So much of the Australian economy now hangs on getting pay rises

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  • Few things are more important in Australia right now than wage growth, at least from a monetary and fiscal policy perspective.
  • The RBA expects wage growth to help boost inflation, allowing it to lift interest rates. The federal government is also banking on a strong pickup in wages to deliver budget surpluses.
  • Australia’s latest wage report will be released next week, and economists don’t think it will deliver great news for workers.

Few things are more important in Australia right now than wage growth, at least from a monetary and fiscal policy perspective.

The Reserve Bank of Australia (RBA) is looking for a pickup in wages to help boost household spending and therefore GDP growth, a scenario that should help to reduce unemployment and lead to stronger inflationary pressures.

If that pans out, it should mean that the next move in Australian interest rates is higher.

The Federal government is also backing a pickup in wage growth, and not just a little but a lot, to help deliver extra fiscal revenues to its coffers, allowing the budget to return to surplus.

So much is dependent on wage growth.

In recent years, there’s not been much for workers to crow about on that front, and that’s putting it mildly.

Wage growth, at least compared to the era before and immediately after the global financial crisis, has been fairly atrocious.

According to the Australian Bureau of Statistics (ABS) Wage Price Index (WPI), average hourly worker wages grew by just 0.55% in the December quarter last year, leaving the change on a year earlier at a paltry 2.08% — barely ahead of inflation.

The news was ever more dire for private sector workers — the largest cohort in the country — whose wages grew by just 1.93% over the year, below the relatively-brisk 2.37% pace enjoyed by their public sector compatriots.

Given the RBA thinks wage growth in the vicinity of 3.5% per annum will be required to return inflation to the middle of its 2-3% annual target, it’s little wonder why price pressures are so muted at present.

Real wage growth for the vast majority of workers is flat.

Given the focus on wage growth, next week will be important for Australian financial markets. Not only will jobs data for April be released but also the latest update on the WPI.

If the views of economists are anything to go by, it’s unlikely to deliver welcome news to workers.

Of the 22 polled by Bloomberg, the median forecast looks for a quarterly increase in wages in the March quarter of 0.6%, basically the same level seen in the prior three months.

Individual forecasts range from a gain of 0.5% to 0.7%. There’s none higher, unfortunately.

Should wages increase by 0.6% as the median forecast suggests, and without revisions to prior data, that will see the annual rate remain steady at just 2.1%.

Some forecasters such as Citibank, Morgan Stanley, Morgans Financial and RBC Capital Markets think the annual rate will actually decelerate, predicting it will fall back to 2%.

If that does eventuate, it would be troubling for any policymaker who is banking on wage growth to achieve their policy objectives, be it to boost inflation or deliver budget surpluses.

Only a handful of economists expect the year-on-year rate will accelerate, including the Commonwealth Bank who see it lifting to 2.2%.

One of the main reasons why expectations for wage growth remain so subdued is because Australian unemployment is still high.

At 5.5%, it currently sits well above Australia’s non-accelerating inflation rate of unemployment (NAIRU), the point where wage growth is expected to accelerate.

We say expected because no one really knows where NAIRU, or Australia’s full employment level, currently sits. That won’t be revealed until wage growth actually picks up.

Given the trends in other advanced economies in recent years, where super-tight labour market conditions has failed to translate to wage pressures, Australia’s NAIRU level could be substantially lower.

The RBA touched upon this point in its recent quarterly statement of monetary policy, noting that “there is uncertainty around the level of the unemployment rate that is consistent with full employment. If experience overseas is any guide, this level of the unemployment rate could turn out to be lower than previously assumed”.

Unfortunately, economists don’t expect there’ll be any progress in lowering unemployment in the April jobs report with the median forecast looking for it to remain at 5.5%.

Along with a large number of undereployed workers — those who already have a job but who would like to work more hours — and an unchanged unemployment reading would suggest there’s still an abundance of underutilised labour available for employers to choose from.

Until progress is made on reducing the level of underutilisation, wage growth will almost certainly remain low.

Now all that’s left is to see how the data prints.

The March quarter WPI will be released on Wednesday, May 16. That will be followed a day later by Australia’s April jobs report.

It’s going to be an important week.

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