Of all the nation’s economic data releases, the Australian Bureau of Statistics’ (ABS) quarterly wage price index is perhaps the most depressing, at least in recent years.
The last release in mid-November revealed that wages grew at the slowest pace on record in the the three months to September.
Private sector wages grew by just 0.41% over the quarter, leaving the increase on a year earlier at just 1.89%. Both were record lows.
Not great news as its the largest employer in the country.
Public sector workers fared marginally better, seeing wages grow of 0.56% over the quarter, taking the gain over the year to 2.27%. Despite the disparity with the private sector — public pay was rollicking along in comparison — that too was the weakest wage growth on record.
Even considering the low inflation environment in Australia right now, it’s was hardly anything to cheer about, particularly given the levels wages were growing at just a few years ago.
And now the ABS is about release its December wages report card on Wednesday next week. Given the recent track record, it’s unlikely many are looking forward to it.
But perhaps we should.
Recent lead labour market indicators have been improving, suggesting that conditions are starting to strengthen after a lull last year, and now ANZ’s economics team says that there’s evidence that wage pressures are following suit.
Go on, we hear you say.
In order to get a more timely indicator on what’s happening with wage costs, economists at the bank have constructed the “ANZ Wage Gauge”, a measure the banks says has a close relationship with annual growth in unit labour costs found in Australia’s GDP report.
Unit labour costs are a measure of staffing costs for firms, taking into consideration both wages and hours worked.
And what the ANZ gauge reveals is good news if you’ve received paltry pay increases, or none at all, in recent years.
“It currently shows that wage cost pressures are building, although from a low base,” says the bank’s economists David Plank and Giulia Lavinia Specchia.
“Our gauge bottomed in March 2016 and it has been gradually picking up since then – suggesting that wage cost pressures have been slowly intensifying over the past three quarters.”
This pickup in wage pressures is shown in the chart below from ANZ.
Not only is the recent acceleration a good sign for labour costs, it’s also good news for the RBA’s attempts to bring underlying inflation back to within its 2-3% target, something it does not see occurring until 2019 based on updated forecasts offered in its quarterly statement on monetary policy (SoMP) released last week.
“Unit labour costs are key to the outlook for core inflation as they are highly correlated with domestic market services inflation which accounts for around 25% of the whole CPI basket,” says Plank and Specchia.
This, they say, will help to lift underlying inflation in the period ahead.
“Our Wage Gauge currently suggests that market service inflation has stabilised and is likely to pick up gradually over the coming quarters and then accelerate further into the end of 2017,” say Plank and Specchia.
“This will be critical to lifting core inflation back to 2%, in our view, given competitive pressures in the retail sector and the impact that increased apartment supply is expected to have on rents.”
The relationship between ANZ’s wage measure and services inflation is shown in the chart below. ANZ has moved the wage measure forward a year to demonstrate the lead relationship it has to inflationary pressures.
So wage growth and inflationary pressures look set to slowly accelerate off extremely low levels — excellent news.
However, there is one caveat attached, says ANZ.
It’s wage measure is the weighted average of three components — household indicators, business indicators and price indicators — with most of the recent strength stemming solely from the latter.
“The recent pick-up in our wage gauge has largely been driven by the prices component — more specifically the lift in commodity prices.” say Plank and Specchia.
“Given that this lift has most likely largely run its course we would expect the lift in the ANZ Wage Gauge to moderate somewhat over the course of this year.
“This further emphasises that the expected acceleration in price pressures will be gradual.”
It may not be much, and there’s still a need for caution, but it’s starting to look like the lows for wages may have already passed.