Australia: Wage inflation still lagging the broader labour market - Westpac

Justin Smirk, Research Analyst at Westpac, explains that while we have seen the removal of some of the excess slack in the labour market, as measured by the broader measures of labour market utilisation, they still observe on-going weakness in wage outcomes.

Key Quotes

“Total hourly wages ex bonuses increased 0.6% in Q4, just slightly above market and Westpac expectations for 0.5% lifting the annual pace modestly from 2.0%yr to 2.1%yr.”

“Private sector wages grew 0.5% holding the annual rate at 1.9%yr. Public sector wages grew 0.6% with the boost coming from professional & technical (1.0%), education (0.8%) and health care (0.9%). Public sector wage inflation is holding an annual pace of 2.4%yr which is just up on the 2016 record low of 2.3%yr.”

“There has been a clear improvement in labour market condition through 2018 as measured by total employment, full-time employment, hours worked, unemployment and even underemployment (where a worker is willing and able to work more hours than they do) and yet there is still no meaningful lift in wage inflation. This is despite the fact 2017 saw a larger than usual rise in the minimal wage which was expected to boost wages in Q3 – we are still waiting for that to happen.”

“A Phillips Curve constructed from wages and underutilisation (unemployment plus underemployment) still has wages underperforming. If the relationship held then based on a 14.2% underutilisation rate wages should be growing around 2¾%yr.”

“By industry manufacturing wages are starting to lift, 2.3%yr in Q4 from 2.2% in Q3 and 2.0%yr in Q1. There has even been an improvement in mining if from a low base (1.4%yr from Q1 low of 0.6%yr). The strongest industries for wages were health care (2.8%yr), arts & recreation (2.6%yr) and education & training (2.4%yr).”

“Wages continue to underperform relative to the broader economy. Underemployment may have been part of the story but as the labour market improved through 2017 wages continued to lag, particularly in NSW. The state with the strongest growth in population, Vic, and thus higher underemployment also has stronger wages growth. Nevertheless outside of the public sector wages in Vic are still somewhat subdued.”

“The RBA may be heartened by the modest lift but we are still a long way from wages threatening the inflation outlook and thus there is little here to get excited about.”