Queensland Economic Advocacy Solutions

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If Queensland wants its long-term wages growth back we need an unemployment rate of 5.0%

The ABS today confirmed that wages growth in Queensland remains stubbornly and well short of the long-term average of 3.3 per cent. Queensland’s Wage Price Index grew by 2.2 per cent over the past twelve months and compares to a national rate of 2.1 per cent.

The factors that are causing slow wages growth are easing but continue to exist namely below-average economic growth; spare capacity in the labour market; low inflation; and lower output price rises due to greater competition.  More specifically:

  • Queensland’s domestic economy is now showing signs of good growth but continues to remain below trend rates;
  • There has been lower inflation and employees have focused more on the purchasing power of their wages in terms of the goods and services they can buy rather than the dollar quantum (i.e. they are concerned about their real as opposed to nominal wages).  Inflation is now only starting to rise;
  • Business output prices are also influencing wages.  With significant import competition and fierce domestic competition to attract and retain customers output prices have also been historically low.  This absence of growth in prices has imposed a major constraint on the capacity of employers to pay higher wages.  This constraint remains firmly in place; and
  • The extent of underemployment is starting to improve with working hours increasing in Queensland but plenty of progress is needed.  Workers have been after more hours of employment (underemployed) preferring to take them rather than a pay rise. Firms have been giving more hours to existing workers without needing a pay rise to entice or retain them. 

None of these constraints have left the State but each of them has eased slightly to give capacity for wages to lift fractionally but they remain over one per cent below their long-term trend. Queensland has now moved beyond the lowest wages growth in recent memory but progress will be painfully slow for some. 

This is a really important issue as wages growth is one of the main determinants of living standards for workers as they represent the largest source of household income.  It also impacts on household consumption and spend across the broader economy.

The degree to how much wages will rise in the future is a function of how much domestic economic growth can place demand on labour that in turn fuels wage pressures.

The Wage Phillips Curve that describes the inverse relationship between demand for labour (as measured by the unemployment rate) and wages growth in Queensland was once a good guide.  However over the past several years wage outcomes have totally detached themselves from the curve.  They are now only starting to come back towards the historical relationship that economists think should exist.

Provided this trend continues then we can reasonably conclude that if Queensland wants its wages growth back up over 3.3 per cent (the long-term average) then we need to reduce our State’s unemployment rate to between 5.0 and 5.5 per cent.


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