Labour Price Index; RBA Governor speech
- Wages rose by 1.0 per cent in the December quarter, slightly above market expectations. In annual terms wages are up 3.9 per cent on a year ago – exactly in line with the average growth over the past five years.
- Private sector wages rose 1.0 per cent in the quarter and 3.9 per cent over the year. Public sector wages rose 0.9 per cent in the quarter and 3.9 per cent over the year.
- In a speech today, the Reserve Bank Governor has reinforced expectations that rates are set to remain on hold. Glenn Stevens has stressed, “a careful response is needed” to the fact that the terms of trade gains are being saved rather than spent while the terms of trade is inducing major structural change in the economy.
- The Reserve Bank Governor has stressed the need for improved productivity, a fact borne out by the latest wage data.
What does it all mean?
- Wage growth across the economy is good, rather than being great. Workers in the fastest growing sectors like mining are achieving the highest wage growth while workers in transport, real estate, media and telecommunications are only achieving salary increases that are modestly above the rate of inflation. The main concern is that wages in the utilities – electricity, gas and water – remain lofty despite poor productivity in the sector and disappointing industry growth.
- In an economy-wide sense, the latest wage figures are encouraging. Wage growth near 4 per cent is sufficiently above the rate of inflation to boost consumer purchasing power. A year ago, wages weren’t covering price increases. And current growth of wages wouldn’t be taxing for businesses especially given solid profit growth over the past year.
- Looking ahead though, businesses will need to focus on extracting greater productivity from their workers rather than just putting more workers on payrolls. Wage growth near 4 per cent is fine when productivity growth is near the longer-term average of 1.5-2.0 per cent, but not when productivity is barely growing as it is currently.
- Productivity has been the missing element in the economic debate of the past few years. Federal Treasury has been successful with two of its three P’s – that is, increasing population growth and increasing workforce participation. But if Australia is to sustainably grow at a fast pace, productivity needs to lift.
- The Reserve Bank Governor is again a force of reason when it comes to discussing the terms of trade (ratio of export prices to import prices). Glenn Stevens knows the income boost from the terms of trade would be a worry if the income were being spent, not saved. But he believes the gains are being saved. In addition he is worried about the structural change induced by the terms of trade. In short, he argues for a “careful response”.
- Analysts should heed the Reserve Bank Governor’s advice. A higher terms of trade doesn’t mean that interest rates need to be jacked up – in fact it may turn out to be completely the wrong response.
What do the figures show?
Wage price index
- The wage price index rose by 1.0 per cent in the December quarter after lifting 1.1 per cent in the September quarter. Annual wage growth continued to move away from the decade low of 2.9 per cent set in the December quarter 2010, lifting from 3.5 per cent to 3.9 per cent. In original terms annual wage growth stands at 3.8 per cent.
- On average, wages have grown by 3.9 per cent over the past five years.
- Private sector wages rose by 1.0 per cent in the December quarter while public sector wages rose by 0.9 per cent. Compared with a year earlier, private and public sector wages rose by 3.9 per cent.
- Including bonuses, wages rose by 0.8 per cent in original terms in the quarter with annual growth of ordinary time hourly rates steady at 3.9 per cent in the December quarter.
- Industries with fastest annual wage growth: Electricity, gas, water & waste (up 4.7 per cent), Mining and Professional, scientific & technical services (both up 4.6 per cent), Education & training and Financial & insurance services (both up 4.4 per cent).
- Industries with slowest annual wage growth: Transport, postal & warehousing (up 2.9 per cent); and Rental, hiring & real estate services (up 3.0 per cent); Information media & telecommunications and Arts & Recreation services (both up 3.1 per cent); Other services (up 3.2 per cent),
- Annual wage growth across States & Territories: NSW, 3.8 per cent; Victoria, 3.6 per cent; Queensland, 4.2 per cent; South Australia, 3.9 per cent; Western Australia, 4.0 per cent; Tasmania, 3.3 per cent; Northern Territory, 3.8 per cent; and ACT, 3.7 per cent.
What is the importance of the economic data?
- The Labour Price Index has been compiled since September quarter 1997 and measures quarterly changes in wage and salary costs for employees. The index is based on a representative sample of employees, and includes measures of non-wage costs including superannuation, payroll tax, public holiday and workers compensation. The Labour Price Index is useful in measuring wage pressures in the economy. While strong growth in wages would boost domestic spending, it could also serve to lift employer costs and prices and add to economy-wide inflationary pressures. The labour price index is a measure of hourly pay rates (excluding bonuses).
What are the implications for interest rates and investors?
- The latest wage data represents a rare bit of good news for retailers and other consumer-focussed businesses. A situation where wages are outstripping inflation – but not excessively so – puts more spending power in consumer pockets.
- When you add all the factors up – a strong job market, real wage gains, stable interest rates and record wealth – it points to higher consumer spending ahead. Now you just have to convince consumers to spend.
- The weakness in wage growth over the past year has been a key reason why consumer spending has been depressed. A year ago wages were growing at the slowest pace in a decade – hardly the reason to start spending, especially on non-essential or discretionary items.
- No one at the Reserve Bank would bat an eyelid at the latest wage data – growth is not a threat to inflation. Interest rates are solidly on hold.
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