Skill shortages are increasing in Australia

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  • The RBA thinks Australian wage growth will pick up modestly in the period ahead, helping to boost economic activity and inflationary pressures.
  • It says stronger labour market conditions should help to lower labour market underutilisation, pointing to recent reports of growing skill shortages being reported by firms.
  • Recent liaison between the NAB and its business customer base suggest skill shortages are increasing across the country.

The Reserve Bank of Australia (RBA) is optimistic about the outlook for wage growth in Australia – a view it’s held annually since 2011.

At its monetary policy meeting earlier this month, the bank noted that the “rate of wage growth appears to have troughed”, referring the latest Wage Price Index (WPI) for the December quarter which revealed a modest acceleration in wage growth, predominantly in the public sector.

It added that “there are reports that some employers are finding it more difficult to hire workers with the necessary skills”, signalling it’s growing in confidence that strong demand from firms will continue to reduce what are still elevated levels of underutilised workers in the labour market.

While admitting that weakness in wage growth is “likely to continue for a while yet”, the RBA said stronger labour market conditions “should see some lift in wage growth over time”, helping to boost economic activity and inflationary pressures, eventually leading to a scenario where it can begin to increase interest rates for the first time since late 2010.

Given the importance the RBA is placing on wage growth to deliver those results, it’s likely that the bank will be pleased with the trends seen in the chart below from the National Australia Bank (NAB).

Source: NAB

From the NAB’s quarterly Australian business confidence survey, it shows the net proportion of firms indicating that they are having difficulty finding suitably skilled staff.

The total figure, shown in red, is broken down into the proportion of firms reporting minor (blue line) and major difficulty (black line) in finding appropriate workers.

In the most recent survey, over 50% of Australian firms reported some degree of difficulty in finding the right staff, the highest proportion since before the GFC.

Along with recent trends in the business survey, Ivan Colhoun, Chief Markets Economist at the NAB, says liaison with the bank’s business customer base over the past few weeks has also helped to bolster his confidence that wage pressures look set to build.

“The past week took me to Queensland and Tasmania for meetings with customers ranging from large to small corporates,” he says.

“I was struck by the much improved confidence and activity reports in much of Queensland and, in particular, in the north and north west of Tasmania, areas of the state that have been underperforming.

“And while it wasn’t uniform, the other important development was many more reports of skill shortages emerging in Queensland and in Tasmania, in manufacturing, construction and mining services.”

Colhoun says similar views were also heard in Western Australia and South Australia over the past month, something he says will no doubt be picked up by the RBA in its business liaison program.

“The bottom line is that the uniformity of meetings reporting improved activity and increased skill shortages are important signs that the recovery is spreading out through the economy,” he says.

“We should expect that the RBA will detect further reports of increased skill shortages in its business liaison program, which will give it greater confidence that wages will begin to pick-up over time.”

In a speech delivered last week, RBA Governor Philip Lowe said that with the Australian economy “moving in the right direction, and interest rates still quite low, it is likely that the next move in interest rates in Australia will be up, not down”.

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