Labour market is weak: CBA Economics

Real wages growth will remain low while the labour market is weak.  Real household disposable income growth will continue to run at a below‑average pace and therefore act as a headwind to consumer spending.

• A run down in the savings ratio, rising wealth positions, a lower Aussie dollar redirecting retail spending onshore and more appetite for household borrowing are needed to drive momentum in consumer spending.
• We expect consumer spending growth of around 2.5% and 3.0% in 2014/15 and 2015/16 respectively.  This compares to the ten‑year average of 3.0%.

The outlook for household consumption has been a key area of uncertainty over recent months.  Retail outcomes have been mixed and consumer sentiment remains fragile.  The concern for the RBA is determining if the waning in consumption growth momentum will be a lasting issue, particularly if households have reassessed expected economic conditions to be worse than previously anticipated.  A return to more “average” consumer spending outcomes is one of the forecast components of the mining to non‑mining growth transition.  The RBA expect consumer spending growth to improve considerably by 2016 because of an increase in household wealth and moderate income growth.

Wages growth is currently running at the slowest level for 16 years and real wages are declining.  If real wages growth is negative, what will drive momentum in consumer spending growth?

Our forecasts for moderate consumer spending growth are based on the assumption that:

1.  There will be some run‑down in the savings ratio
2.  Household balance sheets will remain in good shape
3.  A lower Australian dollar will redirect some retail spending onshore
4.  Consumer borrowing growth will fund additional spending

The risk from weak income growth

Changes in household disposable income growth are a key factor in determining potential changes in consumer spending.  The importance of income growth to household spending means that it is normal for consumer spending and household disposable income growth to run in similar cyclical patterns.

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• Highest and lowest wages: The average wage stands at $69,170. The highest average wage can be found in the Mining sector, at $113,636 per year. The lowest average wage is obtained by workers in the Accommodation and Food Services sector ($49,785), followed by retail trade ($50,898).
• Falling wages: Wages in the Administrative and Support Services sector fell by almost 5 per cent over the past year and stand at two-year lows. But in the Wholesale trade sector, wages soared by almost 12 per cent over the past year.
• Wages by states & territories: Across states & territories, we have calculated average annual wages were highest in: ACT ($80,054) from Western Australia ($79,175), Northern Territory ($71,474), NSW ($68,947); Victoria ($67,257), Queensland ($67,246); South Australia ($63,206) and Tasmania ($60,960).

What does it all mean?

• There are differences in the two measures of wages – the wage cost index and average weekly earnings. The wage cost index is the best measure of wage changes as compositional effects can complicate the average weekly earnings series. But reading the two measures together, it’s clear that Reserve Bank Board members aren’t lying awake all night worrying about wages.
• The Reserve Bank Board minutes noted the results of discussions with businesses that indicated that business owners were more inclined to work existing employees for longer hours rather than take on new staff. That seems to accord with the average weekly earnings data that showed ordinary earnings of private sector employees rose by 0.4 per cent in the latest quarter but total earnings rose at a faster 0.8 per cent rate.
• When it comes to wages, there will always be winners or losers based on the usual forces of demand and supply. Demand for workers in the mining sector continues to outpace demand with workers earning on average almost $114,000 a year. But in contrast wages in the hospitality sector stand at just below $50,000 a year. And admin staff members have suffered from the penchant by businesses to trim costs. In the Administrative and Support Services sector wages fell by almost 5 per cent over the past year. This may reflect some shifting of staff from full-time to part-time and the desire to work employees longer hours rather than take on new staff.
• Over the past three years wages rose by just under 15 per cent while prices rose by just over 8 per cent. Despite the protests of many, Australians have become better off, and affordability for many goods has improved.

What do the figures show?

• Average weekly ordinary time earnings rose by 0.5 per cent in the December quarter to be 4.3 per cent higher than a year ago. Private sector wages rose by 0.4 per cent in the quarter and by 4.4 per cent over the year. Public sector wages rose by 0.7 per cent in the quarter and by 4.0 per cent over the year.
• Average weekly total earnings rose at a faster 0.8 per cent in the quarter but at a more restrained 3.7 per cent over the year.
  Male wages rose by 0.2 per cent in the quarter and by 4.3 per cent over the year. Female wages rose by 0.6 per cent in the quarter and by 3.8 per cent over the year.
• Wages rose most over the year in Wholesale trade (up 11.7 per cent), Construction (5.3 per cent), and Mining (5.2 per cent). Wages were weakest over the past year in Administrative and support services (down 4.8 per cent), followed by Financial & Insurance Services (down 0.1 per cent) and Rental Hiring & Real Estate Services (up 0.9 per cent).
• Across states & territories, we have calculated average annual wages as follows: NSW $68,947 (up 3.2 per cent over the year), Victoria $67,257 (up 4.3 per cent), Queensland $67,246 (up 2.6 per cent), South Australia $63,206 (up 4.3 per cent), Western Australia $79,175 (up 8.0 per cent), Tasmania $60,960 (up 5.2 per cent), Northern Territory $71,474 (up 8.6 per cent) and ACT $80,054 (up 4.8 per cent).
  The highest average wage can still be found in the mining sector, at $113,636 per year. Next highest is scientific & technical services ($82,212), finance & insurance services ($80,480) and information media & telecommunications ($80,257). The lowest average wage is obtained by workers in the accommodation and food services sector ($49,785), followed by retail trade ($50,898) and “other services” ($54,636).

What is the importance of the economic data?

• The ABS publishes the Average Weekly Earnings (AWE) series on a quarterly basis. While the Wage Cost Index allows analysis of wage movements from quarter-to-quarter, the AWE series is best seen as a measure of actual dollar figures for wages. But average weekly earnings figures can be distorted by changes such as the relative growth of high-paid to low-paid jobs and the cashing out of bonuses in ordinary earnings.

What are the implications for interest rates and investors?

• There are clear winners and losers from the structural change moving through the Australian economy. Miners and professional workers like engineers are in strong demand and are being paid handsomely. But the lack of spending by consumers and desire for business to cut costs are hitting admin and support staff hard. The Reserve Bank needs to take into account the compositional changes that are occurring in the Australian economy when assessing rate changes.
• Overall, 12 of the 19 industry sectors continue to record real wage gains – wage growth exceeding price growth. So retailers in some regions of Australia will be doing far better than other retailers.
• The long-term trend has been for overtime and other payments to become part of the ordinary wage. Over the past year that trend has been broken as hiring slowed and businesses more frequently asked staff to take on overtime when demand levels rose.

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