For a central bank that expects economic growth and inflation to accelerate as labour market conditions improve, the chart below must raise some concerns to the Reserve Bank of Australia (RBA).
It shows the New South Wales Wage Price Index, a measure hourly wage rates for both private and public sector workers over the past two decades.
Like the broader Australian economy, wage pressures in Australia’s most populous state remain incredibly benign in 2017.
In original terms, annual growth in the WPI stood at just 2.03% in the June quarter, the weakest level on record going back to when the ABS first began the survey in 1997.
While not all that unusual compared to the rest of the country where wages grew by a slightly slower 1.94% over the same period in seasonally adjusted terms, the troubling aspect is that the NSW labour market is significantly stronger than in other parts of Australia.
At 4.8%, its unemployment rate is the lowest of all states, while its underutilisation rate — capturing both unemployed workers and those already in employment but who would like to work more hours — is also lower than the likes of Victoria and Queensland at 13%.
Essentially, NSW currently has the tightest labour market conditions of any Australian state, yet, at least so far, there’s been absolutely no signs of a pickup in wage inflation, mirroring the trend seen in other major developed nations such as the United States, United Kingdom and Japan in recent years.
As the National Australia Bank’s economics team wrote before the release of the WPI report, “investors should be watching developments in the state first for evidence as to the extent of any cyclical improvement in wage growth in the coming years”.
The evidence, unfortunately for all Australian workers, was not that great, providing a troubling lead indicator for the rest of the country where labour market conditions are significantly weaker.
If wage growth isn’t stirring in New South Wales given the current set of circumstances, what does it say about the outlook for wage growth in other parts of the country?
The outcome will no doubt cause some unease for the RBA who are relying upon an improvement in labour market conditions to stir wage growth in the years ahead, adding to the uncertainty as to whether economic growth and inflationary pressures will follow suit.
Only yesterday, the RBA said in the minutes its August monetary policy meeting that “there was some uncertainty about the effect any decline in spare capacity in the labour market would have on wage and price inflation”.
It also noted that “wage and price inflation had not increased by as much as expected in other economies around the world that are already close to full employment, which raised the possibility that low inflation in Australia might also persist longer than forecast.”
So while that its central case is that a “recent improvement in labour market conditions and the increase in award wages should help support household incomes and thus spending,” it’s not entirely sure.
It thinks it will, especially with a temporary boost provided by the large increase in Australia’s minimum wage rate at the start of the September quarter, but over the medium to long term it is still anything but assured.
Wage growth, in comparison to what was seen in prior decades, doesn’t seem to be responding to changes in labour market conditions as what was the case previously, raising the possibility that it may be other factors that is contributing to weak wage pressures, not only in Australia, but globally.
That’s something that RBA governor Philip Lowe discussed at length in a recent speech delivered in Sydney, citing areas as heightened job insecurity, technological disruption and weak productivity growth, among others, as factors that may be contributing to soft wage growth.
He, like countless others, isn’t entirely sure whether a tightening in labour market conditions will necessarily translate to a pickup in wage growth that would have typically been seen in the past.
Certainly based off what’s been seen in New South Wales recently, it’s not looking all that promising.