The Real Wage Crisis

The worst is yet to come

Real wages have been growing at a tepid past over the past 6 years and the COVID-19 crisis have only seen them plunge lower.

But hidden in the RBA’s latest Statement of Monetary Policy is the grim prediction that the real wage is expected to continue to fall until 2023 at the earliest. What explains this dire forecast?

Mechanically it is the combination of weak nominal wage growth continuing while the price level continues to rebound. This is part of the reason why the RBA is currently so bullish on the unemployment rate predicting it will decline to 4% by 2023 - a rate not seen since before the GFC! Employers will be quick to hire new workers if wages stay this low for this long.

At a deeper level it seems that the RBA has a much more pessimistic outlook for labour productivity or worker’s ability to negotiate a larger share of the pie should productivity recover.

This represents a serious problem for the Australia worker. While the price declines in the first part of the crisis helped improve real wages, the central forecast projects that real wages will continue to stagnate at the level first reached in 2019 - this means that Australia will have gone an unprecedented 5 years without a pay rise.

Obviously this is still only the RBA’s best guess of the future. And if I had to I would take the over, betting the nominal and real wages end up growing faster than predicted (following the experience of the US). But Martin Place is filled with plenty of people far smarter than myself, and if they are this concerned about wages we all should be.

Wonkish Post-script

The picture is much more rosy if you use the trimmed-mean deflator. Indeed the trimmed-mean CPI index often diverges in level terms from the headline measure for years at a time! However for the purposes of measuring the real wage and its implications for the average worker I think the headline measure is (unfortunately) the best one to use. After all households cannot “trim” out goods from their consumption basket just because their prices are volatile.