Australians who want a pay rise above inflation might be waiting a long time, with 2020 looking like the earliest any real wage hikes will emerge for most people. This is the conclusion implied by a new speech from a top RBA official.

Australia's wages growth has been getting weaker for a long time, and the wages coma now looks set to extend for another couple of years.

RBA wage forecasts are not public but the central bank has been talking quite a bit recently about where it expects wages to go. You don't have to listen long to hear the pessimism.

"Wage growth remains subdued and is forecast to increase gradually," the RBA said in a recent statement. But until this week it didn't suggest just quite how gradually that might be.


A major new speech by one of the RBA's top officials has shed far more light on the topic, appearing to suggest wages growth might not show up until 2020, with the exception of a few "pockets".

The speech by assistant governor Luci Ellis spent a lot of time talking about "spare capacity" in the labour market. Unfortunately, the share of jobless people in Australia is still too high to expect wages to zoom up, she suggested.

Spare capacity refers to unemployment mostly, but also underemployment as well as people who aren't in the labour force at the moment. Australia has plenty of spare capacity among the unemployed and the underemployed.

There is a tipping point in the amount of "spare capacity" (it is known as the NAIRU — non-accelerating inflation rate of unemployment). Once spare capacity gets below the tipping point, companies have to make higher pay offers to hire people, pay starts rising again and inflation picks up. That's the theory.

The RBA estimate that the tipping point is when we have unemployment of about 5 per cent.

The real headache comes when you check how long it will be until Australia gets below that level. The RBA forecasts unemployment out to June 2020. The official forecast of unemployment in mid 2020 is 5.25 per cent.

Even in 2020 the country will still be above the tipping point. Only slightly above it, mind you, and the forecast could of course be wrong. But that's the RBA's central unemployment forecast for 2020 and it is above the NAIRU.

A speech by assistant governor Luci Ellis spent a lot of time talking about
A speech by assistant governor Luci Ellis spent a lot of time talking about "spare capacity" in the labour market. Picture / Getty Images

Ellis said in her speech that wage growth will rise, "but not immediately". It certainly sounds like she could be telling people not to get hopes up too much before 2020. If the tipping point theory is correct, there is another two years of meagre pay rises ahead.


For everyone who goes to work each morning, this is awful news. Australia has been stuck with low wages growth for years now, while petrol prices and electricity bills keep rising.

Once you subtract inflation from the picture, wages are stuck. The wage price index went up 2 per cent in the last year and consumer price inflation went up 1.9 per cent. The average worker in Australia basically got no extra buying power in the past 12 months.

Pockets of gold, eventually

Of course there are exceptions. Some people will get decent pay rises before others. Those in healthcare and education should get a bump, while people in mining and many professional industries might be waiting a lot longer.

As Ellis said: "We shouldn't expect labour shortages to appear everywhere at the same time. What happens instead is that they turn up in a few pockets of the labour market, then a few more, and gradually become more widespread as conditions tighten."

For now though, the RBA is seeing firms do everything they can to prevent even scarce workers from getting used to big pay rises.


"We hear that firms are increasingly using other creative ways to attract and keep staff without paying across-the-board wage rises. These include everything from hiring bonuses, to offering extra hours, to increasing perks and workplace conditions," Ellis said.

She also made the chilling observation that getting below the tipping point doesn't necessarily make wages growth happen. The US, Europe and Japan have all wrestled their unemployment rates below their estimated tipping points, and wages growth is yet to really accelerate.

It is also worth mentioning that as wages growth has fallen, the RBA has consistently underestimated how bad that fall would be.

Every year they expected wages growth to rise or flatten out. Every year it fell instead. If their recent track record continues, 2020 might be an optimistic estimate.

The economy

It could be of course that wages growth is far higher than the fears outlined here. The recent Budget update forecasts much higher wage growth of 2.75 per cent next financial year. You can decide if you believe that.


We should probably hope that the RBA is wrong and the Treasurer is right. Because weak wages growth might not just make life hard for those paying the bills. It could also screw up the economy even further by making people stop spending.

"If households start to see this weakness in income growth as permanent, they are likely to change their spending patterns in response," Ellis said.

We can see that happening already. Households are trimming their spending on things that aren't essential, with flow-on effects in the economy. When Myer's CEO lost his job this week, it was probably partly because weak wages growth meant people didn't want to spend in luxury department stores.

Everyone who works in an industry that depends on discretionary spending has double the reason to hope wages growth comes back fast.