Wages growth won’t rise above inflation until 2024 the earliest. Here’s what it means for employers

Wages growth is not expected to rise above inflation until 2024 the earliest, meaning that workers can’t expect a real pay increase for at least another four years.

This date is linked to Treasury forecasts in the budget that predict wages growth of 2.25% in 2022-23 and 2.5% in 2023-2024, before finally exceeding inflation in 2024-25.

However, the 2024 date appears optimistic and is largely dependent on how quickly the government can drive down the unemployment rate.

Treasury predicts the unemployment rate, which currently sits at 5.5%, to decline to 4.5% by 2023-24 — a figure lower than before the pandemic.

But Reserve Bank governor Philip Lowe says the unemployment rate should be even lower than 4% to see wages growth rise above inflation.

What does this mean for employers? 

Richard Holden, professor of economics at the University of New South Wales, says in the shorter term wages growth can be driven by supply and demand in the labour market.

This is the reason the government aims to drive unemployment down to 4.5%.

The idea is if you have more people employed, there are fewer people for businesses to be competing over to employ, which results in wages going up.

So, until the labour market tightens and there are less people employed, businesses will have an easier time hiring staff.

“If unemployment does get driven down, then small and medium businesses will need to compete harder for staff,” Holden says.

What about productivity? 

In the longer term, real wages growth — being wages growth after inflation — is driven by productivity gains.

Productivity measures how well production inputs, such as labour and capital, are being used in an economy to produce a given level of output.

Small and medium businesses are regarded as key to strengthening productivity, with an OECD report finding SMEs that grow have a “positive impact on employment creation, innovation, productivity growth and competitiveness”.

What did the budget do to boost productivity?

The budget forecasts underlying productivity growth to average 1.5% each year over the next ten years, which is the same as the average over the last 30 years.

To encourage productivity, the budget includes spending on infrastructure, the digital economy, and even some mental health support.

For small and medium businesses, there’s also tax relief and JobTrainer to encourage apprenticeships.

Holden says the budget measures aimed at boosting productivity are fine, but what the budget lacked was a reduction in the company tax rate.

“What was really missing, and it was no surprise, was an attempt to get the company tax rate for businesses, which is 30%, down to a more internationally competitive rate,” he says.

France’s company tax rate is currently 32%, Portugal’s is 31.5%, and Australia sets it rate at 30%.

Next year, France will cut its company tax rate to 25.8%, meaning that Australia will have the second highest company tax rate in the OECD.

Xin Deng, senior lecturer in economics at the University of South Australia’s business school, says the budget is an election budget, so productivity is not a major concern.

“The budget is really about attracting the vote of particular cohorts. I don’t think the budget really has productivity in mind,” Deng says.

Deng says the biggest issue small and medium businesses have is a skill mismatch.

“What they want, they can’t really find in the workforce,” she explains.

“For large businesses, they probably have their own training facilities, and they are more attractive to employees, so they have a large pool of applicants,” she says.

But for small businesses, Deng says it’s more challenging to offer those same benefits.

“The budget could have done better in terms of creating new opportunities for businesses in the future.”

Will productivity drop if wages stagnate? 

Slow wages growth doesn’t necessarily result in a drop in productivity.

In economic terms, the relationship between productivity and wages is understood as one where increasing productivity leads to wages growth.

“Sluggish wages growth is sometimes a reflection of productivity not going up,” Holden says.

Holden says the fact that unemployment levels have been reasonable while wages growth has stagnated over the last decade is due to factors such as automation and the offshoring of jobs.

However, to what extent those trends are driving sluggish wages is uncertain.