There's still no sign of a wage pick-up in Australia

Kim Kulish/Corbis via Getty Images
  • Australian wage growth remains weak, especially for private sector workers.
  • Unemployment is elevated, and expected to remain that way for some time.
  • The RBA is banking on faster wage growth to to help lift inflationary pressures.

Australia’s March quarter wage price index (WPI) has come in below expectations, casting renewed doubt over the ability of wages to help boost household spending and inflationary pressures, as well as return the federal budget to surplus.

According to the Australian Bureau of Statistics (ABS), hourly wage growth excluding bonuses rose by 0.47% in the March quarter, missing expectations for an increase of 0.6%.

Private sector wages grew by 0.47%, almost the exact same level seen in the previous four quarters. Public sector wage grew by 0.54% over the same period, down from 0.62% in the December quarter.

The December quarter WPI was also revised lower to a gain of 0.47%, below the 0.6% rate originally reported.

The WPI measures changes in ordinary hourly rates of pay, not the amount of hours worked or compositional changes in the workforce. Just hourly wage rates excluding bonuses.

“Wage growth in the March quarter 2018 continues a period of subdued first quarter rises, primarily driven by regular increases in the Education and training and Health care and social assistance industries,” said ABS chief economist Bruce Hockman.

Despite the undershoot and downward revision to the prior quarter’s data, annual growth in wages was largely unchanged at 2.07%, just below the 2.08% level reported in the December quarter.

An upward revisions to WPI in the June quarter last year ensured the annual rate did not decline further.

However, while the annual pace of change was largely unchanged, that masked some unwelcome news for those working in the private sector, the largest employer in Australia.

The ABS said private sector wages grew by just 1.92%, the same pace as consumer price inflation (CPI) over the same period. That means for the vast majority of workers, real wage growth went nowhere over the year.

In comparison, public sector wages outperformed, lifting by 2.35% over the year.

Previously, annual growth in private and public sector wages stood at 1.93% and 2.44% respectively.

As seen in the chart above, after a modest pick-up in 2017, there are few signs that wage growth is accelerating.

Without seasonal adjustments, the ABS said wage growth over the year ranged from 1.4% in the mining industry to 2.7% for health care and social assistance workers.

This chart from the ABS looks at the quarterly and annual increase in the WPI for individual industries.


The unusually large range on the X axis provides a depressing reminder of how quickly wage growth used to be in the past.

Before taking into account seasonal factors, Victorian and Tasmanian workers received the largest increase over the year at 2.3%. At the other end of the spectrum, those workers in the Northern Territory saw their average wage lift by just 1.1%, the weakest level across the country.

As seen in the chart below, also from the ABS, annual growth for all other states and territories is currently clustered at or just below 2%, including in New South Wales, the state with the lowest unemployment rate in Australia.


Callam Pickering, APAC economist for global job site Indeed, described the report as “dour”, suggesting similar outcomes are likely to be seen in the period ahead until unemployment begins to fall.

“The simply reality is that there remains a high degree of slack across the Australian labour market,” he says.

“Job seekers have little bargaining power and to some extent soft wage growth may have become ingrained in their expectations.

“We may not see a material improvement in wage growth until the unemployment rate dips below 5% and unfortunately policymakers don’t expect that to happen in the next three years.”

Australia’s unemployment rate currently sits at 5.5%.

The 5% level Pickering refers to is Australia’s estimated non-accelerating rate of unemployment (NAIRU), the level where wage and inflationary pressures are expected to pick up.

It’s only an estimation, meaning it won’t be known until wage pressures actually begin to rise.

Given the evidence seen in other advanced economies such as the United States, United Kingdom, New Zealand and Japan — where unemployment is below NAIRU but wage growth is barely responding — some believe Australia’s NAIRU level could be significantly lower.

As Pickering explains, a slower pick-up in wages than currently expected would be a worrying outcome.

“Wage growth remains the key for the Australian economy,” he says.

“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.

“Some firms are also reporting greater difficulty in finding staff, which points to tighter labour market conditions across some occupations.

“Nevertheless, progress is likely to be slow and much slower than predicted in the recent federal budget.”

In the recent Federal Budget, Treasury forecast that the WPI would accelerate to an annual pace of 3.5% over the next few years, a key pillar in the government’s plan for an earlier return to surplus.

Earlier this year, RBA governor Philip Lowe suggested annual wage growth of around 3.5% over a considerable period time would be required to return inflation to the centre of the bank’s 2-3% medium-term target.

Based on current trends, the news is not looking good for either the government or the RBA.

Paul Dales, chief Australia and New Zealand economist at Capital Economics, is one who thinks both groups of policymakers will end up disappointed.

“Wage growth may edge up ever so slightly from here as a gradual fall in the unemployment rate from 5.5% [helps reduce] some of the spare capacity in the labour market,” he says.

“But our view that the unemployment rate would need to fall to 4.0% to signal that the labour market is in equilibrium means a strong cyclical rise in wage growth is not on the horizon.

“Throw in the long-term structural forces such as globalisation and technological innovation that are restraining wage growth in most economies, and it’s hard to see wage growth rising to 2.5% before 2020.

“That means inflation is unlikely to rise as fast as the RBA hopes and tax revenues won’t be as strong as the Treasurer assumed in last week’s Budget.”

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