Economists expect wages to start rising at their fastest pace in years with tens of thousands of people getting back to work in December despite the Omicron outbreak, but they warn it might take months for pay packets to start increasing, and it may not be by enough to keep up with inflation.
Worker shortages exacerbated by staff being forced to isolate due to the virus, continued international border restrictions and a tightening labour market could start putting pressure on wages this year. However, surging prices could still leave wages struggling to keep up.
The labour market has turned around rapidly since the start of the pandemic when many lost their jobs and queues were seen outside Centrelink.Credit: Louie Douvis
The Australian Bureau of Statistics is due to release labour force data for December on Thursday and investment bank Citi is expecting an improvement of 85,000 jobs, while the Commonwealth Bank predicts employment jumped by 60,000 jobs with the jobless rate falling to 4.4 per cent from 4.6 per cent the month before.
CBA head of Australian economics Gareth Aird also forecasts both wages and inflation to start increasing, with the cost of petrol, food, clothing and recreation rising.
“We expect both inflation and wages pressures to emerge sooner and stronger than the RBA anticipates,” Mr Aird said.
The Reserve Bank’s forecasts, which were published pre-Omicron, had the unemployment rate falling from 4.75 per cent in December 2021 to 4.25 per cent in December 2022. The jobless rate spiked at 5.2 per cent in October due to the effects of the Delta outbreak on the workforce and at the height of the pandemic in 2020 hit 7.4 per cent.
The RBA forecasts expect underlying inflation to be 2.25 per cent for the year to December 2021 and 2.25 per cent this calendar year. Wages were forecast to rise in line with inflation last year and 2.5 per cent in 2022. Wages are then expected to grow 3 per cent in 2023, the fastest rate in a decade.
AMP Capital chief economist Shane Oliver said Omicron could put more pressure on wages due to labour shortages as more people isolate due to the virus.
“Freight companies applying a surcharge to cover higher labour costs as a result of Omicron is consistent with this,” Dr Oliver said. “That said the disruption caused by it looks like it will be relatively short and sharp as it rips through the population and then – based on other countries experience – subsides.”
He expects to see unemployment heading closer towards 4 per cent this year with wage growth at 2.8 per cent, accelerating in the second half of the year.
But one of the factors keeping wages from rising quickly is the framework through which wages are set by employers, which EY senior economist Johnathan McMenamin said keeps pay “sticky” as many employment agreements are negotiated every few years.
ABS data shows individual agreements for setting pay are the most common, with 38 per cent of earners on these contracts, however collective agreements are still widespread at 35 per cent of the workforce. About 23 per cent of employees are paid in line with an award.
“This means we expect the acceleration in economy wide wages growth to be slow,” Mr McMenamin said.
Despite this, he expects faster paced growth in 2022. Data released on Wednesday by the official statistics bureau also showed signs of strength in December, with payroll jobs higher than in 2020 in all states and territories.
“The labour market finished on a high last year and all indications are that, despite the challenges faced by Omicron, solid demand for workers will continue into 2022,” Mr McMenamin said. “At the end of 2021 there was less than two unemployed people per job vacancy – a historic outcome – and a solid indication of a tight labour market.”
Deloitte Access Economics partner Chris Richardson expects wages to rise 2.4 per cent in 2022 and 2.8 per cent in 2023, with inflation up 2.5 per cent this year and 2.2 per cent next year.
His business outlook said the wage situation was improving but from a “standing start”. Wage growth hit a record low 1.4 per cent in 2020 as coronavirus hit earnings.
He said jobs have rebounded significantly during the pandemic without a significant acceleration in wages but the key to driving pay growth in the short term was pushing down unemployment and underemployment.
“Even with Australia’s remarkable jobs recovery before Delta knocked on our door, we are still a long way off the point at which bargaining power falls back into the employee’s hand in a broad sense,” he said, adding the unemployment rate may need to be below 4 per cent for this to happen.
“So there’s not much to see yet on the wage front, and it is likely to be still some time before there is in an aggregate sense.”
HSBC’s Paul Bloxham said labour market participation returned to record highs after the Delta lockdowns, but wages growth remained slow despite borders remaining closed and constraining the in-flow of some skills. His central case for the unemployment rate is for it to remain in the 4 per cent range, but he said the tightening of the labour market more rapidly than expected is possible.
“But even then, an across-the-board lift in wages growth to 3 to 4 per cent ... is likely to take some time.“
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