Insights into Low Wage Growth in Australia

Over recent years, Bank forecasts for wage growth have been persistently too strong (Graph 1). The forecast errors have been largely the result of there being more slack in the labour market than anticipated and the decline in the terms of trade being sharper than expected.1 However, even after taking these factors into consideration, wage growth has been surprisingly low. This raises the possibility that the relationship between wage growth and its determinants has changed, or that there are other structural or cyclical factors weighing on wage growth. Understanding the drivers of recent wage outcomes is important for assessing labour market conditions and inflationary pressures in the economy. As wages are the largest component of business costs, the decline in wage growth has also contributed to lower inflation outcomes over recent years than expected.