At a glance
The basic law of supply and demand should mean that when workers are in short supply wages will go up.
Yet, in recent years, this law has been tested in the Australian labour market by a range of factors that have hampered a long-awaited surge in wages.
Financial journalist Alan Kohler refers to a chart he has been using for years that shows the survey data on companies having trouble attracting job applicants against wage growth as evidence that wages have not been responding as expected since 2014.
“The two lines on the chart are usually shown going together – or, in the past, they have done so. But in 2014 there was a break. The line showing difficulty in finding staff went up and the wages line went down, and it has remained that way ever since,” Kohler says.
Factors contributing to this change include a reluctance to increase prices to accommodate higher labour costs, which has resulted in businesses opting to retain and attract staff by offering improved conditions, Kohler argues.
“Firms started shifting the emphasis of human resources from pure wages into what you would broadly call ‘conditions’. In recent years, the focus has definitely been on offering better working environments,” he says.
Westpac senior economist Justin Smirk also points to a systematic and structural preference shift, where expectations for wages got lower and lower.
“For the past 10 to 15 years, we’ve been moving toward lowering labour costs. We’ve deregulated labour markets, had modest increases to the minimum wage, increased global competition around capital markets and introduced more competition in terms of immigration in Australia,” says Smirk.
Rising demand as border remains shut
Change is on its way, however – until we know when the borders will reopen and migration can slowly start to fill the gaps again, there will be demand for labour, says Kohler.
“The one thing that's going on now, which will probably relate to higher wages, is that there are no foreign workers coming in.
“There are no temporary visa workers and no immigrants to replace local workers, and that is probably going to improve people’s bargaining power.
“I’ve been hearing anecdotally that there are higher wages starting to break out all over the place – so I do think that in the next 12 months we'll see a big kick up in wages growth,” he says.
Smirk agrees that, with the borders closed, a quantum shift has taken place, and the labour shortage may lead to higher wages, as well as further improvements in working conditions.
“Workers are in a better bargaining position than they have been in decades, and there will be pay rises, but it's unclear who will get them and how they'll be distributed,” he says.
“They may come in a lifestyle choice, as well – the desire to minimise commutes and have a better work/life balance is real. I think there's going to be people willing to trade off wages for a more flexible lifestyle.”
As trusted business advisers, accountants and finance professionals have an important role to play in helping their companies and clients navigate pay rises as a tool to attract new staff or help retain key employees.
While the economic data might not be showing wage growth yet, recruitment specialist Mark Smith CPA, managing director at People2People, says the reluctance for businesses to spend money on wages is slowly changing as employers start to fight for talent.
“It is harder to find good people than it has been for some time, and we are seeing quite a bit of movement on salaries in some industries – people are starting to offer higher salaries than they originally advertised.
“We had one example of a contract payroll analyst position that increased the hourly wage by A$10 an hour – that was a 20 per cent increase, and the candidate declined because she had another offer that was a 50 per cent increase on the original offer,” says Smith.
Financial services recruiter Ben Wheeler, director at People2People, says accountants and financial business decision makers should be looking at the cost of giving a pay rise versus the cost of losing an employee and having to rehire.
“Financial professionals understand you need people to grow your business, and to do that in this market you may have to offer them more money.
“If you start losing them, it's going to hurt. You also need to be aware that if those labour costs are going up, prices will need to increase as well,” says Wheeler.
Smith agrees and says it is worth crunching the numbers to compete in the current market. He says some industries, such as construction, are already opting to pay higher salaries to keep their staff so they can complete major projects.
“If you've got good people on board right now, who are being productive and enabling your organisation to take advantage of the recovery, and they are asking for the extra money – you should take that opportunity and do it, because the cost of not doing it is a lot more,” he says.