Australian wage growth has been pretty atrocious in recent years, falling to the lowest level on record in the 12 months to March this year.
At 1.79%, wages in the private sector went backward in real terms, failing to keep up with a lift in consumer price inflation of 2.1% over the same period. Public-sector workers fared a little better with their wages increasing by 2.33% from a year earlier.
In comparison to the giddying 4%-plus levels in the years before the financial crisis, it’s been nothing but one-way traffic ever since — lower.
However, salvation may be at hand.
Labour market conditions, whether measured by the Australian Bureau of Statistics (ABS) or the private-sector, have noticeably improved, seemingly laying the platform for higher wage growth in the future should labour market slack continue to reduce.
Like any market, when demand continually outstrips supply, it generally leads to higher wage pressures.
However, we’re still a long way off that point being reached yet, with labour market underemployment and underutilisation still remaining at elevated levels even with the strength in recent jobs data.
And throw in a lack of wage pressures in other advanced nations such as the US, UK and Japan — where labour market conditions are far tighter than Australia — and it’s little wonder why many think that any increase in wage growth, should it arrive, will be pretty tame at best.
While that’s creating plenty of uncertainty on the outlook for inflation and household spending, we may be about to get a sneak peek on what the future holds for wage increases across Australia should labour market conditions continue to strengthen.
As seen in the chart below from the National Australia Bank (NAB), New South Wales’ unemployment rate is currently just below the 5% level the Reserve Bank of Australia (RBA) thinks is required to spur wage pressures.
“New South Wales is arguably already close to full employment, with an unemployment rate of 4.8%,” says the NAB.
“Investors should therefore be watching developments in the state first for evidence as to the extent of any cyclical improvement in wage growth in the coming years.”
That provides a more than interesting tidbit before the release of Australia’s June quarter wage price index later this week, with New South Wales’ figure now likely to be zeroed in upon to gauge when, and by how much, wage growth could increase across Australia should unemployment levels continue to reduce.
It’s likely that it won’t only be workers in New South Wales who will be smiling should an acceleration take place, providing hope that the trend of ever-slowing wage growth may be coming to an end.
However, should no acceleration be seen, it will only help to fuel doubts as to how far labour market slack will need to diminish in order to stir wage pressures.
For the June quarter, economists expect that average hourly wage rates will increase by 0.5%, seeing the year-on-year growth remain steady at 1.9%.