Wages slipping behind No pay rise above inflation expected before 2020 or even later

AUSTRALIANS who want a pay rise above inflation might be waiting a long time, with 2020 looking like the earliest any real wage hikes will emerge for most Australians.

This is the conclusion implied by a new speech from a top RBA official.

Australia’s wages growth has been getting weaker for a long time and the wages coma now looks like staying around for a couple more years.

RBA wage forecasts are not public but the central bank has been talking quite a bit recently about where it expects wages to go. You don’t have to listen long to hear the pessimism.

“Wage growth remains subdued and is forecast to increase gradually,” the RBA said in a recent statement. But until this week it didn’t suggest just quite how gradually.

A major new speech by one of the RBA’s top officials has shed far more light on the topic, appearing to suggest wages growth might not show up until 2020, with the exception of a few “pockets”.

Assistant governor Luci Ellis spent a lot of time talking about “spare capacity” in the labour market. Unfortunately, the share of jobless people in Australia is still too high to expect wages to zoom up, she suggested.

Spare capacity refers to unemployment mostly, but also underemployment as well as people who aren’t in the labour force at the moment. Australia has plenty of spare capacity among the unemployed and the underemployed.

There is a tipping point in the amount of “spare capacity”. Once it drops below the tipping point, companies have to make higher pay offers to hire people, pay starts rising again and inflation picks up. That’s the theory.

The RBA estimates the tipping point is at about 5 per cent unemployment.

The real headache comes when you check how long it will be until we get below that level. The RBA forecasts unemployment out to June 2020. The official forecast of unemployment in mid 2020 is 5.25 per cent.

Even in 2020 we will still be above the tipping point. Only slightly above it, mind you, and the forecast could of course be wrong.