Wages outpace prices by largest margin in 3½-years

Wage price index

• Wage growth at record low: The wage price index rose by 0.5 per cent June quarter after a similar rise in the March quarter. Annual wage growth held at a record (18-year) low of 2.1 per cent.
• Wages grow faster than prices: The gap between annual wage growth and inflation is 1.1 percentage points – the biggest margin in 3½-years (December 2012).
• Industries with fastest annual wage growth: Electricity, gas, water and waste services (up 2.6 per cent) and Education & training (up 2.5 per cent).
• Industries with slowest annual wage growth: Mining (up 1.3 per cent); Administrative & support services and Construction (both up 1.5 per cent); Professional, scientific and technical services (up 1.7 per cent).
• Annual wage growth across States & Territories: NSW, 2.2 per cent; Victoria, 2.4 per cent; Queensland, 2.6 per cent; South Australia, 2.5 per cent; Western Australia, 3.0 per cent; Tasmania, 1.6 per cent; Northern Territory, 2.9 per cent; and ACT, 1.9 per cent

What does it all mean?

• Wage growth is holding just above 2 per cent and it clearly is a win-win situation. Lower growth of wages has encouraged employers to take on more staff. And while low nominal growth of wages is an adjustment for employers, wages are still growing at a faster pace than prices. In fact inflation is just 1 per cent and wages are growing at a 2.1 per cent annual pace. So the gap between annual wages and inflation has now lifted to 1.1 percentage points – a 3½-year high. It is clear that real wage gains are still boosting consumer purchasing power.
• In addition lower mortgage rates and cheap petrol prices are ensuring that the household budget remains particularly healthy. And the result should hopefully ensure a lift in activity and spending – particularly in light of the improved job security.
• For a long time, wage growth near 3 per cent was regarded as “normal”. That is, before the global financial crisis and the new era of disruption. However given the more conservative attitudes of consumers, it may be that the current levels of wage growth is the new “normal”. Certainly when it comes to economic growth and interest rates, the Reserve Bank has suggested normal levels are likely to be lower than the pre-GFC period.
• Interestingly a look at the industries with the strongest and weakest wage growth, highlights just how dramatically the employment landscape has shifted. The mining sector was the weakest, with annual wage growth of just 1.3 per cent – a far cry from the 5.4 per cent annual growth in wage just four years ago. Similar results can be seen for the construction sector. No doubt the slowdown in China, falling commodity prices and over investment in the sector has resulted in excess spare capacity, which is being worked through.
• The wage data is essentially another measure highlighting the benign inflation environment and should result in the Reserve Bank continuing to debate the merits of another rate cut
• What do the figures show

Wage price index

• The wage price index rose by 0.5 per cent in the June quarter after a 0.5 per cent rise in the March quarter. Annual wage growth held at a record (18-year) low of 2.1 per cent.
• Private sector wages rose by 0.5 per cent in the quarter while public sector wages rose by 0.6 per cent. Annual growth of private sector wages held at a record low of 2.0 per cent in the June quarter. Public sector wage growth was steady at 2.4 per cent in the June quarter.
• Including bonuses, wages rose by 0.2 per cent in original terms in the June quarter to be up 2.0 per cent on a year ago.
• Private sector wages including bonuses rose by 0.1 per cent in the quarter to be up 1.9 per cent on a year ago. Public sector wages including bonuses rose by 0.2 per cent in the quarter and by 2.5 per cent over the year.
• Industries with fastest annual wage growth: Electricity, gas, water and waste services (up 2.6 per cent); Education & training (up 2.5 per cent).
• Industries with slowest annual wage growth: Mining (up 1.3 per cent); Administrative and support services and Construction (both up 1.5 per cent); Professional, scientific and technical services (up 1.7 per cent).
• Annual wage growth across States & Territories: NSW, 2.2 per cent; Victoria, 2.4 per cent; Queensland, 2.6 per cent; South Australia, 2.5 per cent; Western Australia, 3.0 per cent; Tasmania, 1.6 per cent; Northern Territory, 2.9 per cent; and ACT, 1.9 per cent.

What is the importance of the economic data?

• The Wage 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 Wage 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 wage price index is a measure of hourly pay rates (excluding bonuses).

What are the implications for interest rates and investors?

• Wages continue to outpace prices. Add in the strong flow of dividends from companies, lower interest rates cheaper petrol and higher home prices and there is plenty of latent spending power to boost sales at retailers.
•  The modest growth of wage costs should continue to help businesses as they deal with the challenges of global technology-led disruption.
• From the Reserve Bank’s perspective the wage data doesn’t add much more extra information. CommSec expects another rate cut in November.