Slowest wage growth on record

Wage price index

• Wages rose by 0.7 per cent in the December quarter. Annual growth of wages eased from 2.7 per cent to a record low of 2.6 per cent (series began in 1997).
• Wages are growing at a slower pace than inflation, with the margin now the largest in over five years.
• Industries with fastest annual wage growth: Electricity, gas, water & waste services (up 3.3 per cent) and Mining (up 3.1 per cent).
• Industries with slowest annual wage growth: Professional, scientific and technical services (1.8 per cent), Accommodation & food services and Wholesale Trade (both up 2.2 per cent).

• At present wages are growing at the slowest pace on records stretching back over 16 years. It’s no surprise that the lacklustre level of activity throughout 2013 has hampered the business sector with cost saving being the key overarching theme.
• It was only a couple of months ago that trading conditions hit the weakest levels in four-years and as a result employers have been shifting to a more flexible workforce – in an attempt to manage costs and maintain profitability. However the outlook is a little bit more optimistic. The economy looks to be gathering momentum, but it will take a longer period before the subdued wage growth figures start to lift.
• The latest wage data could be classified as tame, but really it is the perfect outcome for an economy that has been sluggish over the past year. In fact the annualised 2.6 per cent rise in wages ensured that employees were receiving a modest boost in incomes without crippling business profitability. The one area that is of concern is that inflation is outstripping the growth in wages by the biggest margin in five years. If the cost of living continues to lift at a faster pace than wages it could curb the green shoots of activity across the economy. Still it must be noted rising wealth levels and low interests rates, are helping to offset weak wage growth.
• The Reserve Bank has certainly been keeping a close eye on labour costs and productivity. And on both fronts the central bank has a reason to be rather comfortable with the current situation. The national accounts data confirmed that productivity is growing at a near ‘normal’ rate while at the same time wage growth has been contained – keeping a lid on inflation. In addition the combination of a patchy economic activity and a flattening of the job market suggest that productivity should continue to improve in coming quarters.
• The tame growth of wages ensures that policymakers can cut rates once more if it is deemed necessary. The key is how the labour market reacts in coming months. Forward looking indicators suggest that activity levels are lifting and this should translate into better business profitability over the medium term. For the moment the Reserve Bank looks set to remain on the sidelines and assess proceedings.

What do the figures show?

Wage price index

• The wage price index rose by 0.7 per cent in the December quarter in seasonally adjusted terms after rising by 0.5 per cent in the September quarter. Annual wage growth eased from 2.7 per cent to 2.6 per cent – a record low.
• Private sector wages rose by 0.6 per cent in the quarter while public sector wages rose by 0.9 per cent. Annual growth of private sector wages fell from 2.7 per cent to 2.5 per cent while public sector wage growth lifted from 2.5 per cent to 2.7 per cent.
• Including bonuses, wages rose by 0.8 per cent in original terms in the December quarter. Annual growth of wages at total hourly wage rates including bonuses held steady at 2.6 per cent.
• Industries with fastest annual wage growth: Electricity, gas, water & waste services (up 3.3 per cent); Mining (up 3.1 per cent), and Public administration & safety and Education & training (both up 2.9 per cent).
• Industries with slowest annual wage growth: Professional, scientific and technical services (1.8 per cent), Accommodation & food services and Wholesale Trade (both up 2.2 per cent).
• Annual wage growth across States & Territories: NSW, 2.4 per cent; Victoria, 2.5 per cent; Queensland, 2.6 per cent; South Australia, 3.5 per cent; Western Australia, 3.0 per cent; Tasmania, 2.2 per cent; Northern Territory, 2.3 per cent; and ACT, 2.3 per cent.
• 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).
• The fundamentals for the domestic economy remain sound. However given that the economy is only lifting from a low base and the improvement in business profitability is still patchy wage growth is likely to remain subdued over the coming year.
• The low inflation environment ensures that the Reserve Bank can cut rates once more if necessary. How the economy – particularly the labour market – reacts over the next couple of months will be the key determinant for monetary policy.
  • CommSec believes the Reserve Bank will be in no rush to change policy settings over the medium term.

Why is the data important?

• 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?

• The fundamentals for the domestic economy remain sound. However given that the economy is only lifting from a low base and the improvement in business profitability is still patchy wage growth is likely to remain subdued over the coming year.
• The low inflation environment ensures that the Reserve Bank can cut rates once more if necessary. How the economy – particularly the labour market – reacts over the next couple of months will be the key determinant for monetary policy.
• CommSec believes the Reserve Bank will be in no rush to change policy settings over the medium term.