Wages and prices at a glance. Wage Price Index (WPI) June - 1.0% 3.7% Full-time average weekly ordinary time earnings (AWOTE) May $1, % 3.

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1 Wages Report Issue 4, September 2012 Public sector budget cuts are making themselves felt in the pay packets of workers across the country, with public sector workers seeing the lowest rate of wages growth in around a decade. Overall wages growth remains solid and steady, around its long-run average. There are signs that the gap between the states with fast-growing wages and those with slow-growing wages is starting to widen again, after narrowing in the wake of the GFC. This report is primarily about earnings at work, but wages aren t the only thing that matters for the living standards of working people. Australian unions have long recognised that the social wage the services and safety net provided by government stands alongside fair conditions at work as a vital component of our social protection system. Newstart Allowance is a bedrock component of that system. The current Allowance is too low to ensure that workers aren t exposed to the risk of poverty if they lose their jobs. The ACTU recently provided a submission to a Senate inquiry on this issue, which is summarised as a feature in this Wages Report. This report also includes a feature on real producer wages, which are average wages adjusted for inflation using a measure of the prices that businesses receive for their output. In recent years the prices that Australian businesses receive for the goods and services they sell have risen more rapidly than the prices of the goods and services that workers buy with their wages. This is partly due to the dramatic rise in Australia s terms of trade, which measures the price of exports relative to imports. As a result, workers purchasing power has increased at a greater rate than businesses labour costs, but this trend is likely to be coming to an end. The divergence between producer and consumer wages also further undermines the outrageous claims that Australia has experienced an inflationary wages breakout in recent years. Wages and prices at a glance Latest quarter Level Quarterly change Year-ended change Wage Price Index (WPI) June - 1.0% 3.7% Full-time average weekly ordinary time earnings (AWOTE) May $1, % 3.4% Real full-time AWOTE May $1, % 2.2% Total average weekly earnings (AWE) May $1, % 3.7% National Minimum Wage per 38 hour week From 1 July $ % 2.9% Average wage increase in collective agreements March % Headline CPI June - 0.5% 1.2% Underlying CPI June - 0.6% 2.0% Employees cost of living (LCI) June - 0.5% 0.7% Source: ABS, FWA, DEEWR. Underlying CPI is the average of the trimmed mean and weighted median. All figures are seasonally adjusted other than the CPI, ALCI & NMW. The gender pay gap is calculated using full time adult AWOTE. Real AWOTE is deflated using the CPI. The average wage increase in collective agreements is the AAWI from DEEWR s Trends in Federal Enterprise Bargaining publication. pps =percentage points. ACTU Wages Report September 2012 Page 1

2 Wage Price Index Wages have continued to grow at around their average pace, with the Wage Price Index (WPI) rising by 3.7% in the year to the June quarter. The pace of growth accelerated a little, up from a quarterly rate of 0.9% in the March quarter to 1% in June. Figure 1: Growth in the WPI (year-ended) 4.5% Despite a slight increase in seasonally-adjusted growth in the June quarter, public sector wages are still growing at around their slowest pace in a decade. Figure 3: Growth in the public sector WPI (year-ended) 5.0% 4.5% 4.0% 4.0% Long-run average Long-run average 3.0% 3.0% 2.5% Trend Seasonally adjusted 2.0% Source: ABS 6345 and ACTU calculations. Both the public and private sectors saw the pace of wage growth increase slightly, but public sector wage growth (3.2%) remains well below its long-run average of 3.9% per year. Private sector wages are growing slightly faster than their long-run average, but slower than in the pre-gfc period. Figure 2: Growth in the private sector WPI (year-ended) 4.5% 4.0% 3.0% 2.5% Long-run average Trend Seasonally adjusted 2.0% Source: ABS 6345 and ACTU calculations. 2.5% Trend Seasonally adjusted 2.0% Source: ABS 6345 and ACTU calculations. There are few surprises in the State numbers, with WA wages continuing to grow strongly while Tasmania and South Australia lag the pack. Somewhat surprisingly, the ACT recorded solid wages growth over the year, despite the sluggish growth recorded in the public sector. Figure 4: Growth in the WPI by State (year to June quarter) 0% 1% 2% 3% 4% 5% WA 4.8% ACT 4.0% Qld 3.8% Australia 3.7% Victoria NSW NT SA 3.4% Tas 3.2% Source: ABS In the early 2000s, the gap between the fastest State-level wages growth and the lowest growth was typically around 1 to 1.2 percentage points. In the mining boom period before the GFC, wage growth in the states ranged from 5.9% in WA to in Tasmania a gap of 2.3 percentage points. This gap between wages growth across the states dropped in the wake of the GFC, returning to more normal levels, but there ACTU Wages Report September 2012 Page 2

3 are signs that it is starting to rise again, with a gap of 1.6 percentage points between WA and Tasmania in the June quarter. Figure 5: Gap between highest wages growth and lowest wages growth by State % points 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% Source: ACTU calculations based on ABS The dotted line shows the percentage point gap in seasonally adjusted, year-ended WPI growth across the States/Territories for each quarter. The red line is a LOESS trend. The upward trend in the gap between rates of wages growth across the states is mostly due to WA and the other fastgrowth states racing ahead, rather than the slow-growth states falling further behind. Wages growth across industries ranged from 5.2% in mining to just 2.6% over the year in Health care and social assistance, with the Retail trade industry recording only a 2.7% increase in the WPI over the year. The wholesale trade and mining industries recorded 1.6% and 1.5% wages growth (respectively) in the June quarter alone. Wages in Retail (0.2%) and Accommodation and food services (0.2%) barely rose in the June quarter workers in these industries are more likely to rely on adjustments to minimum wages, which took effect after the June quarter finished (from 1 July, the beginning of the September quarter). Figure 6: Year-ended WPI growth by industry 0% 1% 2% 3% 4% 5% 6% Mining 5.2% Wholesale trade 4.8% Professional, scientific and 4.5% Construction 4.2% Financial and insurance 4.1% Electricity, gas, water and 3.8% Manufacturing 3.8% Transport, postal and 3.8% Other services 3.7% Australia 3.7% Education and training 3.6% Administrative and support 3.6% Arts and recreation services Public administration and Information media and Rental, hiring and real estate Accommodation and food 3.4% Retail trade 2.7% Health care and social 2.6% Source: ABS 6345, original. The WPI growth in the Wholesale Trade industry is particularly notable. The growth over the past year is the largest ever recorded in that industry (these data go back to 1997). The industry did see its wages growth plummet further than the national average during the GFC, so there could be some catch up wage growth in the industry, and the industry-level data aren t seasonally adjusted. Figure 7: WPI growth in Wholesale Trade (year-ended) 5% 4% 3% 2% Wholesale industry All industries 1% Source: ABS 6345, original. ACTU Wages Report September 2012 Page 3

4 Feature: The inadequacy of Newstart Allowance At the 2012 ACTU Congress, unions endorsed a policy that calls on the Government to increase Newstart Allowance. In line with this policy, the ACTU has provided a substantial submission to the current Senate inquiry into the adequacy of government allowances. The full submission can be found at: actu.org.au/publications/workingaustraliapapers/. The submission argues that income support should protect unemployed people from poverty and help them to find work. Allowing the social wage to erode over time doesn t just affect people who are currently out of work; it exposes all workers to greater risk of poverty if they lose their job. With a greater proportion of workers now in insecure work, it s likely that more workers will need to rely on the income support system at some point in their working lives. Newstart is now at its lowest level relative to average wages in over three decades, and its lowest level relative to minimum wages in two decades, as shown in Figure 8. Australian workers on average wages who lose their jobs experience a larger fall in their income than counterparts in any other OECD country (see Figure 9). their Figure 8: Single adult Newstart payment as a proportion of the National Minimum Wage and average full-time wages Ratio 50% Newstart as a proportion 45% of the NMW 40% 35% 30% 25% 20% Newstart as a proportion of AWOTE 15% Mar 82 Mar 92 Mar 02 Mar 12 Source: AWOTE from ABS 6302 and ABS 6304, via Foster Minimum wage data are the NMW/FMW or the equivalent C14 rate. Newstart rates are from FaHCSIA. Figure 9: Unemployment benefits as a % of wages in OECD countries (including housing benefits where applicable) Israel Luxembourg Portugal Netherlands Switzerland Slovenia Czech Republic France Belgium Iceland Slovak Republic Norway Germany Denmark Spain Canada Italy Ireland Hungary Japan Austria Estonia Finland Poland United States Sweden Turkey Greece Korea United Kingdom New Zealand Australia Source: OECD Tax-Benefit Models Charts show the net replacement rates for the first year of unemployment. There are two main poverty lines that are used in Australia the Henderson line and the 50% of median income line. In the mid-1990s, Newstart was just enough to ensure that a single adult wouldn t be in poverty the payment was roughly equal to the 50% of income line. Now, the payment is only around two-thirds of the poverty line, whichever line is used. In other words, Newstart would have to increase by around 50% just to ensure that single adult unemployed people wouldn t be in poverty. Whichever measure is used, it s clear that the single rate of Newstart Allowance is inadequate. The ACTU s submission to the inquiry demonstrates that Newstart isn t sufficient to allow people to purchase a low cost basket of goods and services that are needed to get by, and that Newstart recipients experience very high levels of financial stress and deprivation Unemployment benefit as a % of average fulltime wage (net) ACTU Wages Report September 2012 Page 4

5 Figure 10: Newstart as a proportion of two poverty lines Ratio 100% 90% 80% 70% Source: Newstart rates from FaHCSIA. Henderson PL is from the Melbourne Institute. 50% of median PL is an ACTU calculation based on ABS The ACTU has called for the payment to be increased by $50 per week. Other organisations, including ACOSS, have made the same recommendation. Unusually, this issue has seen common ground across not only unions and community sector, but also the Business Council, conservative economists like Judith Sloan and Ian Harper, the OECD, and the panel of the Henry Review. The $50 per week increase that the ACTU and others have called for arises from the Henry Review s recommendation that singles on Newstart should receive around two-thirds of the couples rate the same relativity as for single pensioners. The ACTU s submission rejects the idea that an increase in Newstart will result in people choosing unemployment over work. For a start, a $50 per week increase in Newstart would still mean that unemployed people could roughly double their take-home incomes by getting a full-time job at the National Minimum Wage, so substantial financial incentives to work would remain. The submission also argues that paying very low, sub-poverty level income support results in people suffering a downward spiral of financial circumstances, unable to meet the costs of living, the costs of job search, and the costs of making themselves available for work. Forcing people into poverty doesn t help them find work. Newstart as a % of Henderson poverty line Newstart as a % of 50% median poverty line 60% The ACTU has also called for Newstart to be indexed to a measure of wages, rather than just the CPI. Pensions, like the Disability Support Pension, are already indexed to wages. Increasing Newstart and improving its indexation arrangements will reduce the gap between DSP and Newstart. The large and growing gap between the two payments can mean that some DSP recipients are fearful of taking paid work when they re able to, for fear that they ll end up on the poverty-level Newstart Allowance. In the 90s, Newstart was over 90% of the DSP rate. It s now about twothirds of DSP. Unless the indexation arrangements are changed, it will be less than half of the DSP in less than 20 years. Figure 11: Growing gap between DSP and Newstart 2011 $ per week 700 Projection DSP Newstart Source: ACTU calculations based on FaHCSIA, ABS 6401, Treasury. The ACTU s submission also includes valuable input from the CPSU, which surveyed its members at the Department of Human Services to get their perspective on the income support system. These workers are familiar with the day-today reality of the lives of income support recipients, and they told the CPSU of the effects of the low payment rate on unemployed people. Among other things, they also talked about the extra difficulties that people face as a result of staffing pressures in Centrelink and elsewhere. A range of other issues are identified in the ACTU s submission, particularly relating to changes in the labour market and the rise of insecure work and the implications of this for the income support system. We called for a broader independent inquiry to examine a range of options for further reforms to income support payments. ACTU Wages Report September 2012 Page 5

6 Other wages measures The WPI gives the most reliable sense of wages growth, because it measures the change in wages for a fixed basket of jobs. This means it isn t affected by compositional change, like if employment in high-wage industries (such as mining) grows faster than overall employment. However, the WPI doesn t tell us the level of wages, ie. the amount, in dollar terms, that Australian workers receive on average. The best source for that information is the ABS Average Weekly Earnings publication. Unfortunately, the ABS will soon start releasing AWE only twice a year, rather than quarterly as it has for the past several decades. AWE will therefore only be included in every second issue of the ACTU Wages Report in the future. Average wages for ordinary time work by full-time adults known as AWOTE - rose by 3.4% over the year to May 2012 and just 0.4% in the quarter. This sluggish wages growth is the lowest in over five years, and well below the long-run average of 4.5% yearly growth in AWOTE. 7% 6% 5% 4% 3% 2% 1% Figure 12: Growth in AWOTE (year-ended) Source: ABS 6302 and ACTU calculations. Still, because inflation has fallen in recent quarters, this modest wages growth still translated into solid growth in real (CPI-adjusted) average wages growth of 2.2% over the year to May Overall AWOTE growth (year-ended) Long-run average 0% May 02 May 04 May 06 May 08 May 10 May 12 The average ordinary time earnings for full-time adults was $ in May 2012, equating to annual earnings of around $ The average for men was $ (around $ per annum) while the average for full-time women was $ , or around $ annualised. This means that the gender pay gap in May was 17.5%, which was unchanged from February and down slightly from May 2011 (17.7%). The gender pay gap has risen since the mid-2000s, after falling slowly but steadily for a couple of decades (see Figure 13). 19% 18% 17% 16% 15% 14% 13% Figure 13: Gender pay gap (AWOTE basis) Trend 12% Aug 1994 Aug 1998 Aug 2002 Aug 2006 Aug 2010 Source: ACTU calculations based on ABS Average weekly earnings for all employees, including parttime workers, was $ in May, or around $ on an annualised basis. This rose by 1.5% in the quarter and 3.7% over the year, but this wage measure is strongly affected by compositional change in the labour market, like a changing share of the workforce who work part-time as opposed to full-time hours. There s a lot of difference in average wages for full-time workers across industries, as you d expect. The best paid fulltime workers are in Mining, earning an average $ per week for their ordinary hours. Full-time workers in Accommodation and Food Services earn an average of $ per week. Seasonally adjusted ACTU Wages Report September 2012 Page 6

7 Figure 14: Full-time adult AWOTE by industry Mining $2, Professional, Scientific and $1, Financial and Insurance $1, Information Media and $1, Electricity, Gas, Water and $1, Education and Training $1, Public Administration and $1, Wholesale Trade $1, Transport, Postal and $1, Construction $1, All Industries $1, Health Care and Social $1, Rental, Hiring and Real $1, Administrative and Support $1, Manufacturing $1, Arts and Recreation Services $1, Other Services $1, Retail Trade $ Accommodation and Food $ Source: ABS Some of the typical relationships between wage rates in Australian industries have started to change in recent years. Until the GFC took hold, average wages in construction and manufacturing were around the same level for full-time adults. In inflation-adjusted terms, AWOTE in each industry was around $1180 in February Since then, real wages in manufacturing have tracked sideways (so average wage gains have been more or less equal to the inflation rate), whereas construction wages have increased solidly. Figure 15: Real wages (AWOTE) $1,400 $1,350 $1,300 $1,250 $1,200 $1,150 $1,100 $1,050 Manufacturing Construction $1,000 May 02 May 04 May 06 May 08 May 10 May 12 Source: ACTU calculations based on ABS 6302 and ABS Similarly, the retail and wholesale industries used to see their average wages grow at around the same pace, with wholesale wages consistently around $200 per week higher than retail (in 2012 dollars). In recent years though, real average wages in retail have been flat, while real AWOTE in wholesale trade has increased by nearly $200 per week since the GFC. Figure 16: Real wages (AWOTE) $1,500 $1,400 $1,300 $1,200 $1,100 $1,000 $900 Retail Wholesale $800 May 02 May 04 May 06 May 08 May 10 May 12 Source: ACTU calculations based on ABS 6302 and ABS DEEWR also releases information on the average annualised wage increase for employees covered by collective agreements. The most recent Trends in Federal Enterprise Bargaining report shows that the average wage increase in collective agreements lodged in march was 4.5%, up strongly from 3.9% in the December quarter. DEEWR suggested that this rise is due to the particular mix of enterprise agreements approved in the quarter, with no large agreements in some industries that typically record modest wages growth and large agreements registered in the Construction and Health Care industries. A final key wages source is the National Accounts. This shows the total compensation of employees across the economy, as well as the change in the level of total compensation per worker. Information about these measures is included in the ACTU Economic Report, the next edition of which will be released following the June quarter National Accounts. ACTU Wages Report September 2012 Page 7

8 Feature: Real producer wages If wages go up in dollar terms by 10%, but prices also go up by 10%, then workers living standards remain unchanged. What matters for living standards are real wages wages adjusted for inflation. The CPI is usually used for this purpose. However, the prices that workers pay for the goods they buy aren t necessarily the same as the prices that producers receive for the items they sell. Usually the prices of producers output and the price of goods and services bought by consumers tend to rise at a similar pace, but recent years have seen these price measures diverge. The primary cause of this is the terms of trade boom the price that Australian firms receive for their exports has soared, while the price we pay for imported goods has plummeted. Figure 17: Real consumer and producer wages in Australia (Index; June 2004=100) Index Real 110 consumer wage from $1389 per week to $2091. Adjusting these wages for using the CPI gives real consumer wage growth of 22%. However, real producer wages in mining have fallen around 45% over the same period! This means that mining companies now only need to sell around half as much output to pay a typical worker s wage as they did in The difference, of course, is accounted for the fact that the price of mining output (iron ore, coal, and so on) has skyrocketed over the last decade, while the price of the goods and services that workers buy with their wages has grown at a normal pace of between 2% and 3% per year. Figure 18: Real producer wages in mining and all industries Index All industries Real producer wage 60 Mining 40 Jun 2003 Jun 2005 Jun 2007 Jun 2009 Jun Jun 96 Jun 01 Jun 06 Jun 11 Source: ACTU calculations based on ABS 6302, 6401, Economists refer to wages that have been adjusted using the CPI (or some other measure of consumer inflation) as real consumer wages, while wages rate calculated in terms of producer prices are real producer wages. These two measures are shown in Figure 17. Until the mining boom took off in the mid-2000s, real producer and consumer wages rose at around the same pace. Since the mining boom began, real producer wages have barely risen, while real consumer wages have grown by over 10%. The difference between the two measures is particularly noticeable in the mining industry. Between 2004 and 2011, average earnings for full-time workers in mining rose by 50%, Source: ACTU calculations based on ABS 6302, 6401, Some other industries that have seen real producer wages fall over the past decade include: accommodation and food services; transport, postal and warehousing; rental, hiring and real estate services, professional services, administrative and support services, and other services. This has a few implications. First of all, some of the wage growth since 2004 has been a free lunch workers purchasing power has grown without a commensurate rise in the cost of labour relative to output costs for employers. This free lunch period is likely to be over. Second, complaints about runaway wages growth in Australia don t hold up. Real consumer wages have grown at a solid, but sustainable pace in recent years, while real producer wages have barely grown at all. Please mcowgill@actu.org.au for more information. ACTU Wages Report September 2012 Page 8

9 Prices Inflation has fallen sharply in 2012 after a natural disasterinduced blip in early Both the headline and seasonally adjusted CPI each rose by only 1.2% over the year, rising by 0.5% and 0.6% respectively in the June quarter. Underlying inflation (also known as core inflation) rose by 2% over the year to June, which is around the bottom of the RBA s target band. Index Figure 20: CPI and workers' living costs Workers living costs rose by 0.7% over year, below the CPI. This is partly because of falling interest rates over the year to June lending rates affect the ABS measure of workers living costs, but aren t included in the CPI. In recent years, the cost of living for workers has tended to grow slightly faster than the CPI the living cost index has risen by 24.3% since mid- 2005, while the CPI has only risen by 21.6%. Figure 19: CPI inflation and growth in workers' living costs Yearly growth 6% 4% 2% 105 Headline CPI Employee LCI 100 Jun 02 Jun 04 Jun 06 Jun 08 Source: ACTU calculations based on ABS 6401 and ABS At the time of writing this ACTU Wages Report, the CPI figures for the September quarter had not been released. However, an unofficial measure of inflation (the TD Securities-Melbourne Institute Inflation Gauge) shows inflation rising only slowly. Over the year to August, the TD- MI Gauge rose by 2.2%; this measure tends to move closely in line with the CPI, so this suggests that inflation is around the bottom of the RBA s target band. The core or underlying measures of inflation in the TD-MI Gauge also point to low inflation. 0% Headline CPI Employee LCI -2% Source: ABS 6401 and ABS The TD-MI Gauge gives us the first reading on inflation after the introduction of the carbon price on 1 July. The TD-MI measure of inflation rose by only 0.2% in July and 0.6% in August, with the underlying measure increasing by 0.4% and 0.2% respectively. This strongly suggests that the carbon price has not resulted in a surge in inflation. Treasury modelling suggested that the carbon price was likely to add around 0.7 percentage points to the CPI; there is no reason to think that this will not prove to be an accurate forecast. Comments? If you have any comments or questions about this Wages Report, or suggestions for future reports, please contact ACTU Economic Policy Officer, Matt Cowgill at mcowgill@actu.org.au. ACTU Wages Report September 2012 Page 9

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