Strongest Aussie wage growth in 8 years

• Public sector wages lifted by a more modest 0.56 per cent in the June quarter to be up 2.43 per cent on the year, the strongest annual growth rate in 3 years (since June 2019). But public sector wage freezes during the height of the pandemic last year and lagged impact of Enterprise Bargaining Agreements (EBAs) is likely behind the slower pace of pay rises in the public sector. The ABS added, “The public sector has a large proportion of jobs paid under multi-year enterprise agreements which tend to be less reactive to labour market conditions.”
• Sectors where skills shortages have been most acute, such as Construction (up 3.41 per cent), Manufacturing (up 3.08 per cent), and Rental, hiring and real estate services (up 3.06 per cent) saw the biggest annual growth in worker pay packets in the June quarter.
• But annual wages growth lagged in Australia’s biggest hiring sectors during the pandemic – Health care and social assistance (up 2.26 per cent), Public administration and safety (up 2.54 per cent), Administrative and support services (up 2.61 per cent), and Education and training (up 2.25 per cent) – reducing overall wage growth momentum.
• Across states and territories, annual wage growth rates in Queensland (up 2.94 per cent), Western Australia (up 2.66 per cent) and NSW (up 2.65 per cent) were the strongest in around nine years. Public sector wages grew by a massive 4.0 per cent in Queensland over the year to June, but lifted by a meagre 1.15 per cent in Tasmania.
• With Australia’s unemployment rate at a 48-year low of 3.5 per cent, job vacancies and employment broadly at record highs, and the underutilisation rate – which counts both unemployed and underemployed people – at a 40-year low of 9.6 per cent in June, one would expect wages growth to be skyrocketing. And with stronger demand for workers, wages are expected to respond to “full employment” levels and higher job vacancies.
• So what gives? The WPI is perhaps not the best measure of pay packets. The WPI measures changes over time in the price of wages and salaries unaffected by changes in the quality or quantity of worked performed. And the WPI doesn’t capture rising labour costs related to job switching or changes in labour-related taxes in subsidies.
• While the WPI has been the Reserve Bank’s (RBA) preferred longstanding measure of wages growth, central bank policymakers have pivoted to a focus on broader ‘labour costs’ in recent months. In fact, the RBA Board has placed more emphasis on its ‘business liaison’ program across capital cities and regional areas. And in the minutes of its August 2 meeting released yesterday, the Board said, “Over 60 per cent of private sector firms indicated that they expected to raise wages by more than 3 per cent over the year ahead.”
• Separate private sector business surveys also suggest the wage inflation pressures are increasing amid worker shortages. In fact, the NAB measure of quarterly labour costs grew at a 3.1 per cent rate in the June quarter and by a record 4.6 per cent quarterly growth rate in July.
• It is also important to note that a smaller proportion (that is, around 15 per cent) of workers typically receive pay rises in the June quarter each year. And today’s WPI outcome doesn’t include the recent 4.6 per cent increase in awards and 5.2 per cent jump in minimum wages effective from July 1, 2022.
• Combined, these increases are expected to put upward pressure on the WPI in the second half of 2022 and early 2023. In fact, Commonwealth Bank (CBA) Group economists expect the annual growth rate of the WPI to lift from around 2.8 per cent in 2022 to 3.3 per cent in 2023.
•  With the headline Consumer Price Index (CPI) growing at an annual rate of 6.1 per cent in the June quarter, real wages fell by 3.5 per cent in 2021/22. In response, the Albanese Government has announced a jobs summit to take place next month.
• While we await to see whether wages eventually respond to lower rates of underutilisation, the real wages of Australians are going backwards due to elevated cost of living pressures. One of the tasks of policymakers at the summit will be to investigate the imbalance that has arisen between company profits and labour compensation. Productivity-driven real wages growth will only occur if a more equitable method of wage setting is implemented.
• CBA Group economists acknowledge there is a risk the RBA does not hike the cash rate by 50 basis points at the September Board meeting and instead increases the cash rate by 40 or 25 basis points following today’s weaker-than-expected WPI print. Attention now turns to tomorrow’s July labour survey.

Originally published by CommSec