Even the PM is warning of low wage growth

From The New Daily.

Prime Minister Malcolm Turnbull has blamed low wage growth for the worst monthly drop in consumer spending since 2010.

Retail turnover in August declined for a second month in a row, according to official data released on Thursday, with the -0.6 per cent drop in trade the worst monthly performance in more than four years – putting economic growth at risk.

“While we’re seeing strong growth in employment, we’re yet to see stronger growth in wages so people feel as though they’re not getting ahead,” Mr Turnbull told Neil Mitchell on 3AW radio on Friday.

“That’s why economic growth is so important.”

The Prime Minister said wages would naturally rise as unemployment falls. “It’s supply and demand. Phil Lowe, the Governor of the Reserve Bank, was making this point just the other day,” he said.

Mr Turnbull also blamed higher energy bills, while some economists pointed the finger of blame at rising household debt and cooling house prices.

August retail trade slumped the most at ‘Newspaper and book retailing’, down -2.3 per cent; ‘Cafes, restaurants and catering services’, down -1.8 per cent; and at ‘Electrical and electronic goods retailing’, down -1.6 per cent.

Nowhere in Australia escaped, with retail sales falling in every state and territory, with New South Wales, Victoria and the ACT tied for worst performance at -0.8 per cent.

retail turnover
It was the worst month-on-month result, in seasonally adjusted terms, in four years. Source: ABS

The link between low wage growth, low spending and low economic growth has been a growing area of concern in recent months.

Commonwealth Bank CEO Ian Narev said in a speech on Friday that wage growth was the “No.1 metric” that policymakers should be concerned about.

The reason experts are so concerned is that any drop in consumer spending from cash-poor workers could have big consequences for economic growth, as household consumption currently accounts for roughly 57 per cent of Australia’s economic growth.

The full impact of the August slump will be seen when the September quarter GDP figures are released. In the GDP figures for the June quarter, the share of economic growth flowing to wage earners fell to 51.3 per cent in trend terms, the lowest since 1964, while the profit share soared to 27.3 per cent, the highest since 2012.

Dr Richard Holden, an economist at the University of New South Wales, has previously warned The New Daily that a drop in consumer spending “goes round in a vicious cycle”.

“If you have more of a drop on consumer spending, you’re going to see a contraction on the business side. It flows straight into business investment and business expansion, and that has a multiplier effect,” Dr Holden said at the time.

Commonwealth Bank economist Gareth Aird has described the August retail report as a “shocker”.

“It’s not surprising to see such weak retail trade outcomes given household income growth is so soft. But two consecutive monthly falls look at odds with the recent strength in the labour market.”

Mr Aird also said mortgage interest payments are taking up a larger proportion of household income, acting as “a handbrake on consumer spending and the retail sector in general”.

The expected arrival of online giant Amazon, and the growth of online retail in general, is also putting pressure on retailers, he said.

Australian Retailers Association executive director Russell Zimmerman blamed increased energy costs, higher tax burdens and an inflexible wage system for the concerning result and called for government action to lift confidence.

JP Morgan economist Ben Jarman said further weakness in household consumption would put at risk the Reserve Bank’s forecasts for a return to economic growth of 3 per cent, from the current annual rate of 1.8 per cent.

“The consumption data challenge the RBA’s assertion that growth will move back above potential,” he said.

Labor leader Bill Shorten told a media conference on Friday that the misuse of labour hire contracts were a major contributing factor to Australia’s low wage growth.

How market forces and weakened institutions are keeping our wages low

From The Conversation.

Within the political class there is a low level moral panic about low wages growth. The irony is that those lamenting this situation are simply witnessing the ultimate outcome of policies they have long advocated.

While Australia still has systems like Industrial Tribunals and Awards – given how they interact with market forces today, these institutions now work to entrench wage inequality rather than reduce it.

Wage rates and movements are determined by a combination of market and institutional forces. Technology, human capital, levels of labour supply and the profitability of companies in laggard and leading set the lower and upper bounds for sustainable wage levels.

As economist and philosopher Adam Smith noted, the income workers require to survive sets what’s called a “market floor” for wages – the lowest acceptable limit. Rates of profit in the best performing firms set the upper limit, as Australia’s executive class has shown very clearly for over three decades now. What rates actually prevail within these very broad limits are determined by institutional forces – in Australia, the award system of minimum wages and unions collective bargaining rights.

Historically Australia has had the great benefit of having institutional arrangements that balanced these forces well. The key elements of this were a network of industrial tribunals that regularly assessed the overall economic and social situation and determined what rates and movements in pay were sustainable.

These rates were not set unilaterally, but in coordination with what employers and organised workers indicated was possible, in industry level collective agreements.

The defacto rule was that wage movements should equate to movements in productivity plus the cost of living. The standards set in the leading profitable sectors then spread to the entire workforce through the maintenance of award relativities (ie standard comparative rates of pay set by reference to benchmark occupations like metal fitter, carpenter and truck driver). During this time awards rates approximated pretty closely to going rates of pay.

These underlying principles were not unique to Australia. In the era following the second world war it meant that in most countries workers shared in productivity growth and wages tracked pretty closely with it.

Since the mid 1970s and especially since the 1980s all this has changed.

Australia has not seen anything like full employment since the early 1970s. While unemployment has been cyclical, it has usually been 5% or more since that time. More importantly, underemployment has been on the rise.

This has not been cyclical. It has racketed up after each recession.

And that is just in terms of hours worked. If we took into account workers with skills not being used, levels of labour underutilisation are much higher. Estimates of underutilisation of this nature vary as being between 15 and 25%.

High levels of indebtedness also weaken workers bargaining power. Today few can hold out for long bargaining periods – either individually or collectively. This gives employers a huge advantage in setting wages.

The legacy of labour market ‘reform’

In the 1970s and 1980s Australia’s wage setting institutions worked well to protect wage rates against the full force of these downward pressures. Since the early 1990s, however, those institutions have been transformed.

The key issue here has not just been the weakening of unions and their bargaining power. Just as significant has been the uncoupling of wage rates set by wage leaders, from the wages of the weak. Workers in benchmark setting sectors like construction used to establish wage norms. These were recognised by industrial tribunals as a community standard which they then passed on to workers in weaker sectors like retail through generalised award wage base rises. In this way the wages of the strong supported movement in the wages of the weak.

This was a key “reform” of the Keating government, introduced with the active support of the ACTU. It was explicitly designed to let wages of the strong grow faster than the wages of the weak to maintain macroeconomic balance as the wages system decentralised.

The Howard governments’ labour law changes – first the Workplace Relations Act (1996) and then Workchoices (2006) – merely extended the logic of this reform trajectory. The current Fair Work Act merely codifies this trajectory as the law of the land today.

Today Austraila’s minimum wages remain among the highest in the world. The difference is they operate in relative isolation from the rest of the workforce.

Until the 1990s they were part of an interconnected system that ensured wages gains of the strong were widely shared. Today they provide the ultimate safety for those with the weakest levels of bargaining power – currently about 15% of the workforce directly and a further 15% indirectly.

We should also not forget the new found role of Treasury departments. Immediately after its election, the O’Farrell government in NSW legislated to cap wage rises in the NSW public sector to no more than 2.5% per annum.

Pubic sector teachers and nurses, especially in NSW, were emerging at the new wage leaders. This meant that their wages were now capped and this Treasury edict – and not collective bargaining and arbitration – set community wage norms.

Today our wages system has a different logic. The recent cut in penalty rates is a case of the wages of the weak putting pressure on the wages of the strong. While the Fair Work Commission quarantined the rest of the workforce from this cut by limiting its recent decision to low paid service workers – the precedent is there. Future movement in wage standards for anti-social hours will be down and not up.

Over the course of the twentieth century Australia devised a remarkable set of institutions to manage the complex problem of wages and labour standards. It’s time we built on what little remains of that legacy to remedy low wage growth.

Building on these institutions doesn’t mean restoring what was. New policies need to engage with new realities. Even former enthusiastic supporters for reducing labour standards and wages such as the IMF now recognise growth needs to be inclusive if it is to sustainable.

It’s much easier to destroy institutions that deliver fair pay than build them. Australia found ways of achieving fair pay over the course of the twentieth century – it can to so again.

Author: John Buchanan, Head of the Discipline of Business Analytics, University of Sydney Business School, University of Sydney

Income Growth Stagnant

The latest data from the ABS shows that income growth remains in the doldrums, putting more pressure on households who are experiencing rising costs (including mortgages), as our Household Finance Confidence Index shows. Given where inflation sits (1.9% on the official figures, but understated we think), many continue to go backwards. This also kills the Treasury budget assumptions. We do not see any reversal of this trend, despite recent positive business lending.

The seasonally adjusted Wage Price Index (WPI) rose 0.5 per cent in June quarter 2017 and 1.9 per cent over the year, according to figures released today by the Australian Bureau of Statistics (ABS).

The WPI, seasonally adjusted, has recorded quarterly wages growth in the range of 0.4 to 0.6 per cent for the last 12 quarters (from September quarter 2014).

ABS Chief Economist Bruce Hockman noted: “Low wages growth continued in the June quarter 2017, with annual wages growth continuing to hover around 2 per cent. This low wages growth reflects, in part, ongoing spare capacity in the labour market. Underemployment, in particular, is an indicator of labour market spare capacity and a key contributor to ongoing low wages growth.”

The annual trend is clear to see. Public servants are doing a little better than the private sector.

Seasonally adjusted, private sector wages rose 1.8 per cent and public sector wages grew 2.4 per cent through the year to June quarter 2017.

In original terms, through the year wage growth to the June quarter 2017 ranged from 1.1 per cent for the Mining industry to 2.6 per cent for Health care and social assistance industries.

Western Australia recorded the lowest through the year wage growth of 1.4 per cent and South Australia and Northern Territory the highest of 2.1 per cent.





Fair Work Commission to cut wages within four weeks

From The New Daily.

More than 600,000 low-wage workers in the services sector will suffer a wage cut on the first day of next month, after a judicial bench refused pleas to cancel or delay cuts to penalty rates.

In a decision handed down on Monday, the Fair Work Commission denied requests from unions for the wage cuts to be postponed for two years or, at the very least, for currently employed Australians to be quarantined from the cuts.

Instead, the Commission chose to stagger the cuts to Sunday loadings, which means workers will have their wages cut every year on July 1 until 2019 or 2020, depending on their industry.

The verdict applies to workers paid Award rates in the hospitality, fast food, retail and pharmacy sectors.

ACTU secretary Sally McManus urged Parliament to legislate against the “devastating” cuts.

“This can be stopped. Our Parliament can stop it. Malcolm Turnbull can stop it,” she told reporters.

“There is a bill before Parliament as we speak and it can be voted on in the next two weeks and bring a stop to these penalty rate cuts.

“These cuts are devastating. It’s $70 a week in total on average for workers. These are the lowest paid workers in our community.”

Employer groups had urged the Commission to not phase in penalty rate cuts at all, arguing this would boost employment sooner.

The Commission dismissed this argument by acknowledging it was “cautious” about any boost to employment flowing from lower rates of pay. Instead, it argued that workers would benefit from “an increase in overall hours worked”.

However, it did decide to impose the public holiday penalty cuts all at once, from July 1, 2017.

Ms McManus disagreed, telling The New Daily that workers would end up “working longer for less pay”.

From July 1, Sunday penalty rates will be cut by 5 percentage points across the four sectors for full- and part-time workers, bringing penalty rates to 145 per cent for fast food; 195 per cent for pharmacy and retail; and 170 per cent for hospitality.

The McKell Institute, commissioned by the ACTU, has calculated, based on 2011 census data, that if the Sunday penalty rate cuts had been implemented in full on July 1, roughly 621,000 workers would have lost $1.4 billion in disposable income a year, with rural and regional areas the worst hit.

Some, such as Warren Entsch, Liberal MP for the worst affected electorate of Leichardt, have dismissed these numbers as exaggerated.

But even if the disposable income and affected worker numbers were overstated by the McKell Institute’s methodology, it would not affect the rankings. Rural and regional workers would remain the worst hit.

penalty rates electorates

The Australian Industry Group said the Commission’s decision was “fair”, but that it would have preferred for the cuts to be implemented straight away, not phased in.

Rob Mitchell, Labor MP for Australia’s second-worst affected electorate, told The New Daily that penalty rates are important because weekend workers “are missing out on what we value in Australia”.

“I know from my experience when I was with the RACV, having to work on Christmas Day and doing weekend work on both day shifts and night shifts, how this had a big impact on family life and the loss of participation in special family occasions,” Mr Mitchell said.

“This cut attacks the young, it attacks the vulnerable. The FWC does its work, and in this case it got it wrong – very badly wrong.”

Mr Mitchell was especially concerned about the impact of the cuts on consumer spending.

“For many in our communities, these cuts will mean that people have less discretionary spend. If they’ve got less discretionary spend, they’re going to be tightening things up, they won’t be going to restaurants or to the shops, so you could actually see a contraction in small town economies.”

How the changes will be phased in:


Economists are trying to out why incomes aren’t rising — but workers have a good hunch

From Business Insider.

Economists are often wringing their hands over why, despite a continuous eight-year economic recovery, US workers’ wages remain largely stagnant, extending a trend that began some three decades ago.

Yet anyone who has applied for a job in the last couple of years knows that, while the US unemployment rate is historically low at 4.4%, the labour market isn’t exactly bustling.

Companies have become a lot more reticent about making new investments in the wake of the Great Recession and during the weak economic recovery that has followed it. That includes investing in people, and the hiring process has become slower and more onerous.

It also means wage increases have become even harder to come by.

The recession caused lasting damage to the job market which still resonates to this day. Steven Partridge, vice president for workforce development at Northern Virginia Community College (NOVA), says the crisis created what he calls “degree inflation” in job requirements — a trend correlated with stagnant and sometimes falling incomes as workers lost their jobs and considered themselves lucky to take lower-paying ones.

In other words, because applicants were so desperate and the pool was so wide, the bar for hiring became unrealistically, and often unnecessarily high. The trend has abated, but not fully receded.

“The downturn made everyone push up their education requirements,” Partridge told Business Insider.

Several job market indicators point to underlying weakness — high levels of long-term joblessness, low labour force participation and, yes, a distinct lack of wage growth.

Albert Edwards, market strategist at Societe Generale, deserves credit for doing something that’s rather rare on Wall Street — admitting he was wrong, specifically about the prospect of imminent wage increases.

“Talking about wrong, I have to put my hands up. I have been expecting US wage inflation to roar ahead over the past three months to well above 3%, yet every data release has surprised on the downside,” he wrote in a note to clients.

“Wage inflation, as measured by average hourly earnings, has actually leveled off at close to 2-1⁄2% while wage inflation for ‘the workers’ is actually slowing (see chart below)! Strictly speaking, ‘the workers’ are defined (by the BLS) as “those who are not primarily employed to direct, supervise, or plan the work of others.” Hey, that’s me!”

EdwardsSociete Generale

Fed officials have also struggled to understand the absence of wage increases. In a recent research brief from the San Francisco Fed, staff economist Mary Daly and co-authors reflect on what they see as a surprising trend.

“Standard economic theory tells us that wage growth and unemployment are intimately linked. Wage growth slows when the unemployment rate rises and increases when the unemployment rate falls,” they write. “The experience since the Great Recession has been very different.”

SffedFederal Reserve Bank of San Francisco

“This slow wage growth likely reflects recent cyclical and secular shifts in the composition rather than a weak labour market. In particular, while higher-wage baby boomers have been retiring, lower-wage workers sidelined during the recession have been taking new full-time jobs,” they said. “Together these two changes have held down measures of wage growth.”

Their explanation provides little comfort in the face of the depressed labour market many Americans still face, especially lower-income and minority families.

The Fed authors also suggest a factor in low income growth that might ring true to those families: “As long as employers can keep their wage bills low by replacing or expanding staff with lower-paid workers, labour cost pressures for higher price inflation could remain muted for some time.”

As suggested in that last excerpt, labour’s bargaining power vis-a-vis employers is probably at least as important as unfavorable demographics in explaining slow wage growth. It will take a substantially stronger economy to tilt that balance back in workers’ favour.

Net Wages Fell To March 2017

The pincer movement of higher inflation and lower wage growth now means that average wages are falling in real terms, especially for employees in the private sector where wage growth is anemic.  Not good for those with mortgages as rates rise flow though.

The ABS says the seasonally adjusted Wage Price Index (WPI) rose 0.5 per cent in March quarter 2017 and 1.9 per cent over the year, according to figures released today by the Australian Bureau of Statistics (ABS).

The WPI, seasonally adjusted, has recorded quarterly wages growth in the range of 0.4 to 0.6 per cent for the last 12 quarters (from June quarter 2014).

Seasonally adjusted, private sector wages rose 1.8 per cent and public sector wages grew 2.4 per cent through the year to March quarter 2017.

In original terms, through the year wage growth to the March quarter 2017 ranged from 0.6 per cent for the mining industry to 2.3 per cent for public administration and safety, education and training, and health care and social assistance industries.

Western Australia recorded the lowest through the year wage growth of 1.2 per cent and Tasmania the highest of 2.3 per cent.

US weekly earnings increase 4.2 percent

According to the US Bureau of Statistics, weekly earnings of the nation’s 110.7 million full-time wage and salary workers were $865 (not seasonally adjusted) in the first quarter of 2017, an increase of 4.2 percent from a year earlier ($830).

From the first quarter of 2016 to the first quarter of 2017, median usual weekly earnings increased 4.2 percent for men who usually worked full time and 2.0 percent for women. In the first quarter of 2017, women who usually worked full time had median weekly earnings of $765, or 80.5 percent of the $950 median for men.

Among the major race and ethnicity groups, median weekly earnings for full-time wage and salary workers were $894 for Whites in the first quarter of 2017, $679 for Blacks or African Americans, $1,019 for Asians, and $649 for workers of Hispanic or Latino ethnicity.

These data are from the Current Population Survey.

Wage Growth Continues To Slow

The latest edition of the RBA Bulletin included a section of wage growth and this chart. Inflation adjusted wage growth is close to zero. Not good for households with large mortgages.  Interestingly they did not separate public and private sector growth, out data suggests public sector employees are doing better than those in the private sector!

The RBA says the job-level micro WPI data provides further insights into the slowing of wage growth in Australia over recent years. Following the
decline in the terms of trade, there has been a reduction in the average size of wage increases.

This has been particularly pronounced in mining and mining-related wage industries. The increasing share of wage outcomes around 2–3 per cent also provides further support for the hypothesis that inflation outcomes and inflation expectations influence wage-setting.

The Bank’s expectation is that wage growth will gradually pick up over the next few years, as the adjustment following the end of the mining boom runs its course. The extent of the recovery will, in large part, depend on how wage growth will respond to improving labour market conditions, including the level of underutilisation.

They observe that wage growth across all pay-setting methods has declined. Wage growth in industries that have a higher prevalence of individual agreements has declined most significantly over recent years,
following strong growth in the previous few years. This may reflect the fact these industries have been influenced by the large terms of trade
movements, but may also indicate that wages set by individual contract can respond most quickly to changes in economic conditions.

Wage growth in industries with a higher share of enterprise bargaining agreements have the lowest wage volatility, as the typical length of an
agreement is around two and a half years. While changes in wage growth and labour market outcomes by pay-setting may reflect differences in wage flexibility or bargaining power, these can be difficult to distinguish from a wide range of other determinants of wages, including variation
in industry performance, the balance of demand and supply for different skills, and productivity.

The share of wage rises between 2–3 per cent has increased to now account for almost half of all wage changes. This may indicate some degree of anchoring to CPI outcomes and/or the Bank’s inflation target. Decisions by the Fair Work Commission, which sets awards and minimum wage outcomes, are heavily influenced by the CPI. A little over 20 per cent of employees have their pay determined directly by awards, and it is estimated pay outcomes for a further 10–15 per cent of employees
(covered by either enterprise agreements or individual contracts) are indirectly influenced by awards.

The Fundamental Disconnect

You only have to look at the trends on housing credit growth and wage growth to see the problem. Using data from the ABS and RBA, we can see that in recent times credit to households for housing has been growing significantly faster than wage growth (note the two different scales) whereas in the 2000’s, before the GFC hit, wage growth was higher, and able to support such credit growth.  No wonder household debt is at a record high.

The other perspective is the cash rate, which has been cut to an all time low, and we see wage growth and rates trending in the same direction.

Whilst you can argue that lower rates means repayments are lower for many, the gearing effect of larger mortgages off the back of the home price boom, has created a major problem, with many households close to the edge at current low interest rates, and with low wage growth, no sign of this pressure relenting. Indeed, if rates rise (either officially or from market pressure) significantly more households will be stressed. Many will also struggle to pay off the capital.

These charts, together should have been a warning to regulators. The settings are wrong.

I think you can argue that we should be aiming for credit growth to match income growth, to stop the rot – but consider the impact on the banks (who rely on mortgage growth for profitability) home prices (a reduction in mortgage availability will force home prices lower) and housing affordability (credit rationing would lift the price of loans).

Even small adjustments might well create the conditions for a property market crash, with all the consequences that follow.

There is an old joke, when a driver stops to ask a local for directions, and the answer is “if I were you, I would not start from here”. The regulators have the same problem!

Wages growth remains at record low

The seasonally adjusted Wage Price Index (WPI) rose 1.9 per cent through the year to the December quarter 2016, according to figures released today by the Australian Bureau of Statistics (ABS). This result equals the record low wages growth recorded in the September quarter 2016.

Those in the public sector are doing better than in the commercial sector.

Seasonally adjusted, private sector wages rose 0.4 per cent and public sector wages grew 0.6 per cent in the December quarter 2016.

In original terms, through the year wage growth to the December quarter 2016 ranged from 1.0 per cent for mining to 2.4 per cent for health care and social assistance and education and training. Mining industry wage growth has continued to slow over the last three years.

Western Australia recorded the lowest through the year wage growth of 1.4 per cent and Tasmania the highest of 2.4 per cent.

If you correct for inflation, wages in real terms are hardly growing at all.  The trajectory is towards zero!

This is really bad news for those highly in debt households, who on any measure you care to select, have a massive burden thanks mainly to excessive home price growth and mortgage lending. As we have said before, this is a toxic mix, and as mortgage rates rise, as they will, more households will struggle to balance their budgets, dampening discretionary spending and having to wrestle with greater mortgage stress.  According to our research 20% of households would struggle with even a small lift in rates.