Fired Miner’s 50% Pay Cut Just Start of Australian Wage Pain – by Michael Heath (June 14, 2015)

For 20 years Australians doubled down on debt, confident that rising wages would inflate away the burden and grow their wealth. Now their luck seems to be running out.

Geologist Marzena Grochot has been forced to go back to her former career as a dental technician after losing her mining job that paid twice as much. Her plan to sell the family’s two-storey, four-bedroom house in Perth is also foundering in a weak market as the impact of collapsing mining investment spills out across the economy.

“It’s affecting everyone — people stop going out and spending money,” the 37-year-old said. “Even working in the dental industry, everything is slowing down because parents can’t afford any more braces for their kids and are postponing treatments.”

Australian wages fell in the first quarter for the first time on record as the wall of Chinese money scooping up the nation’s commodities receded. The implications are profound: stagnant pay limits household spending that accounts for about 55 percent of the economy; it impedes government efforts to repair the budget; and will force the central bank to maintain low interest rates for an extended period or cut even further.

“This is going to be long, it’s going to be slow, it’s going to be a grind,” said James McIntyre, head of economic research in Sydney at Macquarie Bank Ltd. and a former Treasury official. “The risk is it’s going to be painful.”

Main Levers

The three main levers for the economy to adjust to the end of the commodities bonanza are a sharp depreciation of the currency, a surge in productivity or wage cuts, McIntyre said. The Reserve Bank of Australia has focused on the local dollar, yet with a 2 percent cash rate competing against zero levels in major developed economies also seeking lower currencies, its success has been limited.

Higher productivity requires investment to give workers better tools to boost their output, or regulatory changes that improve firms’ operations. But political reluctance to take on vested interests is impeding the structural reforms needed to boost productivity, which dropped in the first quarter.

That leaves pay cuts as the economy’s adjustment mechanism.

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