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Posted: 2017-05-15 19:14:11

Are you all set for the wages boom? Looking forward to your annual pay rise doubling or thereabouts and your overall package rising by even more?

Woohoo! Happy days, if it's true.

The rosy forecast comes from no less reliable a source than those esteemed economic boffins in the Treasury Department. It's there in black and white in the Commonwealth budget.

So, should we bank on fatter pay packets (or the digital equivalent thereof)?

The short answer is no.

Excuse me for being cynical, but pigs might fly before Australia sees the kind of wage wins and salary surges that Treasurer Scott "ScoMo" Morrison's forecasts are based upon.

Return to surplus premised on wages explosion

Here are the numbers the Treasury is using.

On the most reliable indicator, the official wage price index, it reckons that the pace of wages growth will lift from a record low of just 1.9 per cent to 3.75 per cent — or almost double — within four years.

Pay gains will more than double to 5.25 per cent a year on a broader compensation measure, if you believe the Treasury.

This is a big deal for the budget bottom line.

The return to surplus is premised on this wages explosion.

Soaring wages are the basis for the Treasury's forecast of a 16 per cent rise in income tax receipts over two years that pushes the budget back into the black by 2021.

Won't this wages breakout release the inflation dragon, or go hand in glove with a huge fall in unemployment? Nah.

The doubling of wage rises is meant to happen while the unemployment rate still has a "5" in front of it (at 5.25 per cent) and the inflation rate is comfortably within the Reserve Bank's 2-3 per cent target zone.

No doubt the Treasury can point to well-worn conventions of economic modelling and long-run historical averages to justify its forecast.

But history may not be a reliable guide — because the labour market isn't what it used to be.

Modern workforce keeping wages low

The change has been long in the making, but the latest Characteristics of Employment survey by the Australian Bureau of Statistics highlights how profoundly different today's workforce is compared to years gone by when full-time, regular work was the norm.

First off, about a million workers — or about one in every 11 — are not "employees" in the traditional sense at all.

They're independent contractors, hanging out their shingle to find what work they can and wearing the risk that goes with being self-employed.

At least, that's the theory; a fair share of these people may well be wage-slaves classed as "independent contractors" on the paperwork so their boss can avoid liability for annual leave, sick leave, and penalty rates.

Meanwhile, more than one in 12 workers are "underemployed" and want to work more hours — a record high.

This large pool of people wanting more work hours is a big buffer against rising wages, because employers can simply up the employment of existing workers at their current pay rates rather than going out into the marketplace to hire new staff.

Unionised workers get a wage premium over non-union members by dint of collective bargaining power, but as a share of the workforce, the union ranks are dwindling.

Back in 1992, 40 per cent of the workforce was unionised. Today, just 14.5 per cent of the workforce belongs to a union. Only 13 per cent of men are in a union in their main job.

Among young people, the numbers are staggeringly low: just 4 per cent of teenagers and 7 per cent of workers in their 20s are union members.

Incidentally, the Federal Government has capped wage rises in the Commonwealth public service — where unionisation is high — at just 2 per cent, so it's relying on a wages breakout in the private sector where union density will almost certainly have fallen to single digits in four years' time.

Casualisation, underemployment, and the decline of organised labour have all contributed to the stubborn refusal of wages to rise over recent years by as much as the economic boffins' models say they should — a phenomenon that's puzzled the Reserve Bank.

Norms may no longer apply

And Australia's not alone — wages stagnation is rife in the western world, as globalisation and new technologies create an international labour market and replace jobs previously done at home.

That's why there's room to be sceptical about using "historical norms" to predict where wages will go. If there has indeed been a structural change in the world of work, the "norms" no longer apply.

That's not to say we won't get a decent pay boost. If the economy lifts as Treasury is forecasting, employment and wages will rise — but how much?

Even at the height of the mining boom, wages growth peaked at 4.1 per cent. Back then, the unemployment rate was in the low 4 per cent range and the inflation rate hit a whopping 5 per cent — twice the central bank's target.

It was the Spinal Tap economy — the dial turned up to 11.

Treasury's forecasting wages growth to double over the next four years — to 3.75 per cent while the economy is humming along to a very "middle of the road" soundtrack — a return to the trend rate of growth, and inflation under control.

Not likely.

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