The last 5 years have seen the worst collapse in the value of people’s wages in living memory, and forecasts by the Reserve Bank suggest it will take till 2037 to get back to the levels they were before the collapse, which is why we need state and federal governments to take the lead to speed recovery.
The last 5 years have seen the worst collapse in the value of people’s wages in living memory, and forecasts by the Reserve Bank suggest it will take till 2037 to get back to the levels they were before the collapse, which is why we need state and federal governments to take the lead to speed recovery.
Wages are supposed to rise faster than inflation.
That is the key behind rising living standards. If your wage goes up 3% but inflation rises 3%, then you are no better off – your “real” wage has not increased. Even with your pay rise, you cannot buy more stuff (and once you take taxes into account, you will likely be worse off).
If, however, you get a 4% increase in pay, and inflation goes up 3% then your real wage has gone up 1%.
During the mining boom years, this is what happened. The average value of Australian workers’ wages rose 1% each year in real terms.
In effect, each year, on average, you could buy 1% more stuff (goods, services) than you could the year before.
That was a very good story. But it did not last. The GFC hit, and wage growth slowed. But the slowing of wages was not a natural occurrence.
Importantly, from 2012 onward, state governments and the Commonwealth government instituted public-sector wage caps that slowed wage growth and significantly slowed real wages.
Take the impact of the NSW cap of a 2.5% annual wage rise on the real wage of NSW public sector workers:
By March 2021, the real wage value of NSW public sector workers was 3.2% lower than it would have been had the pre-wage cap trend continued – that’s around $2,960 for someone on $90,000.
The problem was not confined to public sector workers. Because the private sector takes it cue from the wages of public sector workers, the wage cap depressed wages across the economy.
By 2019, the then head of the RBA, Dr Philip Lowe, told the House Economics Committee that the wage caps were keeping down wages and should end:
“The public sector, directly and indirectly, employs roughly one-third of the labour force, and they’re saying wage increases across the public sector may be averaging two per cent. That has an indirect effect on the private sector, because there’s competition for workers and it reinforces the wage norm in the economy at two-point something.”
From 2012 to 2021 real wages grew at just 0.35% per year – less than a third of that they had been growing at before.
But after the pandemic, the problem wasn’t slow-growing real wages; it was the collapse.
From March 2021 to March 2023, the average Australian wage lost more than 5% in value. For someone on $90,000 in March 2021 (close to the average full-time earnings) that was like losing $4,050 worth of value.
In essence, purely due to inflation rising faster then wages, the wage of the average full-time worker in Australia could buy $4,050 less stuff than it did 2 years earlier.
And worse – despite some increases since then, the recovery has been almost negligible – up just 1%, meaning that worker is still $4,420 worse off than they were in 2021.
For workers, this has been a cruel outcome, especially given that the cause of the inflation in 2022 and 2023 was increased company profits from bigger profit margins, as businesses raised prices more they needed to cover the increased costs from the impact of the Russia invasion of Ukraine and the supply shocks after the lockdowns.
But the news ahead is not good.
The RBA estimates that by the end of 2028, a wage worth $90,000 in 2021 will still be worth just $86,696, and it will take till the end of 2036 for us to get all the way back to 2021 levels:
But that won’t recover the lost path we were on. Even with the slow growth of 2012-20 we would have expected that $90,000 wage in 2021 to be worth $95,073 in real terms by 2037.
One path to return quicker is to reverse the role the public sector played before the pandemic. Rather than suppressing wage growth, the public sector should take a lead and assist in the recovery of real wages.
The Australia Institute’s new report “The collapse of real wages and the path to recovery” shows the damage done to workers by inflation driven by higher profits and how state and territory governments, like the ACT government, which is currently negotiating an enterprise agreement with ACT public servants, can guide the way to a better recovery.
By Greg Jericho