- The RBA thinks that wage growth has now bottomed in Australia.
- Pay rates in newly-inked enterprise bargaining agreements (EBAs) in Australia, along with other wage indicators, suggest he may be right.
- Despite positive signals, it still appears a long way off until worker wages will increase by any meaningful amount.
Despite a noticeable slowdown in hiring this year, mirroring a weakening in some leading indicators, the Reserve Bank of Australia (RBA) remains optimistic about the outlook for Australia’s labour market.
“The outlook for the labour market remains positive,” RBA Governor Philip Lowe said in the RBA’s July monetary policy statement.
“The vacancy rate is high and other forward-looking indicators continue to point to solid growth in employment… [with] a gradual decline in the unemployment rate expected after being steady at around 5.5% for much of the past year.”
As such, Lowe thinks that wage growth — after falling to the lowest level since at least the early 1990s recession last year — has now bottomed.
“[Wage growth remains low and this is] likely to continue for a while yet, although the stronger economy should see some lift in wages growth over time,” Lowe said.
“Consistent with this, the rate of wages growth appears to have troughed and there are increasing reports of skills shortages in some areas.”
So in Lowe’s opinion, while weak wages outcomes are likely to persist for some time yet — particularly for those employed in the private sector whose wages are going nowhere in real terms — the worst is now behind us.
While Australia’s unemployment rate, currently at 5.4%, still sits well above the 5% level where many, including the RBA, expect that wage pressures are expected to accelerate, tentative evidence is starting to emerge that Lowe may well be right.
According to data released by the ABS late last month, job vacancies surged to the highest level on record in year to May, propelled in part by a sharp increase in administrative and support services openings, largely reflecting growth in vacancies at labour hire firms.
And after a 3.3% increase at the start of the 2017/18 financial year, Australia’s fair work commission delivered an even larger increase to Australia’s minimum wage rate earlier this week, providing Australia’s lowest paid workers a 3.5% boost to their pay rates.
Now newly-inked pay rates in enterprise bargaining agreements, or EBAs, are also starting to push higher, a noticeable development given they cover over a third of Australians in employment.
As Felicity Emmett, Senior Economist at ANZ notes, after plunging to the lowest level on record last year, average pay rates in these agreements appear to have bottomed.
“The average annual wage rise in new enterprise bargaining agreements rose to 2.7% in the March quarter, up from the 2.5% in December quarter and the 2.2% low in the September quarter last year, Emmett says.
“The data are consistent with a range of other wage data which suggest that tighter labour market conditions are gradually feeding into stronger wage growth.”
As seen in the chart below from ANZ, many of Australia’s wage indicators are now starting to lift, albeit they still remain well below the levels that have historically been seen in the past.
Emmett said the improvement in new pay rates was “relatively broad” with the fastest increase seen in public sector agreements.
“The pick-up was most apparent in the public sector were the average annual wage increase (AWWI) rose from 2.3% to 2.5%, while the private sector AWWI rose from 2.65% to 2.75%,” she says.
“The improvement was relatively broadly based across industries, with the largest increases in the construction (5.5%), administration and support (3.9%) and hospitality industries (3.2%).
“The retail sector also saw a solid rise (3.0%). Agriculture (2.1%), information media and communications (2.2%) and transport (2.2%) saw the lowest increases in the quarter.”
Importantly, the proportion of new agreements with an AWWI of more than 3% rose sharply, lifting from 24% from just 4.8% in the September quarter last year.
Given the modest improvement in other wage indicators, Emmett says this will further increase confidence among policymakers that wage growth is gradually improving.
“While the labour market remains patchy, with clear signs of tightness concentrated in some industries, the gradual improvement in wage growth from the lows seen in 2017 can now be seen across a number of different wage measures,” she says.
Such an outcome will be welcomed by the RBA, although, given the still-ample supply of underutilised workers in Australia, any improvement will likely be gradual, keeping inflation pressures muted and official interest rates unchanged until next year at the earliest.
In a speech delivered in June, RBA Governor Philip Lowe said that “wages growth of 2% and reasonable labour productivity growth are unlikely to make for 2.5% inflation on a sustained basis,” referring to the midpoint of the bank’s 2-3% medium term target.
Speaking to parliamentarians earlier this year, Lowe said annual wage growth of around 3.5% was probably required to keep inflation steady in the middle of its target.
Currently, wage growth — as measured by the ABS wage price index (WPI) — grew by just 2.07% in the year to March, the same level reported in late 2017.
That result was despite the big increase in the minimum wage rate at the start of July 2017 and a slight decline in unemployment.
Private sector wages grew by just 1.92% — the same pace as consumer price inflation (CPI) over the same period — meaning real wage growth went nowhere over the year for a majority of workers.
In comparison, public sector wages outperformed, lifting by 2.35% over the year.
While there are encouraging signs starting to emerge for workers, few expect a strong result when the June quarter WPI report is released in mid-August.
Labour market conditions are only gradually tightening, hinting that it will be some time yet before the average worker, and Lowe, will see annual wage growth in excess of 3%.
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