Australia’s Stagnant Wage Growth, is it Impacting Employee Loyalty and Retention?

August 30, 2021

Australia is currently approaching its 10th year of wage stagnation and underemployment, however, with the recent events of 2020 and the COVID-19 pandemic, is stagnant wage growth impacting employee loyalty and retention? Even before the pandemic recession, wage growth had been stagnant and barely keeping up with inflation. Historically, wage growth in Australia was always much stronger compared to other economies across the world, however and wage growth has been quite weak, especially over the past five years.

According to the Australian Bureau of Statistics (ABS) figures the seasonally adjusted Wage Price Index (WPI) rose 0.6 percent in March quarter 2021 with the annual growth rate at 1.5 percent, which compares with average annual growth of 2.2 percent in the five years to December 2018, and 2.3 per cent in the previous five years to December 2013.

In 2015, the Reserve Bank of Australia (RBA) provided some insights as to why the rate of wage growth in Australia has slowed in recent years, including the presence of excess capacity in the labour market (demonstrated by stubbornly high rates of underemployment); a steady decline in inflation and inflationary expectations; and a decline in the terms of trade since the end of the mining boom. 

With wage growth practically flat-lining for more than a decade now, workers in Australia have grown accustomed to the trend of stagnant pay increases. The last time wage growth rates hovered over 4% was right before the 2008-09 global financial crisis. From then on, increases generally plateaued at about 2%.

Deloitte Access Economics quarterly business outlook said that Australian workers could be waiting up to five years for wage growth to return to 2%. Deloitte also commented that as a result of the COVID crisis inflation is predicted to remain steady – hitting rock bottom only by mid-2022, but it likely won’t return to the Reserve Bank’s “comfort zone” of 2-3% until late 2023 or early 2024. More recently the RBA has offered other reasons for sluggish wage growth, including the relatively low rate of voluntary job
turnover among workers.

Workers tend to choose to leave their job for a better job—be it in conditions or pay. The fact that little of this is occurring is likely to be contributing to subdued wages growth. It follows that, with lower rates of turnover, employers have less incentive to offer higher wages to retain their workers. ABS data confirms that the proportion of workers who left their job in 2019 fell from 11.5 per cent in 2008 to 8.1 per cent in 2019.

COVID-19 has now added an additional element to wage growth. In the three months to June 2020, Australia saw the lowest wage growth on record. The reality was, when there were so many people looking for work, there was no pressure on businesses and employers to offer higher wages because it was easier to find people who were willing to take the work at a lower wage. And for employees looking for job security and therefore held onto their jobs, there was no reason for businesses to increase wages to
retain their current workforces.

With the market now bouncing back from the effects of the COVID-19 pandemic and unemployment now stabilised, there is an increased demand from businesses for new talent. New data recently released by SEEK shows that Australian job advertisements have nearly doubled from what they were over a year ago in March 2020, when the pandemic hit, and have now also reached levels not seen in more than a decade. 

With borders still closed to international job seekers, local talent, who held onto their seats with an iron grip during the uncertainty of COVID-19, are loosening up, and looking around for new opportunities. Many are thinking “If I’m not getting a pay rise here,
still, then I may as well see what’s on offer.”

The issue for many businesses now is how to retain the staff they currently have and also attract new talent into the business.

Whilst paying over the odds for talent is a viable attraction and retention strategy, prematurely raising salaries across the board as the sole mechanism to keep and get ‘bums on seats’, could ultimately have a long-term impact on businesses well into the future, if not managed correctly.

In a bid to retain the staff many businesses have a plan to increase salaries in their next review, but at a rate of 3% or below (according to the ABS). However, many workers believe they deserve a lot more, as they said it would better reflect their performance, as well as sacrifices made to support the business during the COVID-19 crisis.

Low or no salary increases is serving as part of the reason why many workers are currently looking for a new job, plan to look for, or are open to new opportunities in the next 12 months.

For the past 12 months, employees have put their careers on hold, they have put their salary expectations on hold, and now they want to play catch-up.

But where to next?

While pay rises are important, many professionals rate learning and developing new skills as the most important priority for them. Employees are looking for more than just a salary, they are looking for more than just a job; they want career development. Businesses need to provide more than just a base salary and wage increases to retain top talent. It’s important to review the whole employee value proposition including bonuses, benefits and reward and recognition programs. It’s looking at those internal promotional opportunities, and tailored training programs for all employees. Having the right proposition will encourage workers to stay and new people to join the organisation.

So, despite the data on stagnating wage growth over the past few years, increasing salaries is not at the top of an organisations retention strategies. In a report by AHRI in 2019 surveying its members, excellent pay is only rated sixth as an effective retention
method, and competitive salary is rated ninth among strategies that organisations have in place to encourage retention.

However, at the same time, the lure of better pay elsewhere is reported as the second strongest factor in why employees say they leave, suggesting a potential mismatch between what organisations rate and how employees behave when it comes to pay as a generator of turnover. Whilst wage growth continues to stagnate, and the market continues to change rapidly, the most important aspect to ensure employee loyalty and retention appears to be closing the gap between employee and employer expectations.

By aligning the expectations of employees and employers, both can thrive, creating a workplace that meets the financial and career needs of its occupants, as well as the business needs of the company.

We will continue to watch this space very closely over the next six months as roles flood the market and candidate numbers are limited.