Here's why Australia's weak wages growth is such a problem

Photo: Adrien Morlent/ AFP/ Getty Images.

The December wage price index is out, and wages grew 1.87% in the quarter.

Although results were in line with expectations, growth in the wages paid to Australian workers still remains subdued. This isn’t as much of a problem in the short term, but it could become troublesome looking out past 2017.

As Westpac’s Bill Evans explained in notes accompanying the January Westpac-MI Leading Index, the Australian economy can still expect growth GDP growth of around 3% in 2017. Rising commodity prices are expected to help foster domestic growth in the short term.

As the outlook extends further out, however, the risks associated with continuously low wage growth become more apparent. According to ANZ, the headline figure of 1.9% masks an increasingly worrying trend in private sector wage growth. December quarter growth in this sector of 0.4% meant that annual 2016 wage growth in the private sector grew at a record low 1.8%.

That’s important because the private sector is by far the largest employment sector in the country: ABS data shows that as at January 2017, the private sector comprises 83.9% of Australia’s almost 12 million-strong workforce.

A pick-up in private sector employment growth from 2016’s record low will be essential to Australia’s growth in the medium term and is worth monitoring. NAB reports that forward indicators for wage price growth look promising, with increases in labour costs reflected in NAB’s most recent Business Survey along with an uptick in average advertised salaries on seek.com.au.

Most commentators expected a bottoming out and stabilization of the wage growth story, and those expectations were met with this morning’s data. That said, the numbers are still cause for concern in the medium term given the relative size of the private sector, and the relevance of household consumption and consumer confidence in national GDP calculations.

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