- Annual Australian wage growth is currently running at a little over 2%, near the lowest level on record.
- Credit Suisse looks at what factors have contributed to recent weak wage outcomes.
- It has some advice — buy Australian stocks that sell to other businesses, not you.
According to the Australian Bureau of Statistics (ABS), hourly pay rates excluding bonuses, as measured by Australia’s wage price index (WPI) rose by less than 2.1% in the year to March, leaving it just above the series lows struck early last year.
And while the WPI is only just over two decades old, as seen in this chart from Credit Suisse, even with the tiny bounce over the past year, from a trend perspective annual wage growth is currently running at the lowest levels in at least seven decades.
Yes, it’s using a three-year moving average, but it’s still an ugly chart nonetheless.
While Australia’s unemployment rate, at 5.6%, is still above the 5% level where wage pressures are expected to build, helping to explain recent low wage outcomes, Hasan Tevfik and Peter Liu, research analysts at Credit Suisse, in consultation with the University of Queensland, believe there are other factors beside unemployment that have contributed to the ongoing wage deceleration.
First, they believe lower unionisation of Australia’s workforce has contributed to lower wage growth.
“The proportion of the labour pool which is part of a union has declined almost every single year for the last 30,” Tevfik and Liu say.
“Wage inflation for those within collective agreements has been 50 basis points per annum faster than the entire labour market, but there are less people in these agreements now.”
Increased flexibility in the labour market, in their opinion, has also been a factor.
“By taking a more flexible and accommodative approach to employment, companies have found a way to keep a lid on wage increases but still provide things that their employees want,” they say.
Tevfik and Liu also suggest that rising female participation, along with an aging workforce which, on balance, tends to receive smaller pay increases than its younger counterpart, have also kept a lid on broader wage pressures.
Credit Suisse believes these trends will persist for some time yet, even with an improvement in the Australian economy.
“While there is a cyclical recovery currently taking place in the labour market it lacks the vigour to overpower these structural headwinds,” Tevfik and Liu say.
“Wage stagnation is set to remain for a while longer yet.
“This will be tough for the Aussie consumer who is already loaded with one of the biggest debt piles in the world.”
So wage growth is likely to remain atrocious for some time yet, in their opinion.
However, is there a way to supplement your household income in the absence of a decent pay increase?
Tevfik and Liu suggest there is — buy Australian stocks that predominantly sell to other businesses rather than to households.
“Continued wage stagnation reiterates our overweight position on those companies selling to businesses, after-all they are enjoying the early stages of a capex recovery and not vulnerable to the current labour market morass,” they say, pointing to the list of stocks below.
The pair also suggest that a delay in RBA interest rate hikes, along with ongoing weakness in worker wages, should provide tailwinds for Australian stocks in the period ahead.
“The median ASX 200 company has labour costs, excluding executives, at less than 20%, and this has been falling,” they say.
“Also, the day when the RBA starts its next hiking cycle is set to be further delayed. The start of the previous four hiking cycles has always preceded a de-rating for Aussie equities.”
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