Has wage growth now peaked?

Wages soared in the wake of the COVID pandemic, driven by a tight labour market and inflationary pressures. This was particularly true between 2021 and 2022, when unemployment fell to historically low levels and businesses faced significant skills shortages. However, at the end of last year, the RBA released data showing that the rate of wage growth had finally peaked.

But this doesn’t mean labour costs are necessarily falling. Rising superannuation contributions and lingering inflation pressures mean businesses still face cost challenges. We explore what this means for your business in 2025 and beyond.

1. Australia’s post-pandemic wage surge ends

Wage growth surged in the wake of the COVID-19 pandemic, driven by an exceptionally tight labour market, in which unemployment fell as low as 3.4%.

With skills in short supply businesses scrambled to attract and retain workers, leading to rapid pay increases. By late 2022, however, this post-pandemic surge had peaked as the labour market eased and inflationary pressures began to stabilise.

The RBA says the peak in wage growth first became noticeable in individual contracts, which cover around 40% of all Australian employees. It detected the first signs here in late 2022, as the effect of government COVID subsidies dissipated and economic conditions began to normalise.

Growth in individual contract rates of pay was followed by a slowdown in pay increases under enterprise agreements, which cover roughly 35% of the workforce. These tend to lock in pay deals over a three year period.

The same slowdown then impacted Awards, which cover 10% of the workforce, and under which pay rates are set by the Fair Work Commission.

2.   Why you might still face rising labour costs

But just because wage growth has peaked, businesses aren’t out of the woods yet.

Non-wage labour costs, particularly superannuation increases, as well as lingering inflationary pressures, continue to push up overall labour expenses. For example, even though nominal wage growth has slowed, businesses are seeing higher real costs due to mandated superannuation increases and rising operational expenses driven by persistent inflation.

The RBA breaks these indirect costs down into three categories.

Superannuation guarantee increases

The superannuation guarantee contribution rose to 11.5% this year; next year it will rise to 12%. That means employers are still up for additional costs when it comes to employing staff even though employees don’t necessarily see extra pay in their pockets.

Broader labour cost measures matter

Labour costs go beyond wages alone. The RBA also tracks unit labour costs, which account for super, redundancy payments and changes in workforce composition.

These broader measures show that real labour costs are rising faster than wages, adding pressure to businesses – again, this is largely the result of the increase to the SGC.

Inflationary pressures remain

Peaked wage growth doesn’t mean immediate relief from inflation. The RBA says “sticky” components of wage growth, such as lagging enterprise agreements and award-linked rises, combined with non-wage costs like super, will mean real labour costs come under inflationary pressure for some time yet.

What this means for your business

Even though wage growth has peaked, rising non-wage costs mean you should still need to keep wages front of mind. That means coming up with ways to manage labour costs and maintain competitiveness. Here’s what we suggest.

Labour cost management

1. Think total compensation, not just wages.

It’s easy to get caught in the trap of equating labour costs with wages. But even though wages are the main component, labour costs go well beyond someone’s paypacket.

When you’re assessing the cost of an employee, always take into account the extras, such as super, bonuses, payroll tax, workers compensation and any benefits.

Remember, also, that it’s not always about pay. Non-wage benefits, such as flexible work options, professional development opportunities, employee wellness programs, and clear career progression pathways, have become increasingly attractive to employees and can help boost retention without adding significant cost.

Employees choose their employers for a number of reasons, including workplace culture, the opportunity for career advancement, work/life balance, the level of support they receive and the satisfaction they gain from their work. Think holistically about your team members and focus on these, just as much as the numbers.

2. Negotiate enterprise agreements carefully.

Inflation is still a factor, even if it is not quite as rampant as it was a little while ago. So, if you’re entering into new agreements with your staff, look for ways to balance competitive pay with long-term cost control.

Again, you should try to avoid front-loading pay rises unless they’re absolutely necessary – as you could find yourself paying well above the odds down the track.

Productivity focus

1. Invest in upskilling.

By focusing on boosting workforce skills through skills training, you can help increase productivity, which could go some way to offsetting rising unit labour costs.

2. Leverage technology and automation.

Explore opportunities for automation and streamline your processes to improve output per employee.

Strategic workforce planning

1. Monitor award-reliant roles.

In sectors like hospitality, retail, and healthcare, where many agreements are linked to annual wage review outcomes, keep an eye on potential flow-on effects from award increases.

2. Retain talent in individual arrangements.

If you’re relying on individual contracts, focus on non-wage benefits and career growth opportunities to retain key staff without overcommitting to wage hikes.

Opportunities amid the challenges

Remember, even though total labour costs may continue to rise, slowing wage growth will present a few key opportunities for many businesses.

1. Long-term wage stability

With wage growth peaking, you’ll now have a bit more certainty in planning medium-term labour costs. After all, even though the SGC is rising – you already know how much it will be by (i.e. another .5% at the end of the financial year). Wages growth, which tends to be influenced by the market more broadly, is less predictable. This can help with budgeting, forecasting, and structuring future agreements.

2. A cooling labour market

Lower wages growth is a sign of a cooling labour market. As the labour market eases, talent attraction and retention may become less costly compared to the post-pandemic hiring surge. That means you may ultimately find it easier to secure skilled employees without needing to offer above-market wages.

3. Retaining top talent with non-wage benefits

With rising non-wage costs like superannuation putting pressure on budgets, you should be able to focus instead on non-wage incentives to attract and retain talent. Flexible work options, professional development, and clear career progression pathways can be effective ways to stand out without escalating wage bills.

You can read about some of the ways you can reward employees without a pay rise here.

Want more?

The dynamics of the labour market have changed. Staying ahead in your business means taking account of the new realities and using them to your advantage.

If you’d like to know about how to get wages and employee benefits right in your workplace, get in touch.