Real wages have fallen for the first time since September 2023 after inflation outpaced annual wage growth, according to the latest data released on Wednesday.
With inflation running at 3.8%, annual nominal wage growth of 3.4% leaves real wages declining by 0.4% in the year to December.
The December quarter saw wages rise 0.8%, in line with economists’ expectations, with both public and private sector wages increasing by 0.8% over the period. However, on an annual basis, public sector wage growth outpaced that of the private sector.
The renewed decline in real wages adds pressure on Treasurer Jim Chalmers, as economists continue to scrutinise government spending levels. Spending is currently at its highest level in 40 years outside of the pandemic period, and some economists argue it is contributing to inflation remaining outside the Reserve Bank of Australia’s 2–3% target band, keeping interest rates higher for longer.
Public sector wages, spending in focus
Concerns have also been raised about the size of the public service and the pace of wage growth within government roles. Commonwealth wage costs have climbed 9.5%, exceeding $40 billion.
The Reserve Bank has downgraded its forecasts for its preferred wage measure – real average earnings per hour – to 0% growth by June, down from a previous estimate of 0.4%. It now expects growth of 0.1% by year-end, also revised down from 0.4%.
Despite softer wage expectations, the central bank continues to forecast headline inflation will remain above its formal 2–3% target range for the rest of the year.
Former RBA governor Philip Lowe joined other economists in questioning the sustainability of elevated government spending amid weak productivity growth.
“Productivity capacity of the economy is not growing very quickly and the government wants to keep spending and wants to keep offering people handouts, which adds to demand, which in the normal course of events would be fine.
"But if the supply is not growing, you can’t do it and if you try to do it then interest rates have to go up,” Dr Lowe said in his new role as chair of the ASX’s corporate governance advisory body.
Meanwhile, fresh data from employment platform Employment Hero suggests wage pressures are more pronounced among small and medium-sized businesses (SMBs) than reflected in official figures.
"While ABS figures may show wage growth hovering around 3.4% for the private sector, the latest Employment Hero data shows those figures are much stronger for the SMB sector, which represents 99% of all Australian businesses. Across the hundreds of thousands of small and medium businesses on the Employment Hero platform, wages are up 5.3% year-on-year," Ben Thompson, CEO and co-founder, Employment Hero, said.
"Small businesses are paying more because they have to. They're competing for talent against larger employers with deeper pockets and in a labour market that's still tight in pockets like manufacturing, science and technology.
"What's particularly striking is where the wage pressure is strongest. Workers aged 55 and over are seeing the biggest gains at 5.9% year-on-year, flipping the common assumption that wage growth favours younger workers. Experience and judgement are commanding a premium, particularly as employers look for people who can navigate complexity without hand-holding. At the same time, record numbers of young people entering the workforce are easing pressure on starting salaries.
"Coming off this month’s rate rise to 3.85%, today's number puts employers in an increasingly difficult position. Wages are growing faster than official figures suggest, costs are rising, and the RBA is signalling rates will stay higher for longer.”