The sharp moderation in wage growth experienced over recent years has many worried that our standard of living is plummeting. Wage growth in the June quarter was a measly 2.6 per cent -- the lowest rate of growth since records began (admittedly only in 1997). Still, that’s not a good result. The idea is that this modest wage growth and high levels of unemployment are symptomatic of the nation’s falling income overall. According to this view, the country is going backwards because there is nothing left to fill the void once the mining boom ends. Well, it’s already ended apparently so this is happening in real-time I guess.
Now I realise this is a very common view. Some very important men with lots of baubles are more than happy to tell you about it. But, there is not a lot in the way evidence to back this claim up. The United Nations, in particular, has a very different view.
According to the UN, Australia currently enjoys an extremely high standard of living. Indeed we are ranked second in the world with only Norway enjoying a higher standard than we do. Now the UN bases this on the human development index (HDI), which is “a summary measure of average achievement in key dimensions of human development: a long and healthy life, being knowledgeable and have a decent standard of living”. In practice that means averaging scores from three indexes on health, knowledge and income.
On the income side, Australia actually scores very well. National income per capita is about $42,500 (on a purchasing power parity basis), which puts us 12th in the world (fourth in US dollar terms). Now that’s up from 10 years ago when we were 15th in the world, although the exact rank is perhaps a little misleading as nations tend to group. So for instance of eight of the top 11 have a very similar gross national income (GNI) per capita -- a few grand either side. A decade ago 12 of the top countries’ GNI per capita was indistinguishable. Looked at that way, the fact is, Australia’s rank -- just on income per capita -- hasn’t really changed all that much over the past two decades. Nor has our overall score on the HDI I might add (at number 2).
That consistency is actually a very important point. If that ranking has been consistent over time -- a few decades -- then it can’t be true to say that the mining boom has been responsible for any significant lift in the nation’s standard of living. That being the case, it must hold that the end of the mining boom -- if that even is a reasonable scenario -- won’t bring with it any material decline.
Against that backdrop we shouldn’t worry about a modest decline in wage growth. Wage growth is not low because of weak economic growth, or because the mining boom is over, or that the labour market is weak (see my piece Take Australia's unemployment rate shocker with a grain of salt August 13).
Wage growth is soft because of Australia’s crisis of confidence. Households have been browbeaten into thinking the country is on the precipice of recession in every year for the past five years and business isn’t investing as they should (Don't believe the negative economic spin August 15)
National income, and the outlook for, is otherwise very good. We are well positioned for the Asian century and the ongoing growth surge under way for our northern neighbours. Moreover, and as we’ve seen this earnings season, our corporates are making good profits -- growth is solid. While wage growth may be modest now, that isn’t going to last. The growth surge in Asia, combined with the ageing population will ensure that the more pressing issue will be finding adequately skilled workers. A more immediate cyclical impact will be the surge in construction and the upcoming non-mining investment boom (Australia's coming jobs boom August 5). Wages are going up, nothing can stop that.
In the meantime, we’re living longer, we’re healthier, and our personal wealth is already at a record. Net wealth is just off records and is more than six times larger than disposable income and about four times larger than our debt. We’re travelling overseas in record numbers and our cars and houses are bigger, better and have more flashing lights.
So as to what will stop our standard of living plummeting? Well, and not to put a too finer point on it, I think reality will stop our standard of living from dropping. You know, the real world, where the prospects for our great country are still outstanding.