The Federal Government is forecasting in its Budget that wage growth, after it fell to coronavirus-driven record lows, won’t exceed consumer price inflation until 2024-25.
Treasury expects that inflation to substantially outpace wage growth in the current financial year, with the cost of living up by 3.5% and the WPI just 1.25%.
The gap narrows next financial year (CPI 1.75%, WPI 1.5%), level-pegs in 2022-23 (both 2.5%) and wages edge ahead in 2024-25 (CPI 2.5%, WPI 2.75%).
Table 1.2: Major economic parameters, Budget Paper 1, Statement 1: Budget Overview | Page 9
Treasury expects unemployment to drop from 5.5% in the current financial year to 4.5% in 2023-24 and 2024-25.
It says the recovery in the Wholesale Price Index (WPI) in the December quarter reflected “a rollback of pay reductions implemented earlier in the year as employers responded to the impact of the pandemic”.
“Modest inflation outcomes however have meant that consumers have maintained purchasing power with real wages growth in line with the 10-year average.”
It says the “near-term outlook” in which WPI remains subdued “is consistent with low wage increases in new federal enterprise bargaining agreements and state public sector wage caps that are expected to moderate the outlook for wage growth over the forecast period”.
“Towards the end of the forecast period, the lower unemployment rate and broader economic strength should see wages begin to pick up,” it says.
It considers that “further falls in the unemployment rate below the non-accelerating inflation rate of unemployment (NAIRU) will likely see wage and price growth become increasingly sensitive to employment growth”.
“However, the extent to which tightening labour market conditions will flow through into wage and price pressures remains highly uncertain”.
It says there is a possibility that “stronger labour market conditions” could push wage up over the next four years, while continuing international border closures “may cause labour shortages and place upward pressure on wages in selected industries”.
It reiterates that Treasury “has recently updated its approach to estimating the NAIRU, resulting in a lower NAIRU estimate that lies within the band of 4.5 to 5%”.
“A lower NAIRU is consistent with the international experience prior to the pandemic of low unemployment with little to no inflation.”
