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Australians have experienced their largest real wage decline on record, with nominal wages growing by 3.3 per cent in 2022, well below inflation of 7.8 per cent.
Key points:
- Private sector annual wage growth (3.6 per cent) is significantly higher than in the public sector (2.5 per cent)
- But real wages (adjusted for inflation), have declined by 4.5 per cent over the past year
- The RBA is expected to hike rates at its next three meetings
The Wage Price Index (WPI) rose by 0.8 per cent in the December quarter, lifting annual wages growth to 3.3 per cent, according to new Australian Bureau of Statistics data.
It means the annual pace of wage growth increased slightly by the end of December, up from 3.2 per cent in the September quarter, which was smaller than expected.
And that means the 'real' value of wages declined by 4.5 per cent in 2022, the biggest deterioration on record.
Economists say it's obvious that workers aren't to blame for Australia's inflation, and the Reserve Bank should stop fixating on them.
"To blame workers for current inflation while they experience unprecedented real wage drops, and companies post surging profits, is economic gaslighting of the highest order," said Matt Grudnoff, senior economist at the Australia Institute.
"This data shows fears of a 'wage-price spiral' similar to the 1970s are a speculative fantasy.
"That story is now itself a risk to the Australian economy. Australians are not living in the 70s. We are falling behind on the cost-of-living in 2023."
Inflation continues to erode the real value of wages
With annual inflation running at 7.8 per cent, wages need to be growing by 7.8 per cent to maintain their purchasing power.
But since nominal wages only grew by 3.3 per cent in 2022, workers have been unable to purchase the same amount of goods with the wages they're being paid.
The "real" value of workers' wages declined by 4.5 per cent over the last 12 months as prices — and some profits — have run well ahead of aggregate wage increases.
David Bassanese, the chief economist at BetaShares, said the "marked acceleration in consumer prices" over the past year cannot be blamed on runaway wage growth.
"Households have faced a drastic cut in real wages," he said.
"Instead, the lift in inflation has reflected a range of non-wage cost factors and the relative ease with which business has been able to pass on these costs without overly crimping their profit margins.
"This reflects strong underlying consumer demand but also areas of the economy where competition is arguably not as strong as it should be," he said.
Callam Pickering, APAC economist at global job site Indeed, has also highlighted the predicament facing workers.
"While Australian wages are growing at their fastest pace in a decade, the reality is that the purchasing power of Australian incomes has crashed," Mr Pickering said.
"The disconnect between wage growth and inflation is devastating for households across the country, with cost-of-living pressures easily outstripping wage gains."
RBA's fortnight-old forecasts already wrong
However, economists still expect the RBA to keep hiking interest rates in coming months.
In its February Statement on Monetary Policy, the RBA said consumer spending was still robust, and it was being supported by households saving less than they had been.
It said the household saving ratio has been declining as a result, to be closer to, but still slightly above, the average levels that prevailed prior to the pandemic.
In its latest forecasts, published less than a fortnight ago, the Reserve Bank also predicted the December WPI number to show annual growth of 3.5 per cent, with annual wage growth to reach 4.1 per cent by the end of June and 4.2 per cent by the end of the year.
"We expect to see rate hikes at the next three meetings," said Sean Langcake, head of macroeconomic forecasting for BIS Oxford Economics.
The politics of wage increases
However, despite the RBA's concerns about a pick-up in wages feeding into higher inflation, business lobby groups and the Albanese government are claiming credit for wages increasing.
Andrew McKellar, the chief executive of the Australian Chamber of Commerce and Industry, said employers had just delivered the strongest rate of wages growth in more than a decade.
"Business is leading the way with private sector wages up 3.6 per cent in 2022 compared to just 2.5 per cent in the public sector," Mr McKellar said.
"Annual private sector labour cost growth has increased to levels not seen since the 2007 mining boom.
"Employers continue to see significant pressure on wages, and can expect further wage increases in the year ahead. Enduring labour shortages mean businesses are working to recruit and retain staff through regular and ad hoc wage reviews, bonuses, promotions, and other incentives.
"With responsible nominal wages growth outcomes being achieved, further effort is now needed to reduce inflationary pressures and supply chain constraints."
Federal Treasurer Jim Chalmers, and Minister for Employment and Workplace Relations Tony Burke, said people should note that wages growth had picked up even further since the change of government in May last year.
"Our economic plan is all about getting wages growing again in responsible ways. We’re pleased that it’s already starting to work, but we know that we need to see inflation moderate to secure real wages growth," they said.
"This is the fastest through-the-year growth rate since the December quarter of 2012.
"The former government spent a decade trying to deliberately suppress wages growth. Now it’s turning around."