Australian wages grew at the slowest pace on record in the year to September, registering a paltry annual increase of 1.88%, according to the ABS’ quarterly wage price index.
The recent, somewhat depressing trend, is easily spotted in the chart below.
Not the best of news, be it for household spending or policymakers pinning their hopes on a lift in wage growth to fuel a recovery in inflationary pressures and reduce the federal budget deficit.
However, help may be hand.
Commodity prices have been surging over the past six months, and that bodes well for wage growth, says the Commonwealth Bank.
Yes, the lows for wage growth may be already in.
Kristina Clifton, an economist at the CBA, explains:
Wages growth has historically shown a strong correlation with commodity prices. For example, the correlation between annual growth in the Wage Price Index and commodity prices sits at 0.8. Other measures of labour costs, like unit labour costs, which have a longer history show a similarly high correlation. Looking at wages growth excluding the mining sector shows the same strong correlation. This shows that the non-mining sector also typically benefits when commodity prices increase.
This chart from the Commonwealth Bank demonstrates the relationship between wage costs and commodity prices that Clifton refers to.
It’s the ABS’ quarterly wage price index versus the RBA’s commodity price index, with the former lagging the latter by six months.
Thanks primarily to some enormous increases for Australia’s bulk commodity export prices, it’s seen the RBA’s commodity price index mimic a rocket in recent quarters, something that clearly bodes well for wage rises given the relationship between the two.
That’s what Clifton expects will arrive in 2017 — a lift in wage growth — although see believes that any increase will be modest in scale.
“This is because the latest run up in commodity prices is generally thought to be temporary,” she says.
“Our commodity analysts are expecting bulk commodity prices to ease in 2017. And the latest government budget update assumes a decline in prices later this year.”
In recent months, the spot price for metallurgical coal has fallen by around 40% having soared by more than 300% from the middle of last year.
Clifton says in the past two commodities booms mining sector investment increased rapidly in response to higher prices, causing the labour market to tighten as employment growth accelerated putting upward pressure on wages.
That’s unlikely to eventuate on this occasion, says Clifton, noting that elevated levels of labour market slack should make any lift in wage growth less pronounced that what has been seen in the past.
“This is vastly different from the previous commodities boom where mining investment ramped up strongly alongside rising prices,” she says. “This time around there is also a lot more spare capacity in the labour market to work through before significant wage pressures are likely to emerge.”