Employees continue to lack confidence in the future
The key development since the GFC that’s contributed to the slow recovery in the Australian (and global) economy has been a substantial reduction in the stock of human capital, reflecting lower expected future incomes growth and sticky personal discount rates. In Australia, nominal average compensation per employee has slowed to a compound annual growth rate of 1.3% in the past four years. Since 2008, if nominal income had grown at the same trend that prevailed in the decade prior, the current quarterly flow of income would be $21.5 billion, amounting to a shortfall of $3 billion ($12 billion annualized). Evidente estimates that expectations of lower future incomes growth have reduced the present value of human capital by around one-third. Despite significantly lower returns on low-risk assets, the rise in the equity risk premium since the crisis suggests that personal discount rates have not declined. The long shadow cast by the financial crisis, persistently high unemployment and widespread anxiety around job security supports the view that the risk premium that households assign to their future income prospects has lifted substantially.