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Will it last and what does it mean for the RBA?
According to ABS data released this week, annual wages in the December quarter grew faster than inflation for the first time since mid-2021. Is this a turning point which means it is time for households to celebrate the end of the cost-of-living squeeze? Who has benefited most and are the gains here to stay? And what will it mean for the RBA?
The wage price index increased by 0.9% in the December quarter, and by 4.2% in the year, up from 4.1% in the year to September. This was slower than the quarterly gain in the September quarter of 1.3%, which was boosted by increases to minimum and award wage rates, but was in line with economist and RBA expectations. It represents the fastest annual rate of wage growth in the Australian economy in 15 years in nominal terms. But in real terms, the gain was just 0.1%, as inflation over the year to the December quarter was 4.1%. So it’s hardly a boon for households struggling with the cost-of-living and higher mortgage costs.
More jobs are receiving larger annual wage increases; the share of jobs recording a wage gains of 4% or more rose to 43% in December, the highest proportion since records began in late 2007. But broader based and larger wage gains are not unexpected given the tightness in the labour market and the high rates of inflation seen over the last two years.
Over the last year, wage growth has accelerated sharply in the health care and education sectors, assisted by the increase in award wages from the Fair Work Commission and the federal government aged care wage subsidies in the September quarter, and a number of newly implemented enterprise bargaining agreements (EBAs) for essential workers in Queensland and New South Wales in the December quarter. These industries are skewed toward female employment, so faster wage growth in these sectors is consistent with the 2023 Workplace Gender Equality Amendment Bill (also known as closing the gender pay gap). Average weekly earnings data for the six months ending November suggest the gap between full-time average weekly earnings for male and females fell to 12%, from around 14% two years ago.
Whether or not the wage gains are here to stay depends critically on how the labour market evolves. In QIC’s central case, forecast wage gains will continue to modestly outpace inflation, underpinned by a gradual improvement in labour productivity. It is likely that wage growth will remain around 4% until the second half of the year, at which time a gradual rise in the unemployment rate will allow for a softening in wage growth to around 3½%. Growth in unit labour costs (the labour cost of producing a unit of output) will slow from a currently unsustainable rate of over 6% toward 3% by the end of the year and 2-2½% in 2025. But the very modest recovery in productivity will mean the RBA remains cautious in cutting the cash rate, waiting until the end of the year to deliver a 25bp cut to 4.10%.
However, data from the last two months suggest there’s a risk that the labour market is deteriorating faster than we expect, with a net fall of 62K jobs over December/January, and a 0.2% pts increase in the unemployment rate to 4.1%. In a downside scenario which sees a faster decline in labour demand that lifts the unemployment rate through 5%, the deterioration in the labour market would result in a sharper slowing in wage growth and nominal unit labour costs. This scenario, should it play out, would likely see pressure build quickly on the RBA to cut rates sooner, and more sharply, than in our central case. It would probably also see consumers retreat further, sending the economy into recession.
But the labour market data are particularly volatile, and we know there are seasonal adjustment issues around the timing of new job starters in January. The ABS reported that there were 110K more people waiting to start work in January than “normal”, of which 23K were counted as unemployed and 87K were excluded from the labour force. Accounting for this, we expect to see a sharp rebound in employment in February, an increased workforce participation rate, and a fall in the unemployment rate back to 4.0%. This outcome would be consistent with our central case.
Beyond the short term, however, rising real wages will only benefit households if they coincide with an improvement in productivity growth. Absent productivity gains, firms would be forced to pass on rising real wage costs through higher prices. Hence, rising real wages would only cause higher inflation and interest rates, which would ultimately be detrimental to households. Unfortunately, Australia’s productivity performance has been the Achilles heel of the economy for almost a decade, with labour productivity having shown no growth since 2016. In fact, measured GDP per hour worked has fallen by 6% from its most recent peak in 2021. Cyclically weak productivity would be expected in a cyclical downturn, such as we are currently experiencing. But the weakness of productivity for the last decade suggests more structural factors may also be at play, including reduced competition, impediments to investment from the tax system or industrial relations, and an ageing population requiring increased spending on aged care and health care, which typically experience slower rates of productivity. Ongoing efforts to boost structural reform will be key to achieving sustainable real wage growth in the Australian economy over the decade ahead.