Wages Prices and Profit in 2014

An analysis by Canberra University’s National Institute for Social and Economic Modelling shows that wages rose by only 0.1 per cent in the quarter, one of the slowest rates on record, while living costs rose by 0.7 percentage points.

NATSEM principal research fellow Ben Phillips said the net 0.6 per cent fall in the December quarter meant living standards had now dropped for three of the past five quarters. The only increases, in the middle of last year, were the result of interest rate cuts rather than wage growth.

“We have had growth in our standard of living of around 66 per cent since our last major recession in 1990, so it should not surprise that we’d run out of steam at some point,’’ Mr Phillips said. “That point may well have been reached.”

NATSEM research shows that declining standards of living are a problem not only for future generations but one that confronts the government now. Over the full 2013 year, wage growth exceeded living costs only by 0.6 per cent, which was well below the long-term average growth of 2.6 per cent, which prevailed over both the 11-year stretch of the Howard government and the six years of the Rudd-Gillard government.

During the latter half of the Hawke-Keating governments, living standards rose by an average of 0.9 per cent. Partial data suggests there was a fall in living standards during the early years of the Hawke government when wage increases were deliberately kept below living costs under the government’s “accord” with the union movement.

Mr Phillips said prices for principal exports would not pay for further income growth, while there was no potential for income tax cuts, little scope for interest rate reductions and the jobs ­market was weak.
“It is hard to be bullish on household standards of living in the short term,” he said.

Commonwealth Bank chief economist Michael Blythe said inflation was being pushed ­higher by domestic structural forces that were beyond the Reserve Bank’s influence.

He said a lack of job security was leading to the fall in wages growth. “Wages are running behind CPI inflation with real wages falling,” Mr Blythe said. “Looking into 2014, it is a trend that will probably continue.”