- Australian wage growth continued to lift in the year to September, increasing at the fastest pace in three years.
- Most economists say unemployment will need to fall a lot further in order to boost wage growth by a meaningful amount.
- All suggest today’s data is unlikely to prompt an earlier-than-expected rate increase from the RBA.
Australian wage growth continued to lift in the year to September, increasing at the fastest pace in three years.
The question many are now asking is whether the recent momentum, seen in the chart below, can last.
While improving labour market conditions over the past few years has undoubtedly helped, many also point out that wage growth has been helped by two large increases in Australia’s minimum wage rate in the past two years, creating some doubt as to whether the momentum in wages can be sustained without large, and legislated, pay increases.
Now that economists have had time to digest the report, it’s time to get their assessment.
Is this the start of a longer-lasting lift in wages, potentially leading to the RBA increasing interest rates for the first time since late 2010, or just a false dawn for workers?
Here’s a collection of views we’ve received so far.
Tom Kennedy, JP Morgan
The fact wage growth is still traversing a 0.5% to 0.6% quarterly range despite the minimum wage boost highlights that although the labour market has tightened through the year, the unemployment rate is still some way from levels necessary to generate any meaningful wage pressure. This is obvious when examining Australia’s Phillips curve which has flattened considerably in the past five years and suggests the jobless rate is now required to fall further than historically has been the case to deliver a given level of wage growth.
For the RBA, today’s print fits with their narrative that although wage growth has troughed for the cycle, the recovery is likely to be gradual and that the path back to levels needed to meaningfully shift the core inflation trajectory is still a long one.
In short, there is nothing in these data to change the RBA’s forecast that wage growth will remain sub-3% through to the end of 2020.
Shane Oliver, AMP Capital
Were it not for the acceleration in minimum wage increases wages, growth would still be running at around 2%, so there is still little evidence of significant pick-up in underlying wages growth.
At least the uptick in wages growth to 2.3% when inflation is just 1.9% means that real wages growth is at least positive. That said, at 0.4% year on year, real wage growth is still very small and won’t provide much of a boost to consumer spending.
Falling unemployment should help contribute to a pick-up in wages growth but with the level of unemployment and underemployment remaining very high at 13.3%, it’s still hard to see a significant acceleration in wages growth. To get wages growth up to a more reasonable 4% probably requires labour market underutilisation to fall to around 10% at least.
David Plank, ANZ Bank
The quarterly change was the largest since the March 2014 quarter. This was, however, a smaller acceleration than we were expecting.
On a more encouraging note, the bonus-inclusive measure of wages rose to 2.8% year-on-year for the private sector — the highest increase since the end of 2014. And our diffusion index, which shows the percentage of industries where wages are accelerating, is at its highest level since 2010.
Further inroads into unemployment and underemployment are necessary preconditions for a more meaningful uplift in wages. We think we’ll get there, but it will take time. Until we do, the RBA will continue talking about the prospect of higher interest rates but won’t actually pull the trigger on a rate increase.
Kaixin Owyong, NAB
The Fair Work Commission mandated a larger-than-usual minimum wage increase this year. While some commentators expected a large boost from the decision, it appears there was only a modest positive impact to Q3 wages. Like in 2017, we suspect there will also be a slight minimum wage boost to WPI in Q4.
A tight labour market, increases in advertised salaries, anecdotal evidence of higher wages and income tax cuts suggest pressure on consumer spending will be alleviated in coming quarters.
Going forward, a tightening labour market will assist with building further wages pressure and the market will be watching the next few wages prints closely. NAB expects tomorrow’s update on the labour market to show the unemployment rate remained at 5% in October.
Gareth Aird, CBA
Things are moving in the desired direction. And the detail was also encouraging. First, private sector wages momentum, which is majority market driven, is accelerating at a slightly faster pace than growth in public sector wages. The annual growth in public sector salaries is still outstripping that of the private sector, but the spread has narrowed.
Second, the annual rate in the “WPI including bonuses” is running at 2.7%. The annual rate lifted sharply in Q1 2018 and has stayed there over the past six months. The data suggest that the use of bonuses, possibly to retain staff as the labour market tightens, may be more prevalent. Recent comments out of the RBA support this idea.
Today’s data is consistent with our view that the next move in the cash rate is up. But there is no case for a near term adjustment in policy and we expect the RBA to remain on hold until well into 2019.