After an election fought on rising costs of living and stagnant wages, the Reserve Bank of Australia has put a figure on what most people should get for a pay rise: 3.5%.
With inflation tipped to reach 7% by year’s end, this amounts to a real pay cut for most workers, and less than those on the minimum wage and awards were recently given.
So where did this figure come from? Is it a cap? And is it fair enough for workers to ask for more?
Stagflation: what is it and is it really happening in Australia?
Labor’s formulation in the election was that the cost “of everything is going up but your wages”.
Despite record low unemployment of 3.9%, wages are still only growing at about 2.4%. Because inflation is already much higher than that (5.1%), this means workers’ pay is shrinking in real terms.
Meanwhile, the costs of goods is increasing due to supply side shocks, with the war in Ukraine pushing up petrol prices and floods affecting the cost of fruits and vegetables.
The Coalition’s last budget contained a series of one-off measures, including halving the petrol tax for six months, but there’s no permanent solution for price rises.
Prime minister Anthony Albanese at the Marrickville Town Hall in Sydney on Thursday. During the election campaign he said he would ‘absolutely’ support an increase of 5.1% in the minimum wage. Photograph: Dean Lewins/AAP
Labor proposed a suite of policies to lift wages, including making a submission in the Fair Work Commission’s annual minimum wage review, supporting the work value case in the aged care sector, and promising same-job same-pay for labour hire workers.
Anthony Albanese said the lowest-paid workers should not see their pay go backwards, telling reporters he would “absolutely” support an increase of 5.1% in the minimum wage.
Shortly after it won the May election, the Albanese government asked the commission in a submission to give the lowest-paid workers an increase of this size.
Yes. The Fair Work Commission ordered a $40-a-week increase in minimum wages, which amounts to a 5.2% increase to the national minimum wage and 4.6% for award minimums.
The decision lifts the pay of 2.7 million workers, with most rises to take effect from 1 July; workers on awards in the aviation, tourism and hospitality sectors will have to wait for 1 October.
Although this still amounts to a real pay cut, it was considered a win for unions, which had asked for a 5.5% rise, and for the Albanese government, because it was a much higher increase than ordered in recent years.
As the Australian Council of Trade Unions secretary, Sally McManus, noted after the Fair Work Commission’s decision, minimum pay rises do not automatically flow to workers who are not covered by awards.
Although the safety net for wages is now higher, most have their pay set by pay deals negotiated between employers and employees.
In heavily unionised industries, such as construction, unions will ask for a higher wage increase, as much as 6%. Employers responded that minimum wage rises and workplace pay deals seeking rises of that size would increase pressure on inflation.
ACTU secretary Sally McManus. Photograph: Diego Fedele/AAP
On Tuesday, the Reserve Bank governor, Philip Lowe, weighed in on the debate about what wages should be in the medium term.
“I think it remains relevant – over time, we want to deliver you an average rate of inflation of 2.5%,” Lowe said.
“If the country can generate labour productivity growth of 1% … that means that labour costs in the steady state could grow at 3.5%; 2.5% for inflation and 1% for labour productivity growth.”
He said steady state wage increases in Australia should be about 3.5%.
“If wage increases become common in the 4% and 5% range, it’s going to be harder to return inflation to 2.5%, and then we’d be in a world where the economy would have to slow more and perhaps the unemployment rate would need to rise.”
Lowe said 3.5% was kind of “the anchoring point that I want people to keep in mind”.
“I know it’s difficult when inflation is higher than that, but, in the 1970s, we got into trouble because wages growth responded mechanically to the higher inflation rate,” he said.
“Then you have to have higher interest rates and a downturn to get inflation down. I’m hopeful that we can avoid that.”
Reserve Bank Governor Philip Lowe addresses the American Chamber of Commerce in Sydney on Tuesday. Photograph: Dan Himbrechts/AAP
McManus rejected the idea wages would automatically increase to levels that would push inflation higher.
“To think somehow the system is going to deliver across the board pay increases of 5% or 7% is boomer fantasy land,” she said.
“We don’t have centralised wage bargaining in this country, it would not be possible for that to happen.”
McManus said workers’ share of the overall economy is at the lowest level it has been since this has been measured.
“We keep hearing that productivity needs to rise and then we’ll get a pay rise, but productivity is rising and we don’t see those pay rises.”
The industrial relations minister, Tony Burke, said that Lowe’s figure of 3.5% was an “anchor point” – not a cap – and if the RBA brings inflation back to 2% to 3%, then 3.5% amounts to real wage growth.
Burke agreed with McManus that it would be “very difficult to imagine a scenario where that wage price index starts to get up to 4s and 5s”. Given the wage price index was only 2.4%, the task for government had not changed, he said.
With inflation going to 7%, workers’ wages are going “significantly backwards”. Burke said although the RBA didn’t want wage rises of 4% or 5% to become too common, that did not mean no workers would or should receive 4% or 5%.
Workers’ real pay is falling, and wages are not to blame for surging inflation. If everyone got pay rises of 5% to 7% overnight, it might add to inflationary pressure, but nobody thinks that is likely.
Lowe’s figure of 3.5% is higher than the current wage price index (2.4%), so there is room for people to ask for more. The 3.5% figure is not a cap, and until inflation is back at 2% to 3%, higher rises are not excessive.
Annual pay raise budgets in the U.S. are getting a bump in 2023 from the longtime status quo.
“The increases have gone up from what had been 3% for many years,” David Turetsky, VP of consulting at Salary.com, told me. “It’s now budgeted for 4% and potentially higher for next year.”
New data released by Salary.com, a software company that provides compensation data and analytics, found that the median pay increase of 4% is continuing an upward trend that began in 2022.
For salary budget planning, the factors usually considered in raises include a general increase (which considers inflation), equity/market adjustment, and merit increases, according to the data.
Unemployment is low right now, Turetsky says. “There are skilled and unskilled roles that are going unfilled,” he says. “And that’s putting a lot of pressure on the starting rates for those jobs.”
He continues, “We usually see job switchers get large pay increases when they go to other places. Now we’re seeing people who are what we call ‘stayers,’ people who stay in roles, are saying, ‘Well, what about me?’ And so these 4% increases are for the job-stayers.”
For the past 10 years, since recovery from the financial crisis of 2008, the average wage increase percentage has been about 3%, Lori Wisper, a managing director at the advisory firm Willis Towers Watson, recently told me. Coming up with a salary budget “is not arbitrary for most companies, especially big companies, where even a 10th of a percent represents millions, maybe even hundreds of millions of dollars in payroll,” Wisper said.
Salary.com’s survey of more than 1,000 companies in a range of industries conducted in June found that the median 4% increase planned for 2023 is across all employee categories—executives, managers, and exempt and nonexempt employees. However, that data showed that the actual median increase in 2022 for executives was 3.5% compared to 4% for all other categories.
“I think it’s saying that executives basically said, ‘Look, we’re going to take a little bit less so we can give the other groups more,’” Turetsky says. “Actually, executive salary isn’t typically the highest driver of pay. Usually incentives or stock or something else is a larger component of pay.” Stock and stock-option awards certainly boosted executive compensation in 2021. For example, the median pay packet for leaders of S&P 500 companies rose roughly 12% to $14.7 million that year.
Salary.com also found that when it comes to salary percentage increases, the health care industry was an outlier. Health care median total increases in 2022 were just in the 3% range. Salary increases in the health care industry are impacted by reimbursement limits imposed by private and federal health insurers, according to the report.
Although there’s historic inflation this year, smaller organizations (under 500 full-time employees) were more likely to provide cost of living increases than larger organizations, according to the report. Average cost of living increases for smaller organizations were in the range of 2.5–2.7% higher than the typical 2% provided by larger organizations.
When it comes to overall salary percentage increases, “a lot of companies are planning to do more next year,” Turetsky says. A quarter of employers surveyed plan to give increases in the range of 5–7%. And 48% said they planned on salary budget increases that are higher or significantly higher than in 2022.
“Salary budgeting time [for next year] is actually right now,” he says. “HR is working with their CFO partners to basically say, ‘How much can we afford to pay?'”
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“We are in this for as long as it takes to get inflation down. So far, we have expeditiously raised the policy rate to the peak of the previous cycle, and the policy rate will need to rise further.”
—Federal Reserve Vice Chair Lael Brainard said in remarks prepared for a speech in New York, as reported by CNBC.