Wages rising slower than expected as profits continue to drive inflation

by Greg Jericho

With public sector wages dragging down wage growth and private sector wages rising slower than expected, it is clear Reserve Bank needs to pause its run of rate rises

The latest Wage Price Index reinforce that the current levels of inflation are definitely not being driven by wages. Those looking for signs of a wage-price spiral will need to continue looking elsewhere as overall wages grew just 3.3% in 2021, done on expectation and the RBA’s prediction of 3.5% made in its most recent Statement on Monetary Policy.

With inflation running at 7.8% this meant real wages fell 4.2% – the biggest annual fall recorded since the Bureau of Statistics began calculating wage growth in 1997, and it puts real wages back at the level they were in September 2010.

Of great concern is the inability of public-sector wages to rise. Annual public-sector wage growth was just 2.5%, only marginally above the 2.4% rates of the June and September quarters last year.  Here we see the massive overhang of public-sector wage caps that are preventing public servants and workers from receiving pay rises that keep up with the cost of living. In the past year public sector workers saw their real wages fall 5%

While private-sector wages grew 3.6% in the last year, this past is below what would be expected. Private sector wage growth has historically had a strong relationship with the annual growth service prices. This is because service industries are much more labour intensive than is manufacturing and other industries reliant on goods, and also because many of our goods are imported. But in 2022 while the prices of service shot up, wage growth has not kept pace with the long-term trend relationship.

With market-sector service prices rising by 6.4% in the past year, you would have expected private-sector wage to have risen by around 4.8%, more than a percentage point higher than the actual growth of 3.6%. Clearly the cost of services are not being driven by excessive wage growth, and as all other indicators reveal, workers are the ones who are being most short-changed by the current rises in inflation, and should the Reserve Bank continue to raise interest rates households will continue to be hit from all sides.

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