If history is any guide, things are looking good for Australian workers in 2018.
Employment surged by 383,000 in the 12 months to November, the second-largest increase over a comparable period on record, helping the national unemployment rate fall to just 5.4%, the lowest level since September 2011.
And recent leading labour market indicators such as job vacancies, job ads and various employment measures in business surveys from the National Australia Bank and Ai Group all point to the likelihood that employment growth will remain strong in the first half of 2018.
Under usual circumstances, strong employment growth and falling unemployment should help to boost wage pressures, something all Australian workers would undoubtedly welcome after years of record-low wage growth.
However, something has gone amiss recently, and not just in Australia, with the relationship between unemployment levels and wage rates seemingly breaking down in the years following the global financial crisis.
Despite tightening labour market conditions — as seen in falling unemployment and underemployment rates around the world — wage growth is not responding anywhere near the way it used to do in the pre-crisis era.
It’s still incredibly weak, even in developed nations such as the US, UK and Japan, where labour market conditions are incredibly strong.
Locally, one only has to look at Australia’s wage price index (WPI) for the September quarter last year for evidence as to just how much things have changed.
Despite an unusually large 3.3% increase in Australia’s minimum wage rate at the start of July, average ordinary hourly earnings per worker grew by just 0.48% in the quarter, missing forecasts for a larger increase of 0.7%.
Without the impact of the minimum wage increase — something that was expected to boost the quarterly rate by around 0.2 percentage points — it suggests that underlying wage growth would have been somewhere in the region of 0.3%, potentially the lowest level on record.
As a result of the soft quarterly result, annual wage growth also came up short, rising by 2.01%, below the 2.2% level expected.
While above the 1.94% annual rate recorded in the previous quarter, the weak result — coming despite booming labour market conditions and the minimum wage increase — again created doubt as to whether wage pressures will build in the year ahead as the Reserve Bank of Australia (RBA) and others currently expect.
Well, if new research from UBS is anything to go by, 2018 could be another disappointing year for those who are looking for stronger labour market conditions to help boost wage pressures.
Based on enterprise bargaining agreements (EBAs) struck in the September quarter of 2017, George Tharenou and Carlos Cacho, Economists at UBS, say that it appears underlying wage pressures in Australia are continuing to slow.
“We keep banging on about EBAs because they provide an accurate indicator of turning points in the Wage Price Index,” say Tharnou and Cacho.
“While wages have now troughed, they rose to only 2.0% year-on-year in [the September quarter of 2017] and the continued fall in EBAs suggests underlying wage pressure has weakened further.”
Enterprise bargaining is the process of negotiation generally between the employer, employees and their bargaining representatives with the goal of making an enterprise agreement, according to Australia’s Fair Work Ombudsman.
It sets out the terms and conditions of employment between an employee or group of employees and one or more employers. According to UBS, EBAs currently cover 36% of all Australian workers.
This chart, supplied by UBS, helps explain why Tharnou and Cacho remain pessimistic on the outlook for wage growth.
It overlays the Australian Bureau of Statistics (ABS) quarterly wage price index against wage rates stuck in recent EBAs.
As it reveals, even with booming employment growth and falling unemployment, new wage agreements in EBA’s continue to plumn record lows.
“New EBA’s struck in [the June quarter of 2017] showed a disappointing further fall to a new record low of 2.6% annual rate, well down from the prior trend of 3-3.5%,” say Tharnou and Cacho.
“There is a similar trend across both the private sector at 2.6%, and public sector at 2.5%.
“Indeed, even construction — which remains the strongest industry — dropped back to a 24-year low of 3.7%.”
And, with new pay rates for EBAs coming in substantially below those that they replace, Tharnou and Cacho suggest weak wage pressures will likely persist for some time yet.
“The flow of new EBAs is below the average of the stock outstanding by the largest margin in history,” they say, pointing to the chart below that shows the gap between new and existing EBA annual pay rates is currently 0.5 percentage points, the widest ever seen before.
“So given EBAs last for around 3 years, as existing EBAs expire they are been replaced with lower wage rates.
“Unless new EBA’s suddenly rebound — outside of the minimum wage decision impact on other awards — EBAs are likely to remain a cap on overall underlying wage pressure ahead.”
UBS says this points to the likelihood that Australia’s WPI “will remain near a record low in coming quarters”, creating a scenario where inflationary pressures will not build to degree required to see the RBA begin to lift official interest rates.
“The continued decline in EBAs suggests that expectations of wages growth — including from the RBA & Treasury — are still too optimistic, with downside risks even to our own conservative expectations,” says Tharenou and Cacho.
“This further reinforces our long-held view that the future rise in wages/CPI will disappoint the hawks — despite booming jobs — and is key to our below consensus RBA rate hike call for a start to normalisation in [the first half of 2019].”
We’ll get further clarity on whether UBS is right next month with the ABS scheduled to release Australia’s December quarter WPI on Wednesday, February 21. That release will be followed a day later by the ABS’ semi-annual average weekly earnings report, a release that will look at not only hourly pay rates but also the amount of hours worked.
Given strength in other parts of the economy, they potentially loom as some of the most important data releases in Australia when it comes to the outlook for interest rates.