Strongest wage growth in 7½ years 

Wage Price Index

• The main measure of wage growth, the Wage Price Index (WPI), grew by 0.7 per cent in the December quarter – the strongest quarterly lift in wages in 7½ years (since the March quarter 2014). Annual wage growth lifted from a 2.2 per cent to 2.3 per cent pace in the December quarter, the equal strongest rate in three years (since December quarter 2018).
• Private sector wages rose by 0.7 per cent in the December quarter – the equal most in 7½ years – to be 2.4 per cent higher when compared to a year ago – also the equal strongest equal annual pace in seven years. Public sector wages also lifted by 0.7 per cent in the December quarter – the most in 2½ years – to an annual growth rate of 2.1 per cent – the strongest pace in 18 months.

What does it mean?

• Wage growth, as represented by the Wage Price Index (WPI), grew by 0.7 per cent in the December quarter – the strongest quarterly pace in 7½ years (since the March quarter 2014). Annual wage growth lifted from a 2.2 per cent to 2.3 per cent pace in the December quarter, the equal strongest rate in 3 years (since December quarter 2018).
• Workers in the private sector fared even better, with wages growing by 2.4 per cent on a year ago – the equal strongest growth rate in seven years (since December 2014).
• Including bonuses, private sector wages grew by 1.2 per cent in the December quarter to an annual rate of 3.0 per cent), the equal strongest pace in nine years (since December quarter 2012). This outcome suggests that firms that are having difficulty sourcing labour are using other strategies to attract and retain workers, including sign-on and retention bonuses, increased workplace flexibility, more internal training and increased hiring of less-experienced staff.
• Pay increases occurred following prolonged Delta lockdowns in Australia’s south-east in 2021. Annual wage growth has lifted off record lows of 1.4 per cent in late 2020 with economic activity generally recovering following lockdown-related labour market disruptions. Public servants – accounting for around 16 per cent of Australia’s workforce – saw record low annual wage gains of just 1.3 per cent in the June quarter of 2021, restrained by pay freezes and cuts.
• But public sector wages also lifted by 0.7 per cent in the December quarter – the most in 2½ years – to an annual growth rate of 2.1 per cent – the strongest pace in 18 months. Despite the end of state government pay freezes, the majority of public sector workers are employed in Public administration and safety (up 2.3 per cent), Education and training (up 2.1 per cent), and Health care and social assistance (up 2.4 per cent) with annual pay gains in these sectors lagging the private sector.
• The reference date for the WPI was the last pay period ending on or before the third Friday of the middle month of the quarter (in this case November 19, 2021). While this was after the reopening of Australia’s south-east, most pay negotiations likely occurred before then, and perhaps even during the Delta lockdowns.
• That said, the 2.5 per cent increase in the National Minimum Wage award for tourism and hospitality workers was delayed from July 1 to November 1, 2021, boosting wage growth in the December quarter. Annual wages growth for Accommodation and food services workers jumped by 3.5 per cent in December, the strongest pace in a decade.
• The re-opening of stores after Delta lockdowns saw retail workers quarterly pay jump by 1.2 per cent in the fourth quarter, the equal strongest pace in over a decade (since September quarter 2011). Annual wage growth accelerated to an 8-year high of 2.6 per cent. Pandemic-induced consumer demand saw wages lift by 2.5 per cent in the December quarter for factory workers, a 6-year high. And the buoyant Aussie housing market contributed to annual pay gains of 2.5 per cent for workers in the Rental, hiring and real estate services industry, a 7½-year high.
• But Covid-19 lockdowns and restrictions weighed on the pay of workers in the Electricity, gas, water and waste services (up 1.3 per cent) and Transport, postal and warehousing services (up 1.8 per cent) over the year to December. And the higher-paying Mining industry (up 1.8 per cent), also lagged average annual pay gains.
• Another way to examine wage growth is to adjust it for changes in inflation, referred to as real wage growth. It measures the increase in wages relative to the increase in other prices in the economy. For consumers, real wages matter for their standard of living as it measures how well wage growth keeps pace with inflation in consumer prices.
• A common measure for assessing real wages from a consumer perspective uses the WPI deflated by the headline Consumer Price Index (CPI), which reflects changes in the prices that consumers face. In fact, the acceleration in the annual growth rate of the CPI to 3.5 per cent in the December quarter has pushed real wages growth further into negative territory – a third successive quarter of negative real wage growth. But when compared to the Reserve Bank of Australia’s (RBA) preferred underlying measure of CPI – the trimmed mean CPI – which excludes the volatile food and energy components – annual real wage growth is marginally negative, down just 0.3 percentage points. But this is still the worst outcome in 7½ years. Nevertheless, Aussie households are likely to have drawn down on the excess savings accumulated during lockdowns, supporting aggregate consumer spending.
• But after a lengthy period of below target inflation growth, it appears that the Reserve Bank (RBA) is determined to drive down the unemployment rate below 4 per cent (“full employment”) in an attempt to stoke annual wage growth of 3-4 per cent.
• In minutes of the RBA Board February 1 meeting, members said it is, “likely to be some time before aggregate wages growth would be at a rate consistent with inflation being sustainably at target.” And, “A further pick-up in wages growth was expected as the labour market continues to tighten. However, the pick-up was expected to be only gradual and there was uncertainty about the behaviour of wages as the international border re-opens and the unemployment rate declines to historically low levels.”
• RBA Governor Philip Lowe has also said in recent communication that, “we don’t have a specific benchmark (for wage growth), but what we want to see in the Wage Price Index (and other labour cost measures)… and in our liaison with businesses which is very important …. is evidence that wages are trending higher”.
• We think that this is a sensible approach as the Wage Price Index (WPI) does not capture non-wage compensation or the impact of compositional changes on aggregate labour income. Observation of other wage growth measures is therefore, warranted by policymakers in determining their policy settings. In fact, leading indicators of wage growth, including the NAB’s labour costs and IHS Markit’s input costs measures are both near record highs in early 2022. And the Commonwealth Bank’s (CBA) wage rate indicator – derived from internal data on wages and salaries paid into customer bank accounts, taking into account tax rates and levies – has also lifted sharply over 2021.
• Another factor likely to influence wage growth is inflation expectations, as wage-setting decisions are forward looking and wages are typically negotiated infrequently. Market inflation expectations, which can be measured by taking the difference in yield between nominal bonds and inflation-indexed bonds (break-evens), are rising as price pressures build on the back of pandemic demand-supply imbalances. This is important as it will likely influence how firms and employees expect inflation to evolve over the period for which wages are set will influence wage negotiations.
• CBA Group economists, therefore, expect both price and wage growth to accelerate further in the coming months, as the labour market tightens and mobility picks up with the Omicron virus wave passing its peak.
• In fact, we expect wage growth, as measured by the Wage Price Index (WPI) to run at a six-month annualised pace of over 3 per cent through to the end of March 2022, as the labour market tightens, driving the unemployment rate down to 4 per cent or below. And our preliminary estimate is for the annual growth rate in trimmed mean inflation to be 3.5 per cent by the end of March 2022 – a six-month annualised pace of 4.4 per cent.
• Our estimate is above the RBA’s inflation forecasts, so we expect the RBA to move to an explicit hiking policy bias at the May Board meeting with our expectation for the first hike in the cash rate to occur at the June 2022 meeting.

What do you need to know?

Wage Price Index (WPI) – December quarter

• Wage growth, as represented by the Wage Price Index (WPI), grew by 0.7 per cent in the December quarter – the strongest quarterly pace in 7½ years (since the March quarter 2014). Annual WPI growth lifted from a 2.2 per cent to 2.3 per cent pace in the December quarter, the equal strongest rate in three years (since December quarter 2018).
• Including bonuses (total hourly rates of pay), wages rose by 1.1 per cent – the biggest lift in over two years – in the December quarter to be up by 2.8 per cent on a year ago, the equal strongest annual pace in nine years.
• Private sector wages rose by 0.7 per cent in the December quarter – the most in 7½ years – to be 2.4 per cent higher when compared to a year ago – also the equal strongest equal annual pace in seven years. Including bonuses, private sector wages grew by 1.2 per cent in the quarter – the biggest lift in two years – to be up 3.0 per cent on a year ago, the strongest annual pace in nine years.
• Public sector wages also lifted by 0.7 per cent in the December quarter – the most in 2½ years – to an annual growth rate of 2.1 per cent – the strongest pace in 18 months.  Including bonuses, public sector wages grew by 0.7 per cent in the quarter to be up 1.9 per cent on a year ago.
• Industries with fastest annual wage growth over the year to December: Accommodation and food services (up 3.5 per cent, a decade high); Retail trade (up 2.6 per cent, an 8-year high); Manufacturing (up 2.5 per cent, a 6-year high); Rental, hiring and real estate services (up 2.5 per cent, a 7½-year high); and Professional, scientific and technical services (up 2.5 per cent).
• Industries with slowest annual wage growth over the year to December: Electricity, gas, water and waste services (up 1.3 per cent); Transport, postal and warehousing (up 1.8 per cent); and Mining (up 1.8 per cent).
• By state and territories over the year to December: NSW (up 2.4 per cent, equal highest in 7 years); Victoria (up 2.3 per cent); Queensland (up 2.4 per cent, highest in 7 years); South Australia (up 2.1 per cent); Western Australia (up 2.0 per cent, equal 6½-year high); Tasmania (up 3.0 per cent, an 8½-year high); Northern Territory (up 2.1 per cent); and the ACT (up 2.6 per cent, an equal 8½-year high).