Something extraordinary has happened in the last few months for Australians looking for work.
The number of vacancies offered has risen to a new high of all time.
Figures released in budget week show that there were almost twice as many jobs available in February this year – 423,500 – as in February 2020, before COVID arrived on our coast. And the number of Australians who satisfied the ABS that they were “unemployed” was just 563,300, the lowest in 13 years.
More vacancies for every unemployed person than ever before
What this means is that in February 2022, there were only 1.3 unemployed people rushing for every vacancy, the smallest ratio on record – down from three unemployed people for every vacancy in 2020, five for every vacancy in 2000, and seven in 1990.
Number of unemployed people for each vacancy
The unemployment rate is now just 4%, and is budgeted to drop to 3.75% within months, taking it to a five-decade low.
Our wages do not keep up
Yet wage growth in Australia remains astonishingly low. Now 2.3%, that’s below 2.5% for seven years.
The Reserve Bank says it aims for wage growth of “three-point something”. It could not succeed for the best part of a decade.
The low wage growth, compared to exceptionally high price growth, means that wage growth has fallen 1.2% lower than price growth in the past year. That means what Australians earn does not keep up with rising prices.
Budget forecasts that do not make sense
The budget provides for price growth of 4.25% in 2021-’22 along with wage growth of 2.75%, which means that Australians’ purchasing power will shrink even more, by 1.5%.
In the fiscal year, 2022-2023, it predicts an increase in wage growth to 3.25% along with a decline in price growth to 3%, meaning that wages will regain 0.25% of the purchasing power they lost.
Read more: Why there is no magic unemployment rate to increase Australians’ wages
And this is where this year’s budget forecasts do not make sense.
It predicts that what we are currently seeing – price increases exceeding wage growth – will suddenly reverse: that we are on the verge of seeing a slowdown in price inflation, along with an acceleration in wage growth.
Here’s the weird part of it. On the one hand, the Treasury tells us it expects the unemployment rate to fall further below the “non-accelerating inflation rate of unemployment” – which by definition means that inflation will accelerate. Yet the budget predicts that inflation will fall.
This is a strange and inexplicable deviation from conventional prediction.
Employers can choose what they pay
If price growth simply remains at its current level of 3.5%, the budget’s forecast of 3.25% wage growth means that real wages will fall.
And since most of the budgets have overestimated wage growth since 2014, it’s worth considering what would happen if wage growth were overestimated again: real wages would fall even further.
Something strange is happening in the labor market.
With very few unemployed people available for each vacancy, employers should offer higher wages to compete for workers.
But the concept of “monopsony” gives us an idea why it does not happen.
The core idea of monopoly is that employers (within limits) can choose the wages they pay to their workers.
Read more: ‘Can-do-capitalism’ produces less than it did. Here are 3 reasons why
If this sounds obvious, I apologize, but this is very different from the perfect competitive model of the labor market that was once loved by economists, in which wages are determined by bargaining in a two-sided market.
When employers offer low wages, they can pay the price with higher staff turnover, unfilled vacancies, absenteeism or poor product quality.
But they still feel that they can get away with paying low wages, and leaving many vacancies unfulfilled. And other employers feel compelled to keep wages low, due to competition from low-priced firms and because their immediate customers (such as supermarkets) insist on low prices.
These employers may choose to pay lower wages than in the past because workers are less powerful and their collective bargaining power is less effective than it once was.
Power imbalances keep wages in check
Work is uncertain. Many workers face casual employment, contracting, hiring, franchising or underemployment. Trade union membership declined.
Only 12.7% of male workers are in a union in their main job, down from more than 50% in the early 1980s. Only 15.9% are women, down from 43%.
Industrial disputes are at record lows, partly because industrial laws have changed, making it extremely difficult for unions to strike for higher wages, and easy for employers to circumvent them.
Do not expect any increases in real wages, no matter how tight the labor market, while this new structure exists.