- The RBA is banking on stronger wage growth to help lift inflation and economic growth in the years ahead.
- Most leading labour market indicators all point to stronger wage pressures as labour market conditions strengthen.
- The relationship between unemployment and wage growth has weakened since the GFC, hinting that any increase in wages will probably be muted.
For many Australians, receiving a decent pay increase is nothing but a distant memory, especially for those working in the private sector.
According to data from the ABS, hourly wage rates grew by just 2.08% in the year to December, well below the 4% plus levels seen before the global financial crisis.
Private sector workers fared even worse than the national average with wages rising by just 1.93%, well below their compatriots in the public sector who received an average increase of 2.44%.
With inflation running at 1.9% over the same period, it meant that real wages for most Australian workers went nowhere over the year.
By any measure, whether real or in nominal terms, wage growth remains fairly atrocious.
But it may not remain that terrible forever.
While few see any meaningful lift in wages arriving any time soon, there are signs that the labour market is slowly tightening.
The unemployment rate, at 5.5%, is edging lower while broader measures of labour market underutilisation such as underemployment, measuring the proportion of Australians who have a job but who would like to work more hours, is also starting to decline, albeit from elevated levels.
It suggests that Australia’s record-breaking pace of job creation seen in 2017 is helping to tighten labour market conditions.
As the economic theory goes, as fewer workers are available to fill vacant positions, employers will have to increase wages to attract suitable staff for their needs.
The relationship between labour market slack and wage pressures, known as the Phillips curve, has weakened in the years following the global financial crisis. As has been seen recently in the United States where labour market conditions are far tighter than in Australia, when unemployment falls to lower levels, wage pressures start to build.
While Australia is still someway off that point at present, the good news is that it’s not just official jobs data from the ABS that suggests excess labour market slack is being slowly eaten up.
Take the charts below from the National Australia Bank (NAB), for example.
The first shows the relationship between Australia’s underutilisation rate, calculated by adding unemployment and underemployment together, overlaid against the proportion of firms in the NAB monthly business survey reporting difficulty finding suitable staff.
If history is any guide, it suggests labour market underutilisation will fall in the months ahead, potentially helping to slowly boost wage pressures in the economy.
And this next chart also suggests that labour market conditions are tightening.
Using data from jobs website Seek, it looks at the average ratio of job applications for every job posting on the site.
When the ratio rises, it suggests labour market conditions are softening, and vice versa. Right now, the ratio is slowly edging lower, indicating that fewer applications, on average, are being received for each job posting.
And as labour market conditions gradually tighten, there are signs emerging that average advertised salaries are also starting to increase.
The three charts, in combination, all point to the likelihood that wage pressures should start to increase.
For a central bank who are backing stronger wage growth to help lift economic growth and inflationary pressures, the three charts will no doubt be welcomed by policymakers at the Reserve Bank of Australia (RBA).
In the minutes of the bank’s March monetary policy meeting, the bank noted that “forward-looking indicators suggested that spare capacity in the labour market would continue to decline gradually over 2018 and, as a consequence, wages growth was expected to rise gradually.”
In turn, it expects that to see GDP “exceed potential growth (2.75%)” and inflation to “a little above 2%”.
While the RBA has a less-than-stellar track record in forecasting wage moments since 2011, it’s clear that it expects stronger labour market conditions to help boost wage pressures in the coming years.
As RBA governor Philip Lowe noted in a speech delivered last September, “the laws of supply and demand still work”.
“Even at the moment, we see some evidence through our liaison program that in those pockets where the demand for labour is strong, wages are increasing a bit more quickly than they have for some time,” he said.
“The Reserve Bank’s central scenario is that, over time, this will become a more general story.”
While Lowe appears confident that ongoing strong demand for workers will help to lift wage pressures more broadly in the period ahead, markets will get to gauge the other side of the equation — labour supply — when the ABS releases Australia’s jobs report for February.
Not only will this contain data on employment growth and unemployment but also a quarterly reading on underemployment, allowing markets to gauge the current level of underutilised workers.
When it was last released in the November, it stood at 13.7% of the total Australian labour force, still well above the 10% level seen just before the global financial crisis.
Still, it did sit close to 15% just a couple of years ago, contributing to growing confidence that labour market conditions are gradually tightening.
Another fall in the February jobs report will only see that confidence grow.
However, while that has traditionally led to a pick up in wage pressures, as seen in the fourth and final chart below from Westpac Bank, there’s no guarantee that will lead to an acceleration in wage growth to levels witnessed in the past.
Even with the gradual reduction in labour market underutilisation seen in recent years, current levels of annual wage growth remain well below what they were during similar levels of underutilisation in the past.
The shaded dots clustered in the bottom-right of the chart show how the relationship has changed in the past couple of years.
Should that trend continue, it suggests that any lift in wage pressures from lower levels of labour market slack is likely to be subdued.
That may also explain why the RBA is cautious on the outlook for wage growth, emphasising on several occasions in recent months that any pick up will likely be “gradual”.
The ABS will release Australia’s February jobs report on Thursday, March 22 at 11.30am AEDT.
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