Part 1 of a three-part series on Australia’s looming debt danger

It’s no surprise to anyone that real wages in Australia have been declining over the past 20-plus years.

But what’s worth considering is why they are in decline and what the future may hold.

In fact, this phenomenon is not restricted to Australia, though there are country-specific reasons for the slide here. Real wages growth has been idling all over the developed world.

 

You’re not alone

Fidelity Investment commentator Michael Collins puts the global fall down to a number of factors.

The first is that the most watched statistics don’t take into account the workers who have given up looking for a full-time job and are making do with part-time and casual work. At the same time, workers are feeling too insecure to move, which normally would force companies to pay higher wages to keep or attract the best people.

Mr Collins says a second reason for sluggish wages growth is that globalisation has shifted jobs from the developed to the emerging world. “The US, for example, is estimated to have shed at least 6 million manufacturing jobs from 1998 to 2010, about one-third of the total. These lost jobs have led to a relatively large slump in factory wages,” he says.

Then there’s the technology that enabled globalisation. “Innovation is not such a boon for middle-class workers who have been replaced by computer programs,” he says. “The result is that new jobs tend to be lowly paid jobs in the services sector and high-paying jobs to a lesser extent.”

The fourth reason is the decline of unions in developed countries. “Up until the 1980s, unions had the muscle to win pay rises, improve conditions and shape politics, and there are few signs that unions are bouncing back to help deliver wage gains,” Mr Collins says.

 

Home-grown reasons

Domestically, the Reserve Bank of Australia (RBA) says a range of related factors also help explain the decline.

“Below-average growth in economic activity has translated into subdued growth in labour

demand,” it says. “At the same time, expectations for consumer price inflation have moderated to be below average.”

The decline in the terms of trade and falls in mining investment have weighed on economic activity and put pressure on firms to contain costs. “This has partly unwound the relatively strong inflation in Australian unit labour costs over the period of the mining boom,” the RBA says.

The end result is a kind of natural adjustment to a changing world, with Australia’s relative labour costs moving to retain some competitiveness against other advanced economies. That’s unlikely to change in the foreseeable future.

 

1

 

In part 2 of this series, we will examine what has happened to average debt levels over the past 20 years.

In part 3, we will bring this together with interest rates and consider: if real household income is down, and debt levels are up (and only made affordable by low interest rates), what happens if official interest rates rise?

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