For the past 10 years, budgets have been predicting a continuation of the 4%+ wages growth that workers enjoyed under the last Labor government. And every year, those predictions have proven comprehensively wrong.
After a brief lapse into realism during the pandemic, the government is back to Pollyanna mode, insisting that we’re on the verge of a wages surge. Wages growth forecasts have been upgraded for every year in the budget compared to the Mid-Year Economic and Fiscal Outlook (MYEFO) — up to 2.75% this year; 3.25% in 2022-23 and 2023-24; and hitting 3.5% in 2024-25 and 2025-26.
It’s still well short of the growth levels that workers had under Labor, but anything with a three in front of it is better than what families have seen since the Coalition got into government. It’s also well above forecast inflation levels, meaning real wages growth of, eventually, 1% in 2026 (yes, an amazing 1% — but before tax, remember).
Are the forecasts believable? Well, if we don’t get wages growth now, we’re never going to get it: the government forecasts unemployment to be 3.75% for the next three years — a sustained period of record-low unemployment. That should finally start to push wages growth up, according to economists, despite previous strong jobs booms — like the one under Malcolm Turnbull — failing to move the dial.
But mitigating against that optimism are a couple of things. One is the return of high immigration. The government forecasts more than 210,000 in net migration in 2023-24, “increasing to 235,000 persons in 2024-25 and 2025-26″. As employers have been demanding, the government will once again open Australia to high levels of inflows of temporary workers, which will help offset wage pressures.
The other is the systematic imbalance of negotiating power between workers and employers now built into Australia’s industrial relations system, including the slow pace of turnover of enterprise agreements, low levels of unionisation, anti-union federal government agencies, and the refusal of governments of both political persuasions to allow decent public sector wages growth for hundreds of thousands of public sector workers.
There’s another interesting aspect to the government’s wage forecasts. According to economic theory, a sustained period of unemployment below the Non-Accelerating Inflation Rate of Unemployment (NAIRU) will push inflation up. What is the estimated current level of the NAIRU in Australia? According to the budget papers:
Treasury has previously assumed the NAIRU to be 4¾ per cent, based on historical economic data and econometric analysis. However, the unemployment rate has fallen faster and lower than previously expected, without generating substantial wage increases.
The underlying level of spare capacity and underemployment present in the economy may not have been captured in the previous NAIRU assumption. Additionally, structural changes may have altered the wage and price setting dynamics in a way which was not fully reflected in earlier estimates.
As a result, Treasury now estimates our NAIRU is 4.25%. But wait — isn’t our current unemployment rate therefore below the NAIRU already? And forecast to go lower? For the next three years, our unemployment rate will be below NAIRU. Treasury says that from 2024 “the unemployment rate is assumed to steadily transition to the assumed non-accelerating inflation rate of unemployment (NAIRU) of 4¼ per cent”.
So during the intervening period — three years — surely inflation will increase? In fact, according to the budget papers, inflation is going to fall from its current high level to 3% next year (the top of the Reserve Bank of Australia’s range — then fall further to 2.75% for the following two years, before reaching 2.5% in 2026.
In Australia’s magical economy, we stay below NAIRU for several years while inflation falls. Remarkable, isn’t it? And very convenient.
