Here's what economists are saying about Australia's wage report

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  • Australian hourly wage rates excluding bonuses increased by 0.62% in the June quarter, leaving the annual increase at 2.14%, up from 2.07% in Q1 2018.
  • Most economists expect wage growth to remain weak, with many unconvinced that rising employment levels will translate to higher wage growth.

Australia’s latest wage growth report came in as forecast, with quarterly wage growth rising by 0.6% in Q2.

That left annual wage growth at 2.14%, up slightly from 2.07% in March quarter.

While wage growth has steadied in recent quarters, it remains well below the long-term average.

Within the headline data, there was a modest improvement in private sector wage growth which had the strongest quarterly gain since March 2014.

However, there appears to be few near-term catalysts that will cause a material rise in wage growth anytime soon.

The RBA remains optimistic that solid business conditions and strength in the domestic labour market will eventually give rise to a pick-up in wage growth, but any increase is still expected to be gradual.

The immediate reaction of financial markets to today’s report was minimal, but the AUD remains under pressure and is trading at the lowest level since January 2017.

In view of all that, let’s see what the experts have to say.

Tom Kennedy, JP Morgan

Our estimation of industry level wage dispersion remains close to all-time lows, highlighting that benign wage growth is an economy-wide issue, rather than the result of concentrated drags in a few under-performing sectors.

On the labour front, while Australia’s unemployment rate has nudged lower since the start of the year, we don’t see the current level (5.4%) as having any material near-term consequences for wages. Particularly given the experience of other DM economies where wage pressures have only eventuated once the jobless rate moves considerably through historical estimates of the Non-accelerating inflation rate of unemployment (NAIRU) (Australian NAIRU estimate: 5%).

The upcoming 3Q print will include recent legislative changes relating to the minimum wage and Sunday penalty rates, both of which came into effect on 1 July 2018. In general, we view these changes as only marginally supportive for wage growth given the large rise in minimum wages (3.3% y/y) will be partially offset by a reduction in Sunday penalty loadings.

UBS’ economics team

The Q2 wage price index (excluding bonuses) ticked up to 0.6% q/q, as expected — the equal highest since Q1 2014, albeit after the 0.5% in Q1 was the equal 2nd lowest quarter on record.

The y/y was 2.1% as expected, the equal highest since 2015, albeit still weak & remaining well below the long-run average of 3.3%, despite booming jobs. By State, NSW held at only 2.1% y/y, despite 5% or less unemployment for ~2 years, suggesting little impact after ‘crossing’ NAIRU.

Looking ahead to Q3, the 3.5% minimum wage hike is almost the same as a year earlier, & hence will add less than 0.1% to y/y growth. Furthermore, given the ongoing weakness of enterprise bargaining agreements, Q3 WPI will likely remain low and still far below the ~3.5% that RBA Governor Lowe indicated is consistent with sustaining their 2-3% CPI target.

We remain more dovish than consensus on inflation and wages, and continue to see the RBA on hold until 2020.

Justin Smirk, Westpac

The modest wage outcomes we have experienced through 2017/2018 are despite an above normal increase in the minimum wage of 3.3% in 2017 Q3. This boost should have been feeding through to higher wage pressures but, which to date, the only impact we have seen is to halt the deceleration in the annual rate of wage inflation.

It is worth noting that a cyclical indicator of wage momentum continues to look a bit more positive. Private sector wages including bonuses moderated to a touch to 2.5%yr from 2.6%yr. We have found that bonus payment tend to be pro-cyclical so this could be seen as a positive indicator for a more broader lift in wages sometime soon (often the variable component of wages adjusts first to changes in economic conditions). But we note that it is a very volatile series and this jump is due to base effects.

Key to the overall under-performance overall has been the significant under-performance of wages in NSW relative to a meaningful tightening in labour market conditions. Despite a significant fall in underemployment in that state, private sector wages continue to languish around 2% per year. Add to that the relative under-performance in public sector wages in that state then you can see why wages remain relatively soft overall.

Paul Dales, Capital Economics

It would be misleading to conclude that the rise in the annual growth rate of the wage price index to 2.1% in the second quarter from 2.0% in the first is a sign that the strong labour market is starting to lead to bigger pay cheques. The annual growth rate rose only because the first quarter’s figure was revised down from 2.1%. Wage growth is only a smidgen above the record low of 1.9% seen in 2016/17.

There are some areas where wage growth is strengthening. It rose to 2.5% in the second quarter from 2.3% in the first in both Victoria and Tasmania. And it rose in the construction, wholesale trade and finance sectors. The rises in Victoria and the construction sector appear to be underpinned by the strength of activity and rising demand for workers.

The rise in the minimum wage on 1st July will probably nudge up wage growth to 2.2% in the third quarter. And as the unemployment and underutilisation rates continue to edge lower, a further rise in wage growth can be expected.

But the lesson from those overseas economies that have tighter labour markets, such as the US and the UK, is that the structural forces of globalisation and technological innovation will mean that wage growth rises very slowly. We’re not expecting it to reach 2.5% until 2020. And a decent rise in real wages won’t happen until productivity growth improves.

Callam Pickering, jobs website Indeed

Wage growth remains the key for the Australian economy. It’s the key for monetary policy, inflation and household spending. We believe that stronger business conditions and lower unemployment should, in time, lead to higher wage growth. That process may have already begun.

Nevertheless, the harsh reality is that there remains a high degree of labour market slack across Australia. The unemployment rate may be just 5.4 per cent but the underutilisation rate, which is more highly correlated with movements in wages, is still near 14 per cent. We are years away from seeing the type of wage growth that was once considered normal by most Australian households.

Today’s result appears broadly consistent with RBA thinking. They anticipated a gradual improvement in wage growth and that appears to be occurring. We also cannot discount the possibility that higher growth this month was a once-off given it was noticeably higher than the trend. We’d like to see the June quarter result consolidated by solid growth next quarter.

This result remains consistent with low inflation and keeping the cash rate at 1.5% and we don’t expect to see a rate hike until at least 2020.

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