We ran some custom analysis for Nine, looking at mortgage stress in and around Sydney. Here is a map showing the relative number of households now in stress – based on their cash flows. This is data to end May, we will run the June update in early July.
While all workers benefit from the 9% superannuation guarantee, those on middle incomes benefit significantly less than lower and upper incomes, according to my research.
I ran simulations on the financial assets accumulated over a working life, comparing this to what would have been earned on the same amount saved but invested outside the superannuation system and earning the same rate of return. I’ve added back the last few words here as this is an important assumption in my analysis
People on low, middle and high incomes are all better off under the superannuation guarantee levy. This is due largely to the concessional tax rate (a flat 15%) on income earned in the super fund.
But lower income earners see a lifetime gain 9% higher than for the medium earner. The high income earners receive a gain 8% greater than those on medium incomes.
Ghosts in the system
About 80% of Australian government spending on cash benefits to individuals and families is subject to means-testing. This includes the low income superannuation tax offset (LISTO), as well as unemployment benefits, pensions and family tax benefits.
LISTO provides a refund of the 15% tax paid on the super contributions. It is a way of compensating low earners for the greater sacrifice they make in forgoing current spending in favour of superannuation saving.
However, means-testing of the LISTO and other cash benefits is a double-edged sword. It may promote some level of fairness, but it can also discourage work through high effective marginal tax rates.
This is because benefits are phased out or cut completely once income reaches a certain threshold, costing the person a benefit they had been entitled to. This is essentially the same as paying a tax.
Means-testing of the LISTO is one way in which our compulsory superannuation levy (SGL) discriminates against middle income earners. Only employees with a taxable income up to A$37,000 are eligible for the refund and it’s capped at A$500 per year.
The super tax offset is lost once taxable income exceeds A$37,000, creating a jump in the effective marginal tax rate paid. This means, according to my simulations, the superannuation guarantee levy provides significantly greater gains to low income earners than middle earners over a working lifetime.
And there are a lot of low income earners. In 2016, roughly 2.9 million employees (28% of all employees) were eligible for the LISTO. This figure is probably an underestimate, as the ABS data used here refers to cash earnings while LISTO is based on taxable income.
The top 20%, or 2 million earners, also gain more than middle earners from their superannuation. This is due to the flat 15% tax on super fund earnings, which represents a significant drop from the marginal tax rate that the high income earner would pay for equivalent savings outside superannuation.
A person with taxable income over A$180,000 will pay 47 cents in tax for every additional dollar earned over A$180,000. But the tax payable on additional income from superannuation earnings is just 15%. This represents a 32% concession (47% minus 15%).
What we could do differently
There is no reason why the superannuation guarantee levy should discriminate against one income group over another. We already have a public pension scheme to support retirement of low income earners – there is no need for superannuation to do this.
New Zealand’s super system, KiwiSaver, offers a great example. KiwiSaver is an “opt out” model of superannuation. Employees are automatically enrolled when they are first employed but they can choose to withdraw their savings.
And unlike Australia’s superannuation guarantee, KiwiSaver allows members to suspend their contributions for between three months and five years after one year of membership. KiwiSaver funds can also be withdrawn to buy an owner-occupied house, provided certain requirements are met.
The flexibility afforded by KiwiSaver means that low income earners are not forced to save through superannuation. In turn this means there is less reason to have tax concessions like LISTO to compensate low earners.
The absence of means-testing benefits in Kiwisaver also avoids the high effective marginal tax rates that act as a disincentive to earn higher income through employment.
KiwiSaver contributions and returns are taxed the same as other savings. This eliminates the gains to high earners from the concessional rate of tax on super fund earnings enjoyed in Australia.
The combination of these KiwiSaver features is that neither the low or high earners are advantaged relative to middle earners.
This is one of several aspects where the New Zealand system of taxation and government benefits is superior to Australia’s in terms of disincentives and complexity, while still allowing New Zealand to have slightly less inequality than Australia.
Author: Ross Guest, Professor of Economics and National Senior Teaching Fellow, Griffith University
Research from consumer education website, CreditSmart, has found that many of us hold misconceptions about what goes into our credit report, and what credit providers look for when checking a credit report.
The CreditSmart website is owned by the Australian Retail Credit Association (ARCA), which is the peak body for organisations involved in the disclosure, exchange and application of credit reporting data in Australia. ARCA’s members are the most significant credit providers including the four major banks, credit reporting bodies (CRBs), specialist consumer finance companies, and marketplace lenders. A list of companies that support the CreditSmart education campaign is listed below.
They say that almost nine in ten Australians (88%) understand that banks and lenders check their credit report when they apply for a loan or credit.
Mike Laing, CEO and Chairman of ARCA, which founded CreditSmart, said that, unfortunately, too many people in Australia misunderstand their credit report and the information it contains.
“Accessing credit is part of everyday life and yet alarmingly, most consumers are unaware of the information included in their credit report. Your credit report will influence whether your application for credit or a loan is approved as your credit report forms part of a credit provider’s assessment of your application for credit or a loan,” said Mr Laing.
The research, undertaken by YouGov Galaxy, was done ahead of the upcoming changes to the credit reporting system. Known as comprehensive credit reporting (CCR), from July 2018, the four major banks will be required to share 50% of customers’ data with lenders, to ensure a complete picture.
What does my credit report include?
A huge 63% of Aussies believe how much money they make is included in their credit report. Further, 40% think the balance on their savings account is also on their credit report.
“Your income and bank balance isn’t included in your credit report. When you apply for credit or a loan, the lender will ask you about your income, expenses and your financial assets, as all of this is taken into consideration, but it will not come from your credit report.
“You could have a lot of savings in the bank, but a bad credit report because you were careless about paying your financial accounts on time”, said Mr Laing.
Separately, more than half of Australians believe that gender and marital status are included in their credit report, and one-third think that their place of birth and car insurance claims are also shown. All of these are incorrect.
A further 63% of consumers thought their credit report already shows whether or not they make their monthly credit card and loan payments on time. This is a change that is only starting to happen now as part of CCR.
According to CreditSmart, a credit report is made up of:
Identifying information (e.g. name, address, date of birth, employment and driver’s licence number)
Information about the credit accounts you have and, for credit cards, personal loans, mortgages or car loans, your repayment history on these accounts over the last two years
Credit applications over the last five years
Default information (if any) over the last five years (payments at least 60 days overdue)
Personal insolvency information and serious credit infringements (if any) for up to seven years
Who can access my credit report?
While most of us know that a bank or lender will look at our credit report when we apply for a loan, many are unaware that our credit report can be checked when we apply to open a new gas or electricity account (46%) or contract a mobile phone (46%).
“Most credit providers, which can include gas, electricity and phone providers, will carry out a credit check to find out how you’ve handled your debts in the past – something to keep in mind,” said Mr Laing.
Your credit report can’t be accessed when you apply for a job or take out or make a claim on insurance, which is not well known by Australians.
According to CreditSmart, your credit report will likely be requested from a credit reporting body by a credit provider when you:
Apply for a loan from a bank (or any other finance provider)
Apply for a store card (e.g. when you buy a TV on interest free finance)
Rent items like a TV, fridge or computer, but not home rental
Apply for a car loan
Buy a mobile phone on a post-paid mobile plan
Sign up for a phone, gas or electricity account
Checking your credit report frequently
Mr Laing stresses the importance of checking your credit report annually.
“A popular misconception is that checking your credit report can negatively impact your credit score, but that is not true. As a security measure your credit report will show who has looked at your credit report, including you, but this is done to protect your privacy and is not shown to a credit provider when you apply for a loan.
“Every consumer should check their credit report annually. Monitoring your credit health regularly – like your physical health – lets you confirm you’re managing your credit well and are able to access credit when you need to,” concluded Mr Laing.
For more information on how to get your free credit reports, and to understand what is on them or fix any errors, consumers should go to http://www.creditsmart.org.au website, set up by credit experts to provide clear information on the credit reporting system to assist consumers to optimise their credit health.
Companies that support the CreditSmart education campaign include:
ANZ
Bankwest
Bendigo and Adelaide Bank/ Delphi Bank
BOQ
Citi
Commonwealth Bank
Compuscan
Credit Savvy
Credit Simple
CUA
Customs Bank
Experian
Firefighters Mutual
Bank/Teachers Mutual Bank
Genworth
GetCreditScore
Good Shepherd Microfinance
HSBC
Keypoint Law
Macquarie
ME Bank
MoneyMe
MoneyPlace
NAB
Now Finance
Pepper Money
Police Bank
QBE
SocietyOne
Suncorp
Toyota Finance/Hino Financial Services/Lexus Financial Services/Power Torque Financial Services
Unibank
Westpac/ Bank of Melbourne/ BankSA/ StGeorge/ RAMS
The Australian Bureau of Statistics has just released its latest analysis of the effects of government benefits and taxes on household income. Overall, it shows government spending and taxes reduce income inequality by more than 40% in Australia. Disparities between the richest and poorest states are also greatly reduced.
The ABS analysis provides the most up-to-date (to 2015-16) and comprehensive figures on the impacts of government spending and taxes on income distribution. As well as direct taxes and social security benefits, it estimates the impact of “social transfers in kind” – goods and services that the government provides free or subsidises. These include government spending on education, health, housing, welfare services, and electricity concessions and rebates.
The figures also include a wide range of indirect taxes. Among these are GST, stamp duties and excises on alcohol, tobacco, fuel and gambling.
The 2015-16 results are the seventh in a series published every five to six years since 1984. The methodology is based on similar studies by the UK Office of National Statistics since the 1960s. The latest UK analysis coincidentally also came out on Wednesday.
How do the calculations work?
The ABS analyses income distribution in a number of stages.
First, it calculates the distribution of “private income”. This includes wages and salaries, self-employment, superannuation, interest, dividends and income from rental properties, among other items. It also includes net imputed rent from owner-occupied dwellings and subsidised private rentals.
Next the ABS adds social security benefits, such as the Age Pension, unemployment and family payments, to give “gross income”.
Then it deducts direct taxes – primarily income tax – to give “disposable income”.
The next stage is to add the estimated value households derive from government services. This is mainly the value of public health care and education spending.
The final stage is to deduct the estimated value of indirect taxes.
So what are the impacts on income inequality?
It is possible to calculate measures of economic inequality at different stages in this process. By implication, the difference between inequality measures is the result of the different government policies taken into account.
Figure 1 shows the Gini coefficient, which ranges between zero – where all households have exactly the same income – and 100% – where one household has all of the income. The Gini coefficient for private income in 2015-16 was 44.2. The addition of social security benefits, which mainly increase the incomes of low-income groups, reduces the coefficient by 8.1 percentage points.
Deducting income taxes – which are progressive – further reduces inequality by 4.5 points. Government non-cash benefits reduce the Gini coefficient by nearly as much as the social security system. However, indirect taxes slightly increase income inequality.
The Gini coefficient for final income is 24.9. So, compared to a coefficient of 44.2 for private income, government spending and taxes reduce overall income inequality by more than 40%.
Figure 2 shows the distribution of social security benefits and government services across income groups, from the poorest 20% to the richest 20% of households. The poorest 20% receive about seven times as much in benefits as the richest 20%. The average for OECD countries is close to one, with rich and poor receiving about the same amount.
Government spending on social services is also progressively distributed. This spending is considerably greater than social security spending and includes both Commonwealth and state spending on education and health.
The poorest 20% receive about 70% more in non-cash benefits than do the richest. This is not due to income-testing. Instead, it’s largely a result of the greater value of public health spending on hospitals and Medicare for older people, who tend to be in the bottom half of the income distribution.
Taxes, of course, work to reduce income inequality, as high-income groups pay a higher share than low-income groups. Figure 3 shows that the poorest 20% pay about 5% of their disposable income in direct taxes, while the richest 20% pay about 30% of their disposable income.
In contrast, indirect taxes – particularly those on tobacco and gambling – are regressive. Low-income groups pay more than high-income groups as a share of their disposable income. However, the undesirable effects of smoking and gambling on the wellbeing of low-income households need to be borne in mind.
When direct and indirect taxes are added together the overall tax system is less progressive, but the richest 20% still pay nearly twice as much of their disposable income as do the poorest 20%.
Redistribution also happens between age groups and states
In addition to reducing inequalities between income groups, government spending and taxes redistribute across age groups. Government spending is much higher for households of Age Pension age than for younger households. This is because of both the Age Pension and older households’ use of the healthcare system.
For example, households where the reference person is 75 or older receive on average just over $1,000 a week in government spending but pay about $180 a week in direct and indirect taxes. Households with a person aged 45 to 54 pay the highest taxes on average – about $800 per week – and on average receive about $620 a week in social spending.
There is also redistribution across states and territories. For example, average private income is about 65% higher in Western Australia than in Tasmania. However, on average, Western Australian households receive about two-thirds of the social security benefits that Tasmanian households get. This reduces the disparity in gross income to about 45%.
Western Australian households pay about twice as much in income taxes as Tasmanians, reducing the disparity to 35%. Households in the West receive only about 3% more in spending on social services than in Tasmania, which reduces the disparity in average incomes to 28%. West Australian households also pay about 20% more in indirect taxes than Tasmanian households (although as a percentage of disposable income, this is a higher share in Tasmania).
These figures suggest that while the financing of fairly equal social services across most parts of Australia reduces inequality between states, the income tax and social security systems also significantly reduce disparities. This is because income tax and social security are national systems and because Tasmania is the poorest state largely due to the higher share of age pensioners in its population.
Overall, this publication provides an invaluable picture of how government spending and taxes affect household economic well-being. Its results are relevant not only to the political debate about tax cuts, but also to long-term policy development to prepare Australia for an ageing population.
Author: Peter Whiteford, Professor, Crawford School of Public Policy, Australian National University
Australians can now get on board the drive for change to tackle Elder Financial Abuse in a new campaign launched today by the Australian Banking Association, National Seniors, the Council on the Ageing, the Older Persons Action Network and the Finance Sector Union says the ABA.
The campaign invites Australians to write to their state or territory Attorneys General demanding change to empower bank staff to properly detect and safely report Elder Financial Abuse.
In February, Australia’s banks renewed their push for change and called on the Federal, state and territory governments to have key policy changes decided by Christmas. These changes are:
Standardised Power of Attorney orders across state and territories
An online register of Power of Attorney Orders
A designated safe place for local bank staff and members of the public to report suspected abuse.
CEO of the Australian Banking Association Anna Bligh said this was a chance for all Australians to show their support and call on lawmakers to make the changes needed without further delay.
“While elder abuse can take many forms, elder financial abuse is one of the most common forms and one that local bank branch staff witness regularly,” Ms Bligh said.
“The Australian public can now take part in our campaign by logging onto our website and writing directly to their state or territory or Federal Attorneys General calling on them to take urgent action.
“Bank staff unfortunately all too often see people who are their customers being pressured to give access to their accounts, all too often see their accounts being drained by family members, by friends that they trust and care about.
“This is a really difficult, complex problem, but there are things that can be done about it.
“We need a standardised power of attorney order, with an online register and a designated safe place to report suspected abuse to help address this growing problem in our community.
“Australian banks, along with seniors’ groups and the Financial Services Union, are calling on the Federal Government and the states and territories to take these actions to empower local branch staff to detect and report suspected Elder Financial Abuse.
“The last meeting of Attorneys General was an important step in taking action, however every day we delay the problem continues and grows in our community,” she said.
Since the Government released the report of the Independent Panel’s Review of the Small Amount Credit Contract Laws in April 2016, three million additional loans have been written, worth an estimated $1.85 billion and taken by some 1.6 million households.
In that time, around one fifth of borrowers or around 332,000 households, were new payday borrowers.
We also know that over a 5-year period around 15% of payday borrowers will get into a debt spiral which leads to events such as bankruptcy. On that basis, an additional 249,000 households have been allowed to enter a debt path which leads to this unfortunate end. A larger number fall into other family or relationship issues when borrowing from this source.
Digital Finance Analytics was asked by the Consumer Action Law Centre to complete custom modelling using data contained in our rolling 52,000 per annum household surveys, focussing in on the question of the quantum and impact of delays in the proposed legislation relating to the sector.
Specifically, we estimated the incremental damage done to households in terms of the value of loans taken since the final review was published on 19th April 2016, as well as some observations as to the characteristics of borrowers over this period.
The data presented is this paper is somewhat indicative, in that we made a number of reasonable assumptions to support our findings.
The survey remains as statistically robust sample (aligns with the most recent ABS census data).
We have extrapolated 2018 figures on the current run rates per month.
We have not tried to overlay the potential before and after impacts, had the proposed changes been made to payday sector, but we have considered the mix and impact of loans taken during this time.
We use the term “payday loans” to refer to those loans made within the SACC (Small Amount Credit Contract) legislation, so this excludes medium term loans and other personal credit facilities.
The Current Size of the Payday Market
We continue to see some growth in the payday sector overall.
In 2016, the total loans written (loan flows) were in the order of $736 million and based on projections for the full year 2018, this will rise to $925 million. However, because payday lending is by nature short term, the incremental value of $189 million is not the full measure of loans written in the period. We will estimate this later in the paper.
Of note is the significant increase in online origination, with 83% of loans now accessed via a web site on a mobile device or another computing device.
The other important factor is to note the switch in types of customers being attracted by these services. As a result of tighter controls on loans to Centrelink recipients, and the rise in online services, the mix between those we classify as financially distressed (those with immediate financial needs and no alternative) and financially stressed (those with financial needs, with alternatives, but who reach for payday loans as a simple, quick and confidential alternative) has increased, and is facilitated by greater online access.
Since 2016, the total loan flows have risen by $191 million for financially stressed, but the value of loans to distressed households has remained static. But again the net value of loans does not tell the full story.
The Number of Households with Payday Loans
Value apart, the other perspective is the number of households taking payday loans. Since 2016, the number has risen by 149,000 households. Of that 13,000 are classified as distressed households and 136,000 are stressed households.
This once again reflects the refocussing of the industry of those in financial pain rather than distress. Within these numbers we note a continued rise in the number of women accessing payday loans. The number of women using payday loans has risen from 177,000 in 2016 to 226,000 in 2018. This represents a rise to 22.18% of all borrowers.
Within the women segment we see a large number of one-parent women accessing payday loans, representing 40% of women.
This is in stark contrast to males where just 6% are one-parent families.
How Many Loans, and What Value Has Been Written Since 2016?
The final part of our analysis we examined the run rate of loans written by volume and value to assess the impact of the Government inaction since April 2016.
Since April 2016 and June 2018, just over 3 million discrete payday loans have been written, worth in total around $1.85 billion by around 1.6 million households. These loans would have generated something in the order of $250 million in net profit to the lenders.
In that time, around one fifth of borrowers will be new borrowers, or around 332,000 households. We also know that over a 5-year period around 15% of payday borrowers get into a debt spiral which leads to events such as bankruptcy. On that basis, an additional 249,000 households have been allowed to enter a debt path which leads to this unfortunate end. A larger number fall into other family or relationship issues.
The way “gig workers” are paid and protected might be about to change, as a result of legal proceedings brought by the Fair Work Ombudsman. The Ombudsman alleges that food-delivery platform Foodora underpaid three workers by A$1620.74, plus superannuation, in a four-week period.
The Ombudsman argues that while Foodora engaged these workers as independent contractors, they were in reality employees. If the action succeeds, it could be positive for the underpaid workers, but it could also drive down working conditions.
The food-delivery platforms have stated they would be willing to give their workers more benefits, such as training. But not at the cost of workers being classified as employees. If the Ombudsman’s case succeeds, it could cause gig platforms to offer fewer protections in order to ensure workers are classified as contractors.
This could not only disrupt the food-delivery sector, but have a broader impact on the gig economy, restaurants, customers and workers.
If a contractor performs poor work they are legally liable for that. But an employer is responsible for the poor work of an employee.
In many cases this distinction is clear-cut. However, in the gig economy these workers operate in a grey area, one the Fair Work Ombudsman seeks to test.
Whether workers can be classified as employees or contractors depends on a variety of factors, including the nature of the work. If workers are deemed employees then they receive a greater number of protections, including minimum wage rates.
In one case, Commissioner Nick Wilson stated that “[the driver] did not bring anything especially entrepreneurial to the arrangement” but also that “it is evident that the weight of those indicators leads to the finding that [the driver] was not engaged as an employee, but instead as an independent contractor”.
The Fair Work Ombudsman’s decision to intervene in the food-delivery sector might be a response to poor working conditions for gig workers. But the decision to go after Foodora specifically could dissuade rather than encourage other platforms to improve working conditions.
As shown in the table below, the three major food-delivery platforms have varying approaches to engaging workers. For instance, Foodora, in the period under investigation, would engage workers for set periods of time, rather than per delivery. Deliveroo and Foodora also provided uniforms for workers, while UberEATS did not.
Authors’ original work based on Fair Work Ombudsman, The Australian Financial Review, The Guardian Australia, original research.
The fact that the case was brought against Foodora suggests that the company has the most direct relationship with workers, and thus its workers are most likely to be classified as employees.
Our research shows, however, that these work practices are evolving all the time.
For instance, Deliveroo argued that it “… wishes to be able to provide additional benefits to [workers] without the risk of those benefits changing the relationship from one of self-employed riders to riders employed by Deliveroo”.
UberEATS similarly argued that “current employment classifications create significant disincentives: they can mean that offering training to these [workers] can compromise the self-employed status of the individual. We believe that companies should be incentivised, not penalised, for helping independent workers”.
This is why the Fair Work Ombudsman’s decision to target Foodora may be counterproductive. It sends the signal that the better you treat your workers, the more likely they are to be classified as employees, the more expensive your labour costs will be and the more inflexible your operation will become.
However, unlike high-profile franchising cases such as the underpayment of 7/11 workers, their current classification as contractors means this practice is within the law.
If the Fair Work Ombudsman is successful and these workers are reclassified as employees, it might provide a disincentive for other platforms to protect workers. The law itself might need to change.
Authors: Tom Barratt, Lecturer, School of Business and Law, Edith Cowan University; Alex Veen, Scholarly Teaching Fellow in Work and Organisational Studies, University of Sydney; Caleb Goods, Lecturer – Management and Organisations, UWA Business School, University of Western Australia
RBA Governor Philip Lowe discussed the state of the economy today, in a speech “Productivity, Wages and Prosperity“. His remarks included a section on wage growth. He concluded that any pick-up is expected to be only gradual given both the spare capacity that still exists in our labour market and the structural factors at work.
Over recent times, wages growth around the 2 per cent mark has become the norm in Australia. Some time back, the norm was more like 3 to 4 per cent. This downward shift in the rate of wages growth is clearly evident in the wage price index as well as in the more volatile measure of average hourly earnings in the national accounts.
There are both cyclical and structural explanations for why this change has taken place.
From the cyclical perspective, there is still spare capacity in the labour market. The unemployment rate has been around 5½ per cent for a year now. While we can’t be definitive about what constitutes full employment, most conventional estimates for Australia are that it means an unemployment rate of around 5 per cent. It is possible, though, that we could do better than this, especially if we approach the 5 per cent mark at a steady pace, rather than too quickly. Indeed, in a number of other countries, estimates of the unemployment rate associated with full employment are being revised lower as wage increases remain subdued at low rates of unemployment. We have an open mind as to whether this might turn out to be the case here in Australia too. Time will tell.
Broader measures of underutilisation suggest another source of spare capacity in the labour market. Currently, around one-third of workers work part time, with most of these people wanting to work part time for personal reasons. However, of those working part time, around one-quarter would like to work more hours than they do; on average, they are seeking an extra two days a week. If we account for this, these extra hours are equivalent to around 3 per cent of the labour force. This suggests an overall labour underutilisation rate of 8¾ per cent, compared with the 5½ per cent traditional unemployment rate measure based on the number of unemployed people.
Recent experience also reminds us of another important source of labour supply; that is, higher labour force participation. As we have seen over recent times, when the jobs are there, people stay in the workforce longer and others, who had not been looking for jobs, start looking. So the supply side of the labour market is quite flexible, even more so than we expected.
Another cyclical element that has affected average hourly earnings over recent years is the decline in very highly paid jobs in the resources sector as the boom in mining investment wound down. It looks, though, that this compositional shift has now largely run its course.
These various factors go some way to explaining the low wages growth over recent times. When there is spare capacity in the labour market, it is understandable that wages growth is slow.
Yet, alone, these cyclical factors don’t fully explain what is going on. Some structural factors also appear to be at work, with perhaps the most important of these related to competition and technology. I will come back to this in a moment.
The idea that structural factors are at work is supported by this next graph, which shows the wage price index and the responses to the NAB business survey where firms are asked whether the availability of labour is a constraint on output. While there is still spare capacity in the labour market, firms are finding it more difficult to find suitable workers. Yet despite this difficulty, wages growth has not responded in the way that it once did.
A similar pattern is evident overseas. This next graph shows wages growth in the United States and the euro area as well as survey-based measures of labour market tightness (similar to those in the NAB survey). In both economies, wages growth has picked up in response to tighter labour markets, but the response is not as large as it has been in the past.
We are still trying to understand fully why things look different in so many countries and how persistent this will be. Part of the story is likely to be changes in the bargaining power of workers and an increase in the supply of workers as the global economy becomes increasingly integrated. But another important part of the story lies in the nature of recent technological progress.
There are a couple of aspects of this progress that are worth pointing out. One is that it has been heavily focused on software and information technology, rather than installing new and better machines – or on intangible capital rather than physical capital. The second is that the dispersion of technology and productivity between leading and lagging firms has increased, perhaps because of the uneven ability of firms to innovate and use the new technologies. The OECD has done some very interesting work documenting this increasing productivity gap.
Both of these aspects of technological progress are affecting wage dynamics. The returns to those who can develop and best use information technology have increased strongly. These returns, though, are often highly concentrated in a few firms and in only certain segments of the labour market. At the same time, the firms that are not able to innovate and take advantage of new technologies as quickly are slipping behind and they feel under pressure. As a way of remaining competitive, many of these firms are responding by having a very strong focus on cost control. In many cases this translates into a focus on controlling labour costs. This cost-control mentality does not make for an environment where firms are willing to pay larger wage increases.
Over time, we can expect the diffusion of new technology to take place. This is what the historical record suggests. I am optimistic that this diffusion will boost aggregate productivity and lift our real wages and incomes. Advances in information technology, in artificial intelligence and in machine learning have the potential to reshape our economies profoundly and lift average living standards in ways that are difficult to envisage today. But the adoption and the diffusion of these new technologies is a gradual process; it takes time. While it is taking place, the benefits of new technologies are accruing unevenly across the community. In my view, this is one of the key structural factors at work.
Whatever weight one places on these various factors constraining wages growth, it is clear that the slow growth in wages is affecting our economy.
On the positive side of the ledger, it is one of the factors that has helped boost employment growth over recent times. Of course, there are other effects as well.
One is that the low growth in wages is contributing to low rates of inflation in Australia. Indeed, if wages growth were to continue at around its current rate for an extended period, it is unlikely that the rate of inflation would average around the midpoint of the inflation target in the period ahead. Wages growth of 2 per cent and reasonable labour productivity growth are unlikely to make for 2½ per cent inflation on a sustained basis.
Another consequence is that real debt burdens stay higher for longer. Many people who borrowed expected their incomes to grow at something like the old rate rather than the current rate. With their expectations not being realised, the real value of the debt stays higher than they expected and this is likely to affect their spending decisions.
And beyond these purely economic effects, the slow wages growth is diminishing our sense of shared prosperity. If this remains the case, it can make needed economic reforms more difficult.
Given these various effects, some pick-up in wages growth would be a welcome development. It would help deliver a rate of inflation consistent with the target, it would help with the debt situation and it would add to our sense of shared prosperity.
In my judgement, a return, over time, to a world where wage increases started with a 3 rather than a 2 is both possible and desirable. To be clear, this is not a call for a sudden jump in wages growth from current rates to 3 point something. Rather, we will be better off if this increase takes place steadily over time as the economy improves.
There are some signs that we are starting to move in this direction, but it is likely to be a gradual process.
Labour markets in most parts of the country have tightened over the past year. One piece of evidence in support of this is the responses to the NAB survey I showed earlier. There has been a sharp increase in the share of firms reporting the availability of labour as a constraint (Graph 6). The only other time in the past 25 years where this share has been as high as it is now was in the early stages of the resources boom. These survey results are consistent with what the RBA is hearing through our own business liaison program.
One explanation for why firms are reporting that it is hard to find workers with the necessary skills is that the very high focus on cost control over recent times has led to reduced work-related training. With the labour market now tightening, we are perhaps starting to pay the price for this. On a more positive note, a number of businesses and industry associations are now starting to address the skills shortage. Some businesses also tell us that another factor that has made it more difficult to find workers with the necessary skills is the tightening of visa requirements.
It’s reasonable to expect that as the labour market tightens, wages growth will pick up. The laws of supply and demand still work. Consistent with this, we hear reports through our liaison program of wages increasing more quickly in areas where there are capacity constraints, although these reports are still not very common.
As part of our liaison program we also ask firms about their expectations for wages growth over the next year: whether it will be lower, higher or about the same as the recent past. The results are shown in this next graph. There are now more firms expecting a pick-up in wages growth and fewer firms expecting a decline compared with recent years.
So it is reasonable to expect growth in wages to pick up from here. To repeat the point, though, this pick-up is expected to be only gradual given both the spare capacity that still exists in our labour market and the structural factors at work.
The latest Digital Financial Analytics Household Financial Confidence Security Index for May 2018 is released today. The index tests households attitudes to their finances, based on our 52,000 rolling household survey.
The index dropped to 90.2, down from 91.7 last month. This is below the neutral setting of 100.
Property-related sentiment is hitting hard, especially in New South Wales and Victoria where price falls are most evident. In Western Australia and South Australia, the index hardly moved compared with last month, and in Queensland it slid just a tad.
Looking across our property segments, those not in the property game, and renting or living continue to languish. But we also are tracking falls among property investors, reflecting difficulty in obtain finance, higher interest rates, and falling property prices, and now, also those who are owner occupiers. Both of these property owning segments slid again, mirroring falls in property prices, and the slowing auction clearance rates. That said, those owning property are still relatively more confident about their finances, compared with renters, so the property effect continues.
Across the age bands, those aged 40-50 were a little more confident, reflecting recent stock market progress, especially among those without mortgages (yes, some have paid down their loans completely), while levels of employment remain pretty good. But for younger households the budget pressure on them remains severe, especially those paying rent, or mortgages. Those entering the retirement phase, 60+ continue to wrestle with outstanding mortgages (many hold these loans into retirement now) and also lower returns from deposits.
We can examine the moving parts within the index, to get a sense of what is driving the results. First we look at job security. Something appears to be happening here, as the proportion feeling less secure is rising, up 1.7% compared with last month. There was also a fall by 2.4% of those reporting no change in sentiment compared with last month. Below the hood, it appears that more are involved in multiple part-time jobs, and becoming swept up in the gig economy. Zero-hours contracts appear to be on the rise in some industry sectors. So, while the number of jobs created may be north of one million as the Government often says, we question the quality of these jobs, and their security. Our index reveals another perspective.
This may also help to explain the fall in real income (after inflation) many households are experiencing. 54% of households said their incomes had fallen in the past year, and only a small fraction report a rise. 43% say there has been no change since June 2016. There are a number of drivers here, but the main one is simply no, or low pay rises, adjustments to overtime rates, and lower returns from bank deposits. Many older households rely on income from savings and this in under pressure with the current low interest rates, and banks trimming their deposit rates too boot.
On the other hand, the costs of living continue higher. Nearly 81% of households say their costs are higher than a year ago, up 2% on last month. The litany of rising categories includes electricity, fuel, health care costs, school fees and child care costs. But households are also reporting higher costs at the supermarket, and a tendency to eat in, rather than out, to keep costs under control. More also turning to credit cards, or pulling equity from their properties to keep the household afloat.
On the savings front, more are concerned about the amount they have for emergencies. Just 2% are more comfortable compared with last month, while 46% are less comfortable, up 1% on last month. The interest rates offered on bank deposits continue to fall, and this is impacting many who rely on a regular savings generated income. Those who are in the stock market are a little more positive, but the recent crash in bank shares following the revelations from the Royal Commission, and other adverse events, translates to lower confidence. Its worth remembering that nearly half of dividends paid last year came from the financial sector.
Households continue to feel the pressure from debt. 45% of households are less comfortable with the debt they owe, up 0.6% from last month. Around 49% remain the same as a year ago, and 3% are more comfortable. The drivers relate to larger mortgages, and higher real mortgage rates (despite some refinancing to gain a lower rate); the inability to get mortgage funding due to tighter lending standards, and a rise in equity withdrawals and some areas of personal credit. While personal credit balances overall are falling, personal debt is concentrated in households with larger mortgages and here it is rising. Payday lending is also on the rise. In addition, households are concerned about the prospect of higher interest rates ahead. Many are stuck in the debt machine.
Finally, and putting the data together, we look at net worth – defined as assets less loans outstanding. 47% of households say their net worth has improved over the past year, down 4% on last month, as property values slide and household debt rises. 22% reported their net worth was lower, up 2% compared with last month and 28% said there was no change in the past year.
So, the pressures on household finances are clearly visible in these results, and bearing in mind the expected continued fall in home prices, and the prospect of interest rate hike, plus flat incomes, we expect the trend to continue to weaken in the months ahead.
This is certainty a different read compared with the recent headlines of jobs and GDP growth, and it shows the disconnection between the top-line narrative, and the real experiences of households across the country.
Whilst banks have reduced their investor mortgage interest rates to attract new borrowers, we believe there will also be more pressure on mortgage interest rates as funding costs rise, and lower rates on deposits as banks trim these rates to protect their net margins. In the last reporting round, the banks were highlighting pressure on their margins as the back-book pricing benefit from last year ebbs away.
By way of background, these results are derived from our household surveys, averaged across Australia. We have 52,000 households in our sample at any one time. We include detailed questions covering various aspects of a household’s financial footprint. The index measures how households are feeling about their financial health. To calculate the index we ask questions which cover a number of different dimensions. We start by asking households how confident they are feeling about their job security, whether their real income has risen or fallen in the past year, their view on their costs of living over the same period, whether they have increased their loans and other outstanding debts including credit cards and whether they are saving more than last year. Finally we ask about their overall change in net worth over the past 12 months – by net worth we mean net assets less outstanding debts.
Nine ran a short segment last night.
The ABS analysis provides the most up-to-date (to 2015-16) and comprehensive figures on the impacts of government spending and taxes on income distribution. As well as direct taxes and social security benefits, it estimates the impact of “social transfers in kind” – goods and services that the government provides free or subsidises. These include government spending on education, health, housing, welfare services, and electricity concessions and rebates.
Digital Finance Analytics was asked by the Consumer Action Law Centre to complete custom modelling using data contained in our rolling 52,000 per annum household surveys, focussing in on the question of the quantum and impact of delays in the proposed legislation relating to the sector.
Since 2016, the total loan flows have risen by $191 million for financially stressed, but the value of loans to distressed households has remained static. But again the net value of loans does not tell the full story.
This once again reflects the refocussing of the industry of those in financial pain rather than distress. Within these numbers we note a continued rise in the number of women accessing payday loans. The number of women using payday loans has risen from 177,000 in 2016 to 226,000 in 2018. This represents a rise to 22.18% of all borrowers.
Within the women segment we see a large number of one-parent women accessing payday loans, representing 40% of women.
This is in stark contrast to males where just 6% are one-parent families.
How Many Loans, and What Value Has Been Written Since 2016?
Since April 2016 and June 2018, just over 3 million discrete payday loans have been written, worth in total around $1.85 billion by around 1.6 million households. These loans would have generated something in the order of $250 million in net profit to the lenders.
Property-related sentiment is hitting hard, especially in New South Wales and Victoria where price falls are most evident. In Western Australia and South Australia, the index hardly moved compared with last month, and in Queensland it slid just a tad.
Looking across our property segments, those not in the property game, and renting or living continue to languish. But we also are tracking falls among property investors, reflecting difficulty in obtain finance, higher interest rates, and falling property prices, and now, also those who are owner occupiers. Both of these property owning segments slid again, mirroring falls in property prices, and the slowing auction clearance rates. That said, those owning property are still relatively more confident about their finances, compared with renters, so the property effect continues.
Across the age bands, those aged 40-50 were a little more confident, reflecting recent stock market progress, especially among those without mortgages (yes, some have paid down their loans completely), while levels of employment remain pretty good. But for younger households the budget pressure on them remains severe, especially those paying rent, or mortgages. Those entering the retirement phase, 60+ continue to wrestle with outstanding mortgages (many hold these loans into retirement now) and also lower returns from deposits.
We can examine the moving parts within the index, to get a sense of what is driving the results. First we look at job security. Something appears to be happening here, as the proportion feeling less secure is rising, up 1.7% compared with last month. There was also a fall by 2.4% of those reporting no change in sentiment compared with last month. Below the hood, it appears that more are involved in multiple part-time jobs, and becoming swept up in the gig economy. Zero-hours contracts appear to be on the rise in some industry sectors. So, while the number of jobs created may be north of one million as the Government often says, we question the quality of these jobs, and their security. Our index reveals another perspective.
This may also help to explain the fall in real income (after inflation) many households are experiencing. 54% of households said their incomes had fallen in the past year, and only a small fraction report a rise. 43% say there has been no change since June 2016. There are a number of drivers here, but the main one is simply no, or low pay rises, adjustments to overtime rates, and lower returns from bank deposits. Many older households rely on income from savings and this in under pressure with the current low interest rates, and banks trimming their deposit rates too boot.
On the other hand, the costs of living continue higher. Nearly 81% of households say their costs are higher than a year ago, up 2% on last month. The litany of rising categories includes electricity, fuel, health care costs, school fees and child care costs. But households are also reporting higher costs at the supermarket, and a tendency to eat in, rather than out, to keep costs under control. More also turning to credit cards, or pulling equity from their properties to keep the household afloat.
On the savings front, more are concerned about the amount they have for emergencies. Just 2% are more comfortable compared with last month, while 46% are less comfortable, up 1% on last month. The interest rates offered on bank deposits continue to fall, and this is impacting many who rely on a regular savings generated income. Those who are in the stock market are a little more positive, but the recent crash in bank shares following the revelations from the Royal Commission, and other adverse events, translates to lower confidence. Its worth remembering that nearly half of dividends paid last year came from the financial sector.
Households continue to feel the pressure from debt. 45% of households are less comfortable with the debt they owe, up 0.6% from last month. Around 49% remain the same as a year ago, and 3% are more comfortable. The drivers relate to larger mortgages, and higher real mortgage rates (despite some refinancing to gain a lower rate); the inability to get mortgage funding due to tighter lending standards, and a rise in equity withdrawals and some areas of personal credit. While personal credit balances overall are falling, personal debt is concentrated in households with larger mortgages and here it is rising. Payday lending is also on the rise. In addition, households are concerned about the prospect of higher interest rates ahead. Many are stuck in the debt machine.
Finally, and putting the data together, we look at net worth – defined as assets less loans outstanding. 47% of households say their net worth has improved over the past year, down 4% on last month, as property values slide and household debt rises. 22% reported their net worth was lower, up 2% compared with last month and 28% said there was no change in the past year.
So, the pressures on household finances are clearly visible in these results, and bearing in mind the expected continued fall in home prices, and the prospect of interest rate hike, plus flat incomes, we expect the trend to continue to weaken in the months ahead.
