Wage growth remains weak, with unemployment trending down

Brendan Rynne, Partner, Chief Economist
Brendan Rynne, Partner, Chief Economist

Data released by the Australian Bureau of Statistics (ABS) reveals wage growth is still persistently weak, while unemployment is trending down in most jurisdictions.

The June quarter wage price index (WPI) shows the average wage growth across Australia was 2.1 percent, year-on-year, which is about two-thirds of what the normal trend growth is, just over 3 percent. The strongest wages growth has been in Victoria and Tasmania at 2.5 percent, with the weakest in Western Australia and the Northern Territory at 1.5 percent.

It’s not surprising that some households are feeling their wage growth isn’t giving them additional buying power in the market place.

Compared with July last year, July figures from the ABS indicate unemployment is trending down in most jurisdictions, sitting at 5.3 percent. Nearly 12.6 million people are now employed in Australia, an increase of about 300,000 over the past 12 months.

While unemployment is trending down, it’s still above 5 percent, the point at which you will start to see wholesale wages growth within the economy.

This data paints an interesting picture when put in a global financial crisis (GFC) context.

The chart below shows from the early 2000’s to the start of the GFC, both consumers and producers were achieving real wages growth which was beneficial to both.

Put simply, it is good for consumers and households when their real wage line is above zero, and it is good for producers when their real wage line is below zero. When either line is zero, wages growth is balanced with prices growth.

From the onset of the GFC producers have experienced a wage price squeeze for most of that time, except for the period during 2011/12 when the mining infrastructure boom peaked, and more recently from the beginning of 2017 when wages growth have generally moderated.

From the consumers’ perspective, real wage growth post-GFC has been somewhat weaker than the period pre-GFC, and in particular during the past 18 months. So not only have consumers and households experienced limited nominal wage growth, that wage growth they had has been eaten away by (albeit low) inflation.

While the soft wages data places increased pressure on households, it has created the incentive for businesses to employ more people.

There is a really strong inverse relationship between producer real wages growth and employment, particularly since the GFC. This suggests that employers have been much more cautious in hiring people; waiting for price improvements to materialise prior to adding to their staff base.

The analysis does show however there is likely to be wages growth in the near term as labour demand tightens, but this will come at the expense of continued growth in employment.

In essence we seem to be trapped in a counter-cyclical employment/wages growth spiral, and the recent weakness in wages is helping drive labour demand. But it is likely to swap around soon with wages growth crowding out employment growth.

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