Pay rises: why workers are not getting gains near inflation

Painful increases in the cost of living are prompting more calls for big wage increases, but more subdued rises have a silver lining.

Everyone wants a big pay rise, and you can’t blame people after housing, grocery and fuel costs have surged in the past year.

But some demands from unions and employees threaten to prolong the pain of rising living costs, which will hurt not only workers but also retirees who rely on their nest eggs.

In recent weeks, there have been pay demands and strike action threats across several states and industries, including bus drivers, teachers and even ABC journalists seeking 6 per cent a year for three years.

The problem facing workers is that wages growth nationally was 3.3 per cent last year, while Consumer Price Index inflation surged 7.8 per cent – meaning, in real terms, wages went backwards.

Demands for large wage increases can spark a price spiral. Picture: iStock

But if everyone demands pay rises matching inflation, things could get very bad for interest rates and the economy.

Nobody wants a wage-price spiral where inflation rises, wages rise to match it, businesses put up prices to pay those higher wages, inflation remains painfully high, and so on. This leads to high interest rates lingering for longer and people’s savings being eroded.

Hopefully, inflation has peaked, with early signals suggesting it has, and if wages growth remains relatively subdued we could see rate cuts coming sooner and be able to avoid a recession.

In the meantime, workers will struggle with reduced purchasing power – and hope it doesn’t hang around for too long.

The national minimum wage last year rose 5.2 per cent, well above overall wage rises and twice as much as public sector wage rises of 2.5 per cent, but nobody would begrudge the lowest paid Australians receiving more relief. Another strong rise in minimum wages should come this year, helping retain the nation’s status as having the highest minimum wage in the world.

Pay rises to those on the lowest incomes helps the economy more than giving extra money to wealthy workers and savers because battlers spend almost every dollar they earn instead of squirrelling it away for the future.

Australia’s economy will need all the help it can get this year as the Reserve Bank’s run of 10 straight interest rate rises bites into household budgets and business borrowing and spending. The RBA is walking a tightrope, hoping to avoid a recession while using its sledgehammer of interest rate rises to bash down spending, consumer demand and inflation back towards its target range of 2-3 per cent.

Don’t expect to be counting wads of extra cash this year. Picture: iStock

Not everyone thinks a recession will be terrible. Some business owners and managers may silently hope for one because a recession results in rising unemployment, reducing staff shortages and making it easier to hire and keep workers.

If your wage is not rising as much as you want, it also has something to do with our employment system.

HSBC chief economist Paul Bloxham says Australia has a large proportion of workers on multi-year enterprise- bargaining agreements.

“They are continuing to hold back the upswing in wages growth,” he says.

Remember that just 18 months ago inflation was running at only 3 per cent, and a year before that only 0.7 per cent in the middle of Covid.

Price rises are painful now, but people’s patience will pay off if the RBA’s rate rises push inflation back down quickly.

If wages spiral higher, Australians may have to be patient for a lot longer in this cost-of-living crunch.

Originally published as Pay rises: why workers are not getting gains near inflation