Australia’s jobless rate is only 3.4% – so what’s holding wage growth back?

Workers desperate for a pay rise anywhere close to the rate of inflation won’t take much solace from the flurry of labour market figures released this week.

On Wednesday, the Australian Bureau of Statistics reported another disappointing increase in the wage price index with the June quarter rise of 2.6% lagging consumer price gains of 6.1% by a record amount.

On Thursday, the jobless rate in July fell to 3.4%, the lowest since August 1974. That success, though, masked the biggest drop in full-time jobs – 86,100 – since May 2020 when the first wave of Covid was hitting the economy.

Economists believe unemployment will shrink further, particularly once the winter bane of influenza and Covid recedes, easing disruptions inflicted by 750,000 afflicted workers in July.

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Westpac, for instance, forecasts the jobless rate to dip to 3% while ANZ predicts a “high 2s” rate by early next year.

“It’s an unbelievably tight labour market,” Justin Smirk, a senior Westpac economist, said, noting the number of unemployed roughly equals job vacancies, compared with a more normal ratio of four or five to one.

“We’ve also been seeing falling underemployment, which suggests that people who want work are getting in and finding more, and youth unemployment hit a record low” of 7% in July, he said.

Such strength in labour demand, though, makes it more surprising – and perhaps galling for staff – that wages aren’t rising faster.

Separate ABS figures released on Thursday reveal average weekly earnings for full-time work actually grew more slowly in the year to May, at 1.9%, compared with the 2.1% pace reported in November.

Understanding this disconnect, and when the shortage of workers will finally translate into greater bargaining clout, are “the very issues we are debating, researching and talking to our clients about”, Smirk said.

Related: A rise in wages should be good news, but in real terms, this is historically pitiful | Greg Jericho

Jim Stanford, economist and director of the Centre for Future Work, said the anaemic growth in weekly earnings, along with the weak WPI result, were “more proof that there is a deep structural weakness in wage determination in Australia”.

“Real earnings are falling dramatically despite supposed labour market tightness,” he said. “That will require structural solutions, not just waiting hopefully for supply and demand to work their magic.”

Stanford detailed some of those proposed solutions, including restoring collective bargaining, in a paper commissioned by the ACTU ahead of next month’s Jobs and Skills Summit in Canberra.

“Many years of deliberately suppressing wages [including through direct diktat in the public sector], vilifying and restricting unions, and weakening the relative power of wage regulations have ‘paid off’,” he said. “They did what they were intended to do: undermine the ability of workers to win higher wages, even in a historically tight labour market.”

Other economists, such as Westpac’s Smirk, are more optimistic. For one thing, employees may be doing better than the general wage statistics indicate.

The WPI, for instance, won’t include the 5.2% rise in the minimum wage affecting about a quarter of workers until the current quarter. Someone who takes on new roles – such as a cafe barista who becomes a manager with higher pay – would also not be captured in the WPI as an increase in wages, Smirk said.

The ABS, meanwhile, reckons growth in average weekly earnings has held back an increase in relatively low-paid restaurant and accommodation jobs as the economy bounced back from Covid lockdowns. That altered the composition of jobs, as did the rise in youth employment.

Westpac predicts the WPI will rise to 4.5% by late this year or early next year, an improvement but still shy of CPI. The RBA expects inflation to peak at 7.75% by late 2022.

As proof of where the bargaining power still lies, companies are tending to offer employees one-off bonuses or negotiating shorter term agreements rather than locking in longer-term permanent rises, Smirk said.

The banking sector is one case in point, according to Julia Angrisano, national secretary of the Financial Sector Union. The union has a claim across the big four banks for a 6% wage rise.

CBA, the country’s largest bank, is so far refusing to engage at all despite the existing agreement expiring in June, she said.

CBA last week posted an 11% rise in full-year cash profit to $9.595bn and raised the pay of CEO Matt Comyn 35% to almost $7m.

Despite the bumper result, “they’ve told us they won’t be returning to the negotiating table any time soon,” Angrisano said.

“We’ve got a real problem in Australia,” she said. “Profit is up, the unemployment rate is going down but real wages for workers are not going in the right direction.”