Why wage growth is so soft, even in a strong economy – The Canberra Times

A recurring theme from American business-owners is that it is getting it hard to get the staff they need.

Debbie Sharpe, who founded a Chicago-based catering and deli business called The Goddess and Grocer, said although the economic conditions facing her business were soft, the industry was also experiencing skills shortages. Sharpe said this challenge was being made worse by the Trump administration’s tough stance on immigration.

“We cannot find cooks, that’s the biggest thing. We cannot find front of house staff. I use a lot of immigrant labour in my kitchens, as do most restaurants. I could hire another 15 people but there’s no one to hire,” said Sharpe, who was born in Melbourne and is a former Herald journalist.

Her business pays above average wages, she said, and in the past year it has started to lift some wages by 15 to 20 per cent in response to the shortages. Rather than cutting immigration, Sharpe said the government could help business by allowing the millions of people already living and working in America illegally to have work rights.

Another business-owner finding it harder to get the right staff was Steve Gianoutsos, who started a cafe chain called Mojo in New Zealand, and has opened up an outlet in Chicago.

He said it was “not easy” to find the right staff, and the prospect of tougher immigration laws could make it harder still, as well as pushing up wages.

“It will do some other things for the industry as well, it will probably force the wages up, which is not a bad thing,” he said.

These anecdotes are backed up by the economy-wide statistics: US pay packets grew at an annualised 3.1 per cent last month, a nine-year high.

There have also been reports of large US employers becoming more open to hiring people with criminal records, which some are linking to the tightness of the labour market.

But how is that relevant to us, on the other side of the world?

Well, the surprising thing is that it’s taken a red-hot US labour market to produce these sorts of outcomes, as America’s unemployment rate is just 3.7 per cent – the lowest in nearly 50 years.

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Normally, when unemployment is that low, you’d expect wages to be rising by a lot more than they are, because most people who want a job have one, pushing employers to pay up for staff.

But in most economies around the world, including here, the traditional relationship between wages and unemployment has weakened since the global financial crisis.

The Reserve Bank governor Philip Lowe noted in a speech last week that real (after inflation) wages in Australia grew by almost 2 per cent a year between 1995 and 2012, but they’d barely grown at all in the last six years.

This is a global story with all sorts of possible explanations, including a loss of labour’s bargaining power due to globalisation and automation. It is also playing out in Australia.

The Reserve Bank had previously estimated Australia’s level of “full employment” – the rate to which unemployment can fall before labour shortages start to trigger wage inflation – was about 5 per cent. But that’s the current rate of unemployment, and there’s clearly no wages boom happening. The RBA now says it has an “open mind” on the level of full employment.

Official figures published this month offered a glimmer of hope, showing Australia’s wage price index grew a 2.3 per cent in the September quarter, the fastest pace in three years. The RBA and the federal Treasury both expect the pace of wage growth to lift further, albeit gradually.

But the experience of US, where it’s taken the lowest unemployment rate since 1969 to generate decent wage rises, suggests it will be a slow process indeed.

The reporter travelled to Chicago courtesy of Air New Zealand.

Clancy Yeates writes on business specialising in financial services. Clancy is based in our Sydney newsroom.

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