Wage caps in the public sector drag down wages growth

“Wage and price pressures remained subdued,” the Reserve Bank noted in the minutes of its May meeting, “despite the strong recovery in economic activity in Australia.” And a big part of that is the refusal of governments to increase public sector wages.

“Members also noted that public sector wage policies were likely to restrain aggregate wage outcomes,” the minutes continued.

Today’s Wage Price Index figures for the March quarter demonstrate that perfectly.

The overall result was 0.6% growth — slightly above the expected 0.5% — for an annual rise of 1.5%. But it would have been noticeably higher if governments had given their public servants bigger pay rises. The public sector pay rise was just 0.4% for March.

The usual suspects had the biggest pay rises: education, health and social care, infrastructure. Public administration and safety was near the back of the pack, along with traditional wages backmarker construction, where the tight conditions induced by the government’s successful HomeBuilder package don’t appear to have translated into stronger growth.

Just to confirm that it’s not merely — as per the budget papers — state government wages caps that are suppressing wages but the Commonwealth too, the ABS noted “the Australian Capital Territory recorded the lowest annual rise of 1.3%, with lower public sector growth influenced by wage deferrals and lower increases limiting annual wage growth for the state”.

Despite its own wage cap being a clear impediment to wages growth, the Morrison government has refused to consider removing it. Unsurprisingly, business economists agree. Writing in today’s Australian Financial Review, Ed Shann warned about surging wages created by border closures and “labour market rigidities” — but failed to mention the biggest rigidity of all, the Commonwealth’s cap on public sector wages, and those of states like Victoria and NSW.

The RBA continues its now-standard line on inflation:

The board will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range. For this to occur, wages growth would need to be materially higher than it is currently. This would require significant gains in employment and a return to a tight labour market. The board viewed these conditions as unlikely until 2024 at the earliest.

The retention of punitive caps on public sector wages may well guarantee that the 2024 deadline turns out to be accurate — if we’re lucky.