Wage growth lifts from the floor
Wage Price Index
• What happened? The main measure of wages – the Wage Price Index (WPI) – rose by 0.6 per cent in the March quarter after a similar rise in the previous quarter. Annual wage growth rose from a record (23-year) low of 1.4 per cent to 1.5 per cent.
• Implications: There are no immediate implications for investors. The Reserve Bank wants to see annual growth of wages closer to 3 per cent before it gives any thought to lifting interest rates.
The data on wages highlights the costs faced by businesses and gives insights into future interest rate decisions.
What does it all mean?
• Before the Reserve Bank even thinks about lifting rates, it wants to see evidence of higher inflation and a tighter job market (notably, firmer wage growth and lower unemployment). The Reserve Bank (RBA) would like to see the jobless rate fall to the ‘early 4’s’ – a rate near 4 per cent. And in terms of wages, the central bank would like to see annual growth near 3 per cent, rather than 1.5 per cent where it is currently. So interest rate hikes are still some way off.
• But it is important to note that economic recovery is occurring at a faster rate than most had expected. A raft of companies across mining and construction is reporting rising cost pressures and a difficulty in filling roles – companies such as James Hardie and Macmahon Holdings. And if the job market tightens more broadly across regions and industries, then wage growth will lift.
• It’s worth noting that private sector wages rose by 0.6 per cent in the March quarter after a 0.7 per cent lift in the prior quarter – the strongest six-month gain in seven years. The pick-up in growth would encourage policymakers.
• The Reserve Bank has clarified its position on rate hikes over the past few weeks. The RBA says future rate decisions are based on the flow of economic data and that rates are not set according to the calendar (a reference to the expectations of rate hikes in 2024).
• While activity across construction and mining is strong, buoying revenues, the cost pressures are boosting expenses and thus crimping productivity and margins. So investors need to be alert to both the positives and negatives that flow from stronger activity levels.
• Commonwealth Bank Group economists tip 1.8 per cent annual growth in wages in 2021 and 2.6 per cent growth in 2022. Higher wages growth and lower unemployment will serve to boost consumer spending and thus support the outlook for consumer staples and consumer discretionary sectors.
• The Bureau of Statistics has provided some ‘colour’ on the latest wage outcome. The ABS wrote: “March quarter 2021’s moderate growth was influenced by regularly scheduled increases. Improved business conditions saw employers revisit wage reviews postponed during the height of the pandemic. The phased approach to the delivery of award increases saw jobs in the accommodation and food services, retail trade, arts and recreation, aviation and tourism industries receive rises previously recorded in September quarters.”
What do you need to know?
Wage Price Index – March quarter
• The Wage Price Index (WPI) rose by 0.6 per cent in the March quarter after a similar rise in the previous quarter. Annual wage growth rose from a record (23-year) low of 1.4 per cent to 1.5 per cent.
• Including bonuses (total hourly rates of pay), wages rose by 0.8 per cent in the March quarter to be up by 1.8 per cent on a year ago.
• Industries with fastest annual wage growth: Education and training (up 2.2 per cent); Electricity, gas, water and waste services (up 1.8 per cent); and Health care and social assistance & Financial and insurance services (both up 1.7 per cent).
• Industries with slowest annual wage growth: Rental, hiring and real estate services (up 0.4 per cent); Arts & Recreation Services (up 0.8 per cent); and Administrative and support services (up 0.9 per cent).
Published by Craig James, Chief Economist, CommSec