- ANZ says the sharp rise in bonus payments in Q1 may lead to a permanent shift in wage growth.
- Economist David Plank said a degree of caution is warranted because wage data including bonuses has historically been more volatile.
- However, “the key point is that wages are growing faster than the headline WPI suggests”, Plank said.
There wasn’t a whole lot of good news for Australian households in Wednesday’s quarterly wage data.
The release has taken on extra importance due to the influence of wages on consumption, inflation and the outlook for interest rates.
Once again, the results were lukewarm at best, with a quarterly increase of 0.47% against a forecast rise of 0.6%.
But in the wake of the release, some of the more optimistic analysts were eager to point out one key change — a notable rise in bonus payments.
And while noting that bonus-payment data can be volatile, ANZ economist David Plank said the increase is evidence enough that a long-awaited pickup in wage growth may still be on the cards.
Plank based his argument on the relatively strong historical correlation in wage growth data, when shown both with and without bonuses.
As this chart shows, the sharp rise in bonus payments means the correlation has diverged to some extent:
“The chart suggests that moves in bonuses may lead to permanent wage shifts,” Plank said.
While noting that the data may signal a broader acceleration in wage growth, Plank also said the sharp rise in bonus payments may also be indicative of a shift in the way Australian companies are remunerating their staff.
He highlighted that bonus payments were larger in the private sector — as one would probably expect, given that private sector employers have a higher level of flexibility in how they pay wages.
“It seems that employers are using this flexibility more than usual,” Plank said, pointing back to his chart (shown above).
“Certainly the gap between wages excluding and those including bonuses is unusually large at present, especially relative to the pace of wage growth.”
Plank also noted that so far, wage growth has failed to catch up to a slight decrease in the underutilisation rate — calculated as the sum of unemployment and those who are employed but would like to work more hours.
But he said that “apparent puzzle” appears to have been solved if you add bonuses into the mix. “It seems that the law of demand and supply is working after all,” Plank said.
At the same time, Plank said a degree of caution is warranted given that wage data including bonuses has historically been more volatile.
“The RBA will need a few more observations of the wage data before it can confidently conclude that wage growth has moved sustainably higher,” Plank said.
In addition, research suggests that if bonuses tend be saved rather than spent. So if overall wage growth remains reliant on bonus payments, it’s unlikely to feed into higher domestic consumption — no doubt the preferred scenario of policy makers.
One also needs to consider having fallen to a multi-year low at the same time last year, wage growth including bonuses is coming off a low base — which also exacerbates the gains in percentage terms.
However, “income is income, whether it comes through ordinary wages or bonuses,” Plank said.
“The key point is that wages are growing faster than the headline WPI suggests.”
While ANZ forecasts that the next RBA rate hike will be a year off at least, “we think this will be an important consideration for the setting of RBA policy,” Plank said.