Wage growth hits a 3-year high

Lisa Maree Williams/ City of Sydney/ Getty Images
  • Australian annual wage growth hit the highest level in three years in the September quarter, helped by modest gains for both private and public sector workers.
  • Improved labour market conditions, along with a hefty increase in Australia’s minimum wage rate, saw wages increase by 0.62% in the quarter, the largest gain in over four years.
  • Public sector workers enjoyed larger average pay rises over the year than those in the private sector, increasing by 2.47% and 2.14% respectively.
  • Despite the acceleration in wage pressures seen last quarter, economists continue to express doubts as to whether that momentum can last.

Australian wage growth hit the highest level in three years in the September quarter, helped by modest gains for both private and public sector workers.

According to the Australian Bureau of Statistics (ABS), hourly wages excluding bonuses grew by 0.62% in the three months to September in seasonally adjusted terms, the fastest increase since early 2014.

The quarterly figure left growth over the year at 2.29%, the largest annual increase in three years.

With inflation increasing by 1.9% over the same period, that left real wage growth at 0.4% over the year, providing a modest offset for household budgets at a time when home prices are falling in many parts of the country.

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.

“There was a higher rate of wage growth recorded across the majority of industries in comparison to this time last year, reflecting the influence of improved labour market conditions,” said Bruce Hockman, Chief Economist at the ABS.

Australia’s unemployment rate fell to 5% at the end of the September quarter, the lowest level in over six years.

Some believe this is the level where wage growth will accelerate, known as the non-accelerating inflation rate of unemployment, or NAIRU for short. This is when a reduced pool of available workers is insufficient to keep up with labour demand, leading employers to pay more to attract or retain staff.

The ABS also acknowledged the impact of the large 3.5% increase in Australia’s minimum wage rate that kicked in at the start of the quarter, along with updated enterprise bargaining agreements (EBAs).

“September quarter wages growth was mainly influenced by increases to the national minimum wage, regularly scheduled enterprise agreement increases, modern awards and salary reviews timed to coincide with the financial year,” it said.

Private sector wages rose 2.14% over the year, up from 2.07% in the June quarter, leaving it at the highest level since the June quarter 2015.

Despite the modest improvement, it was again outpaced by wage growth in public sector where the average wage increased by 2.47%, up from 2.41% in the 12 months to June.

That was the fastest increase since the December quarter of 2015.

For the quarter, private sector wages grew by 0.55%, the same pace seen since the beginning of the year. Public sector wages grew by a slightly faster 0.61% over the quarter, again, the same pace seen in the three months to June.

Without any seasonal adjustments, the ABS said annual wage growth ranged from 1.8% for mining and retail workers to as high as 2.8% for those in the health care and social assistance sectors.

This chart from the ABS shows the quarterly and year-ended percentage change in wages by individual industry.

The ABS has not adjusted the scale at the bottom of the chart, providing an unwelcome reminder about where average wage growth sat in the past.

ABS

By state and territory, Western Australia wages grew by just 1.8% over the year in original terms. At the other end of the spectrum, workers in Tasmania saw their average wage lift by 2.6%, the fastest increase across the country.

“Rises through the year in the Private sector ranged from 1.4% for the Northern Territory to 2.8% for Tasmania,” the ABS said.

“Through the year, Victoria continued to record the highest Public sector rise of 3.3%, while Western Australia recorded the lowest of 1.5%.”

Despite the recent decline in Australia’s unemployment rate, hitting the level where some anticipate an increase in wage pressures, Paul Dales of Capital Economics remains sceptical as to whether the September quarter acceleration can be repeated in the period ahead.

“The 0.6% increase in Q3 partly reflected a jump in the minimum wage, and we doubt that the RBA will see it as evidence that wage growth is about to surge,” he says.

“Given that the minimum wage affects nearly a quarter of all employees directly, and overall wages only rose by 2.3% over the past year, it probably did provide some lift.”

Dales also suggests Australia’s NAIRU level is now likely significantly lower than what it was the past, creating doubt over the prospect of supply-demand driven acceleration anytime soon.

“We think that the natural unemployment rate is around 4% instead of the RBA’s estimate of 5%,” he says.

“We believe that the large number of people that would like to work additional hours means that the unemployment rate isn’t telling the whole story.”

He also says the “structural forces that have depressed wage growth in all advanced countries in recent year, including globalisation and technological progress, are unlikely to go into reverse.”

The upshot is that we expect wage growth to pick up to only 2.5% by 2020.

Like Dales, Callam Pickering, Asia-Pacific Economist at labour market specialists Indeed, says it’s not the unemployment rate that likely holds the key to unlocking bigger wage increases ahead.

“Labour market slack remains elevated across the country, particularly when considering broader measures of unemployment,” he says.

“The underutilisation rate, which is highly correlated to wage growth, remains above 13%. It is unlikely that wage growth will exceed 3% until the underutilisation rate tumbles below 11%.

Australia will receive updated information on both unemployment and underutilisation on Thursday when the ABS releases Australia’s October jobs report.

While today’s wage report will likely see the Reserve Bank of Australia (RBA) retain its view that the next move in official interest rates is likely to be “up”, the bank will want to be sure that annual wage growth will move back above 3% before it will consider tightening policy, especially given the importance of wage growth to help build inflationary pressures and sustain household spending levels.

Previously, RBA Governor Philip Lowe has said that annual wage growth in the vicinity of 3.5%, accompanied by a modest improvement in labour market productivity, was likely required to keep underlying inflation steady at 2.5%, the midpoint of the bank’s annual target.

Underlying inflation currently sits at just 1.75% in Australia, below the bottom of the RBA 2-3% target range.

Should wage pressures continue to build, it’s likely that underlying inflation will also begin to lift. However, there’s still far too much uncertainty about the outlook, an outcome that looks set to see the RBA hold off lifting interest rates for the foreseeable future.

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