December quarter wages data released on Wednesday by the Australian Bureau of Statistics showed seasonally adjusted wages rose 3.4 per cent for the year, up from 3.3 per cent, keeping in line with market forecasts.
But the figure is below the 3.8 per cent in annual inflation to December, the first time wages have not kept up with rising prices since September 2023.
Wages also rose by 0.8 per cent for the final three months of the year, keeping in line with the September quarter.
Treasurer Jim Chalmers was still optimistic about the wages data, despite the drop in real wages.
"While we would have liked to have seen real wage growth, today's result is better than what we inherited," he said in a statement.
"This is the longest streak of wages growth above three per cent in more than a decade and a half.
"With inflation higher than we would like, partly due to temporary factors, annual real wages ... fell 0.2 per cent through the year to the December quarter 2025."
The bureau's head of price statistics, Michelle Marquardt, said the year to December showed a four per cent boost for public pay packets, compared to 3.4 per cent for those in the private sector.
"Strong growth in public sector wages for 2025 was due to new state public sector agreements that delivered multiple pay rises over the course of the year," she said.
"Multiple pay rises occurred when agreements included backdated increases that took effect soon after the agreement was finalised and a further scheduled rise was received later in the year."
The figures showed healthcare and social assistance industries were the main contributor to wages growth for the quarter.
The last quarter also coincided with pay rises for aged care workers across Australia, which came into effect from October.
The increase in salary was the final stage of wage rises for the sector following a case lodged by the Health Services Union to the Fair Work Commission at the end of 2022.
Childcare workers also got a five per cent wage rise in December, on top of a 10 per cent boost the previous year.
ACTU secretary Sally McManus said the wage data reinforced the need for collective agreements.
"Workers on union-negotiated agreements continue to be the winners, with a huge gulf now between their average pay rises and those on individual contracts," she said.
Head of economic research for Oxford Economics Australia Harry Murphy Cruise said the wage growth was likely to remain solid due to a tight labour market.
"Nominal wage growth around three to 3.5 per cent is consistent with inflation returning sustainably to target, but only if productivity growth improves," he said.
"If capacity constraints persist and employers are simply paying more for the same level of output, stronger wages will translate into higher unit labour costs, prolonging inflation pressures and keeping interest rates higher for longer."
But the broad pay increases come against a backdrop of a rising number of businesses shutting their doors, with fresh figures showing the hospitality sector under more pressure than other industries.
CreditorWatch's business risk index for January revealed 10.4 per cent of service businesses closed in the past year, double the economy-wide average.
Chief executive Patrick Coghlan said rising wages meant narrow margins for business owners were being squeezed.
"Asset‑backed pubs and clubs are holding firm, but cafes and restaurants are operating on razor‑thin margins with very little room for error," he said.
"When overdue invoices in food service are running at more than double the national average, that's not cyclical noise – it's sustained financial stress."
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