature%20Article)%7E101">Around 29%</a> of Australian households are “over-indebted”. As interest rates rise, many of these households will be unable to meet their mortgage repayments. An increase in mortgage defaults will hit banks’ balance sheets, and will spread through the financial system.</p>
<p>Increasing wages would not only ease some of this financial stress, but would also jolt inflation as these newly enriched workers buy themselves things. Rising inflation will erode some of the debt repayment the household sector faces over the coming years.</p>
<h2>Warning signs</h2>
<p>A <a href="https://www.researchgate.net/publication/317703679_The_Balancing_Act_Household_Indebtedness_Over_the_Lifecycle?ev=prf_high">study</a> in Ireland (which has similar household debt levels to Australia) found that a 1-2% increase in interest rates leads to a 2-4% reduction in a typical borrower’s disposable income after debt repayments.</p>
<p>Households are <a href="https://scholar.harvard.edu/campbell/publications/model-mortgage-default">considered</a> “vulnerable” if their debt service ratio (the share of debt repayments to income) is over 30%. If you earn A$1,500 after taxes every week, but are barely making a A$850 mortgage repayment, you’re going to be in trouble if repayments rise to $A900. </p>
<p><iframe id="V6Ya3" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/V6Ya3/2/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<p>Part of the reason for the increased household debt is that the “labour share” of the Australian economy has been declining.</p>
<p>In 1960, Australian workers took home 62% of the value of what they produced. Australian owners of capital got 38%. This split <a href="https://www.quandl.com/data/AMECO/AUS_1_0_0_0_ALCD2-Adjusted-wage-share-total-economy-as-percentage-of-GDP-at-current-factor-cost-Compensation-per-employee-as-percentage-of-GDP-at-factor-cost-per-person-employed-Australia">was similar</a> in the rest of the developed world.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/how-market-forces-and-weakened-institutions-are-keeping-our-wages-low-83446">How market forces and weakened institutions are keeping our wages low</a>
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</em>
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<p>In 2018, workers will <a href="https://www.quandl.com/data/AMECO/AUS_1_0_0_0_ALCD0-Adjusted-wage-share-total-economy-as-percentage-of-GDP-at-current-prices-Compensation-per-employee-as-percentage-of-GDP-at-market-prices-per-person-employed-Australia">most likely</a> take home less than 50% of the value of what they produce. The <a href="https://www.oecd.org/g20/topics/employment-and-social-policy/The-Labour-Share-in-G20-Economies.pdf">average drop</a> in the labour share as a percentage of GDP since 1960 is 12% across the OECD. </p>
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<p>Wages <a href="https://www.rba.gov.au/publications/bulletin/2017/mar/pdf/bu-0317-2-insights-into-low-wage-growth-in-australia.pdf">have been growing</a> at less than 2% a year since 2014. This is despite the fact that unemployment is 5.5% and falling, which is around the level where we would expect to see wages rise because workers can command a premium in the market. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/explainer-what-exactly-is-a-living-wage-86927">Explainer: what exactly is a living wage?</a>
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<p>But the Australian labour market is also changing. Underemployment (workers who would like to work more hours) is a key problem in many households. Underemployment is relatively high among 15-24-year-olds and is projected to rise.</p>
<p>According to the Oxford Internet Institute’s <a href="http://ilabour.oii.ox.ac.uk/online-labour-index/">online labour index</a>, Australia is number three in the world for “gig economy” jobs, behind Britain and the United States. These jobs provide cash flow but no security. They also build up other vulnerabilities - <a href="https://theconversation.com/how-gig-economy-workers-will-be-left-short-of-super-85814">many Uber drivers will be short on Super</a>, for example.</p>
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<p>As you can see from the previous chart, Australian corporations aren’t doing too badly even as the labour share declines. The chart shows the gross profits, compared to the last month of 2008 – pretty much the peak of the crisis. This comparison allows us to see the changes in profits before and after the crisis more clearly. </p>
<p>The raw data <a href="https://www.quandl.com/data/AUSBS-Australian-Bureau-of-Statistics?keyword=operating%20surplus">show</a> the same pattern. </p>
<p>You can see clearly a drop after the global financial crisis hits, and then a very sharp recovery in 2015 and 2016. Gross operating surplus, our rough measure of the profits of the private sector, are more than 24% higher than they were in 2008. One important reason for the increase in profits is the lack of wage growth for households. </p>
<h2>What should be done?</h2>
<p>In the longer term the ratio of debt to income and assets will have to fall. This could happen via write-offs, sell-ons and bankruptcies, or via increases in incomes. But we don’t live in the longer term. </p>
<p>Right now, middle-income workers need more cash in their pockets. There are a couple of options available. </p>
<p>The first is to reduce the burden of debt repayment on those new entrants to the mortgage market. One solution is to provide tax relief on the interest that a household pays in the first few years of a mortgage (as <a href="https://www.revenue.ie/en/property/mortgage-interest-relief/index.aspx">Ireland</a> and the <a href="http://taxsummaries.pwc.com/ID/United-Kingdom-Individual-Deductions">United Kingdom</a> do). This will keep the property market working well and support younger borrowers, if only temporarily. But it could also bid up house prices if not properly targeted. </p>
<p>The second is the simplest approach - reduce taxes, combined with tax reform. But the federal government is already running a budget deficit of <a href="http://www.budget.gov.au/2017-18/content/glossies/overview/download/Budget2017-18-Overview.pdf">around</a> 2% of GDP, so this doesn’t work in the short term. </p>
<p>The third option is to reduce the cost of living by making public transport easier to access, improving early education, and reducing energy prices. But <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2424835">research shows</a> that the “worst” infrastructure projects are the ones that generally get built, so this isn’t advisable either. </p>
<p>The solution, then, is to increase wages, especially at the middle of the income distribution. Minimum wages have already gone up by more than 3% this year, but this is unlikely to help those on middle incomes, who have access to enough credit to afford current house prices and so <a href="http://melbourneinstitute.unimelb.edu.au/__data/assets/pdf_file/0010/2437426/HILDA-SR-med-res.pdf">have become stretched</a>. </p>
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Read more:
<a href="https://theconversation.com/the-costs-of-a-casual-job-are-now-outweighing-any-pay-benefits-82207">The costs of a casual job are now outweighing any pay benefits</a>
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<p>There are models Australia can learn from internationally. In Germany, the <a href="https://www.eurofound.europa.eu/observatories/eurwork/comparative-information/national-contributions/germany/germany-wage-flexibility-and-collective-bargaining">Variable Payment System</a> links pay increases to profit sharing and bonuses. When the company or the sector does well, the worker does well. The reverse is also true. </p>
<p><a href="http://ftp.iza.org/dp3867.pdf">A survey</a> of 23 different wage-increasing mechanisms found almost all countries bar the US, Hungary and Poland have some collective bargaining and minimum wages. These range from hard wage indexation enforced by law, to intra-associational coordination (roughly what we have here in Australia). The right model for the 21st century and the changing nature of work may be very different, however. </p>
<p>As we’ve seen, private sector is doing very well and can afford a wage hike. And productivity increases in the Australian workforce has <a href="http://www.abs.gov.au/ausstats/abs@.nsf/mf/5260.0.55.003">long outpaced</a> wage increases. A wage increase is not only feasible and justified, it is in the national interest.</p><img src="https://counter.theconversation.com/content/87182/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Stephen Kinsella does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Low wage growth isn’t just bad for households - it’s also bad for the overall economy. Research shows that increasing wages would take some of the risk out of the housing sector.Stephen Kinsella, Reseach Fellow, School of Government, The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.