- Australia’s wage price index data for the quarter is out, and it’s slightly stronger than the market expectation.
- Most of the increase was due to increases in pay for government employees — mainly in the health industry — while private sector pay, which accounts for the majority of workers, remained weak at just over 1.9%.
- Private sector pay remains in line with inflation so the pressure on households the RBA has been worried about remains entrenched.
- Annual public sector pay has now outpaced that in the private sector for the past four years.
After years of near-constant declines, it finally looks like Australian wage growth has turned the corner.
But for the vast majority of Australian workers, pay increases are still barely keeping up with inflation.
According to the Australian Bureau of Statistics’ (ABS) wage price index (WPI), wages grew by 0.55% over the December quarter in seasonally adjusted terms, leaving the change on a year earlier at 2.08%.
Markets had been expecting a quarterly gain of 0.5%, seeing the year-on-year rate hold steady at 2.0%, so the data is a marginal beat.
The WPI measures changes in ordinary hourly rates of pay, excluding bonuses, and not the amount of hours worked or compositional changes in the workforce.
“The annual rate of wage growth has increased for the second consecutive quarter reflecting falling unemployment and underemployment rates, and increasing job vacancy levels,” said Bruce Hockman, ABS Chief Economist.
While the headline wage figure showed a small acceleration, it was largely driven by strength in public sector wages.
They increased by 2.44% over the year after seasonal adjustments, outpacing growth of 1.93% for private sector workers. Previously, annual wage growth for these groups stood at 2.37% and 1.86% respectively.
Annual public sector pay has now outpaced that in the private sector for the past four years.
With consumer price inflation running at 1.9% over the same period, it means that real wage growth was flat over the year for most Australian workers, at least from an hourly pay perspective.
From a quarterly perspective, public sector wages grew by 0.62% in seasonally adjusted terms, up from 0.55% in the September quarter.
In comparison, private-sector workers saw their pay increase by just 0.48%, the same level reported in the prior quarter.
In original terms, annual wage growth ranged from 1.4% for the mining industry to 2.8% for health care and social assistance workers.
The health care sector is the largest employer in Australia and has been adding jobs at a decent clip in recent years in response to the roll out of the NDIS program.
There was also a wide divergence recorded across Australia’s states and territories with annual growth ranging from 2.4% in Victoria to 1.1% in the Northern Territory.
While wage growth now appears to have bottomed in Australia, Callam Pickering, economist at global jobs site Indeed, said further progress on lowering unemployment was needed before wage pressures could build.
“Economy-wide there remains a high degree of slack in the labour market,” he said.
“Any improvement in wage growth will be gradual and it could take a number of years before wage growth gets back to 3%.
“Anyone hoping for a wage breakout will unfortunately be disappointed.”
In particular, Pickering notes there is little evidence that private sector wage growth is improving.
“Private sector wages have… barely kept pace with inflation despite improved business conditions and strong growth in corporate earnings,” he says.
And until that changes, Pickering says, inflationary pressures and household spending will likely remain weak, providing little justification for higher interest rates from the Reserve Bank of Australia (RBA).
“In the current environment, low wage growth continues to point towards weak inflation and makes it difficult for the Reserve Bank to justify higher interest rates,” he says.
“Until wage growth improves, the RBA will be more than happy to leaves rates unchanged.”
Paul Dales, Chief Australia and New Zealand Economist at Capital Economics, also said that given current trends, the RBA will likely remain on the sidelines.
“We suspect that wage growth will creep ever so gradually higher as the unemployment rate edges lower and spare capacity is used up, but it may still just be around 2.2 to 2.3% by the end of this year and perhaps only 2.5% by the end of next year,” he said.
“Wage growth is unlikely to significantly boost household income growth or underlying inflation this year at least, [and] until that changes, the RBA isn’t going to raise interest rates.”
Speaking to MPs last week, RBA Governor Philip Lowe said annual wage growth of around 3.5% was probably required to keep inflation steady in the middle of the RBA’s 2-3% inflation target.
The RBA is banking on a gradual lift in wage pressures to push underlying inflation back to within its target band and help support household spending.
Many economists, including the RBA, believe that an unemployment rate of around 5% will be required to help push wage growth higher, although there’s plenty of uncertainty as to whether that will occur given recent evidence from the US, UK and Japan.
Australia’s current unemployment rate sits at 5.5%.