Declining real wages

One of the defining features of the economy over the last year has been the decline in real wages.

Nominal wages have continued to increase, with the most recent statistics showing wage growth of 2.6% over the last year. In normal circumstances this is a pretty healthy rate of wage growth, and it would be worth celebrating, except for the fact that prices are increasing much quicker.

Over the same time period consumer prices have increased by 6.1%, which means that real wages (adjusted for inflation) have decreased by roughly 3.5% over the last year. The sad reality is that many working Australians are getting poorer.

The silver lining on this economic cloud is that the decline in real wages has helped to put downward pressure on the unemployment rate. Fundamentally, unemployment is caused by wages exceeding the marginal productivity of some workers, which makes those workers effectively unemployable. The downward shift in wages has meant that more workers have now become employable, and the result has been relatively low levels of unemployment.

This is cold comfort to productive working people who are seeing their wages devalued every month through higher prices. Inflation is an insidious tax on productive and prudent people, and it is vital that monetary and fiscal policy be focused on getting inflation under control. At the same time, Australia desperately needs a renewed productivity agenda — which is the only way to increase real wages without inadvertently pushing some workers out of the workforce. The government will have an opportunity to address both of these issues in their upcoming mini-budget, scheduled for October.