What happens if wages keep struggling to keep up with inflation?

The problem

As most workers would know, it has been hard to get a pay rise in recent years. And with inflation picking up, the cost of living has become a big issue for households.

But low wages growth is not just a recent thing. In its issues paper released before last month's jobs summit, the federal government said real wages (after inflation) have grown by only 0.1% a year over the past decade and have declined substantially over the past year.

With inflation currently running at over 6% and predicted to come closer to 8% by the end of the year, wage earners have good reason to feel they're going backwards, even if they manage to land a pay rise of 2% or 3%.

While the jobs summit came up with ideas to strengthen wage growth, through measures such as industry-wide bargaining, the unpalatable truth is that there is no silver bullet to improve wages.

And in a cruel twist, a rapid rise in wages in the short term could do more harm than good by further fuelling inflation and putting pressure on interest rates.

What to expect

As the Reserve Bank outlined in its August statement on monetary policy, it is expecting inflation to peak later this year and come back to the upper levels of its 2%-3%   target range by the end of 2024 as global economic growth slows. But it says the labour market has tightened faster than expected, with unemployment now at 3.5%.

It says it expects wages to pick up in this environment, but it does not want to see a situation where wages and prices are set on the assumption that high inflation will continue. 
If the "inflation psychology" changes, it said, there is a risk that higher inflation could become more persistent.

Unfortunately, that means the people who set the country's interest rates would probably prefer your wages to be going backwards in the short term, so they don't have to raise interest rates much further.

The RBA's thinking is that with the labour market tight, unemployment shouldn't be a problem as it lifts rates to put a lid on inflation. And it argues that many households still have higher savings levels than before the pandemic, and thus should be able to weather a period when the cost of living is rising, provided it doesn't become entrenched.

So, it's a sort of "damned if you do, damned if you don't" situation for wages generally. They're unlikely to rise enough to offset the higher cost of living and if they do there's a risk that the Reserve Bank could get tougher with interest rates, potentially leading to more mortgage pain, house price falls and slower economic growth (with possibly unemployment trending back up more than expected.)

Productivity is key

Of course, higher wages don't necessarily have to lead to higher prices. If businesses can raise productivity so that they can produce goods and services more efficiently, it's only fair that employees should benefit from that.

There was a lot of talk during the election campaign and at the jobs summit about boosting productivity so that everyone wins.

According to Treasury's summit issues paper, productivity growth averaged 2.1% a year from 1989 to 2004 but has only been 1% a year since 2004. It said average productivity growth over the past decade is at its lowest rate in half a century.

Increased business innovation and investment in new technology can lift productivity growth. The paper said we also need to ensure the workforce has the right education and skills to meet the needs of employers and a constantly evolving economy.

What you can do

The Reserve Bank said its research suggested wage rises would pick up this year, but not by as much as inflation. Wages growth in the year to June was 2.6% and it is expected to go well above 3%.

However, with employers across the board finding it difficult to recruit new staff, employees are in a better bargaining positioning than they have been for some time. Payroll data reported in the Australian Financial Review in March showed people who moved jobs in mid-2021 received pay rises of 8%-10%. And with no easing in the demand for staff, skilled workers in particular can demand bigger rises.

Side hustles, and employees taking on extra hours, have also been increasing as people have looked for extra income to help meet the cost-of-living challenges.

Data from a Finder.com.au survey found that 36% of Australians (or 7 million) now have a side hustle, such as renting out a room in their home, collecting recyclable cans and bottles, selling pre-owned goods, and freelancing, for example, through Airtasker.

The survey also showed that 85% of Australians are looking to cut their spending to ride out the spike in living costs. Eating out, discretionary shopping and TV subscriptions top the list of possible cuts.

Finder money expert Rebecca Pike says it's worth doing a budget and grouping your expenses into essential and non-essential items. "Cut from the non-essential items first and shop around."

Finder says it's also worth reviewing the cost of some essential items, including energy, financial products and technology, to see if you can save money.

Finder's Taylor Blackburn says there has already been an increase in people switching or cutting out services. "Many people have realised that some savvy swaps - like switching energy providers or cutting down on subscriptions - could save you hundreds of dollars a year."

If you're having trouble making ends meet, Pike says it's worth contacting your providers about a payment plan or hardship provisions or contacting the national debt help line on 1800 007 007.

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