The release of the latest wages data saw yet another record set for low growth. The figures show that not only are real wages lower than they were four years ago, but that the hopes of the budget returning to surplus rely on wage growth that is completely incompatible with current levels of underemployment.

The Bureau of Statistics estimates that in the past year wages for all workers grew by just 1.9% – equal with the record low set in the December quarter (although at 1.865% the current rate is marginally lower than the 1.874% of December):

And while the overall growth is decidedly at dire levels, the real damage is in the private sector.

In the March quarter, private sector wages grew by just 0.4% in trend terms – a level achieved only four times before. But the public sector actually saw a slight improvement – its 0.6% increase in March was the best quarterly growth since September 2015:

That meant that while annual public sector wage growth improved from 2.25% to 2.3%, private sector wages grew in the past year by a paltry 1.7%:

The big driver of public sector wages was in Victoria, which saw a 1% jump in March. Canberra public servants by contrast saw their wages grow on average by just 0.3%:

For private sector workers, however, the picture is dire all over the nation.

The fall to 1.7% was just the latest in a nearly five-year run of falling growth. In the past six years, the annual growth of private sector wages has risen just once:

This pathetic growth is below the latest inflation growth figure of 2.1% and even below the more stable underlying inflation growth figure of 1.9%. It means that real wages for private sector workers fell in the past year:

But alas, once again this is nothing new. Real wages for private sector workers have not increased for more than four years – a longer period of stagnation than occurred during the GFC:

It means most workers would have less purchasing power now than they had at the end of 2012.

So what is driving this low wages growth? Clearly the issue is not unemployment. While the current level of 5.9% is a touch higher than 12 months ago, it is not so much higher that it means the employment sector is significantly weaker.

The problem (as I have noted before) is that the link between wages growth and unemployment has completely broken down.

Normally, when unemployment falls, wages growth rises. But that relationship collapsed about two years ago. In December 2014 the unemployment rate was 6.2% – higher than now, but wages were growing at 2.5%.

Since then while unemployment has improved, wages growth has worsened. Normally with an unemployment rate of 5.9% wages would be growing by 3.3% - almost twice as fast as the current rate:

So what happened to break the relationship and cause this record low wages growth? Underemployment.

Unemployment and underemployment usually move in synch. The unemployment rate is always a bit lower than the underemployment rate, but when one falls, so does the other – that occurred even during the GFC.

But at the end of 2014, the two went their separate ways – unemployment fell, but underemployment rose to record highs:

And in the past two years the relationship between wages and unemployment also decided it was time for a trial separation – a separation that is now almost a total divorce. It is why the relationship between wages is now closer to the underemployment rate.

While wages growth is a touch below where it should be given the current level of 8.6% underemployment, with such high underemployment we would still expect wages growth only marginally above inflation:

And while this is bad for workers, it is also bad for the budget.

Remember that last week’s budget projections forecast strong wages growth over the next three years. By 2020-21 the budget predicts wages will be growing by 3.75% a year, despite unemployment then predicted to be only 5.25%.

So while unemployment is expected to fall just half a percentage point, wages growth is expected to increase by more than double the current rate of 1.9%?

Now that might be possible but it would also require a massive fall in underemployment – something that is unlikely to occur given the budget also projects employment to grow annually by a less-than-stellar 1.5% over the next three years. And full-time employment as a rule grows slower than overall employment.

In the past, governments thought that if they worried about unemployment, underemployment would take care of itself. The past two years have shown that not to be the case and it has led to a precipitous drop in wages growth for workers.

Unless that situation changes, not only will workers continue to see their real wages barely rise, Scott Morrison’s budget projection of a surplus in 2020-21 will continue to be barely credible.

Play Video

1:04