[Australia] Wage growth is a positive for some workers but could fuel inflation

According to the Australian Bureau of Statistics (ABS), wages grew by 1.3 per cent over the September quarter. It is the biggest increase in the 26-year history of the ABS Wage Price Index (WPI) and surpasses the inflation rate of 1.2 per cent for the September quarter, ABC News reports.

In short, real wages crept upwards. Over the course of the year, wages rose 4 percentage points; the highest for the WPI since 2009.

Millions of workers have reportedly been seeking meaningful wage growth since the onset of the global financial crisis and their demands might seem to have been answered.

However, looking more closely at the data it becomes clear that the latest increase in wages is concentrated in particular pockets of workers.

Economists have cautioned that these wage hikes have the potential to embolden other workers to demand higher pay. Something the Reserve Bank is said to have been worried about since it began raising interest rates in May 2022.

Angela Jackson - Impact Economics and Policy Lead economist - told ABC News that this "healthy" wage growth comes off the back of "really low unemployment".

But this was only one of the factors the ABS pointed towards when it gave its reasons for the lift in wage growth.

"In the private sector, higher growth was mainly driven by the Fair Work Commission's annual wage review decision, the application of the Aged Care Work Value case, labour market pressure, and CPI rises being factored into wage and salary review decisions," the ABS said. Making it clear that the boost to wages growth was driven largely by legislative intervention.

"The strength in the industry level data is skewed toward sectors most exposed to the award/minimum wage changes," JPMorgan reportedly said in a research note.

"Wages in the hospitality, health and education sectors - industries where wage outcomes are largely governed by legislated wages and EBAs - reported the strongest rates of annual growth ranging between 4.5 per cent and 5.6 per cent."

At the other end of the spectrum, JPMorgan said, "The financial sector is now the economy-wide underperformer with wages running just above 3 per cent".

The Australian government has done what it said it would do.

"We are closing the gap that we inherited from those opposite," Treasurer Jim Chalmers stated during Question Time on November 15.

"3.4 per cent real wages fall under them, 1.4 [per cent they fall] in the numbers today but the second consecutive quarter of real wages growth on our watch, Mr Speaker. This isn't accidental," he said.

"Wages growth is a deliberate design feature of our economic plan. It's why we supported an increase to the minimum wage. It's why we supported decent pay for aged care workers. And that was recognised in today's release, Mr Speaker."

Yet one significant problem comes with stronger wages growth: the rising cost of living is hurting millions of Australians.

The issue is that when one group of workers receives a big pay rise, however equitable and well deserved, it emboldens other workers to achieve the same outcome. David Bassanese - BetaShares chief economist - explained.

"Considering that around 20 per cent of workers got a 6 per cent wage boost in the quarter, the results suggest wage growth among the other 80 per cent of workers remained remarkably muted - despite an unemployment rate near 50-year lows," Mr Bassanese says.

"The concern for the RBA is that the longer inflation remains high, the greater the risk that more workers use their bargaining muscle in a still-tight labour market to demand ever higher wages — and the more workers are granted large inflation compensating wage gains, the greater the risk others will be goaded into demanding the same treatment."

The bitter truth is reportedly that although a boost to wages helps workers make ends meet, it is exactly what the Reserve Bank has been warning about for more than a year.

The RBA needs inflation to return to 2 to 3 per cent by the end of 2025 and it can still achieve this with wages growth of 4 per cent.

Four per cent is where the Reserve Bank expected wages growth to be right now. But the bank needs to see a significant improvement in productivity at the same time to be comfortable with wages growth at this level.

"Wages growth has picked up over the past year but is still consistent with the inflation target, provided that productivity growth picks up," Michele Bullock - RBA governor - wrote following the Melbourne Cup interest rates decision.

Productivity

A key part of both the inflation story and interest rates lies in the Australian workforce’s levels of productivity.

Labour productivity reportedly decreased by 2 per for the whole economy in the June 2023 quarter, resulting in an expected 3.2 per cent fall in productivity from 2021-22 to 2022-23, according to the Productivity Commission's September bulletin.

Therefore there is a chasm between where productivity needs to be and where things currently stand.

"It does not help that measured labour productivity growth remains weak, meaning a given level of wage growth is boosting unit labour costs to a greater degree than usual," Mr Bassanese told ABD News.

"Annual growth in non-farm unit labour costs, for example, recently surged to over 6 per cent. As such, signs of firming wage growth will continue to test the patience of the Reserve Bank.

"It's precisely why the bank can't wait forever for inflation or the labour market to gradually ease, or for labour productivity growth to begin to recover," he said.

Source: ABC News

(Links and quotes via original reporting)

According to the Australian Bureau of Statistics (ABS), wages grew by 1.3 per cent over the September quarter. It is the biggest increase in the 26-year history of the ABS Wage Price Index (WPI) and surpasses the inflation rate of 1.2 per cent for the September quarter, ABC News reports.

In short, real wages crept upwards. Over the course of the year, wages rose 4 percentage points; the highest for the WPI since 2009.

Millions of workers have reportedly been seeking meaningful wage growth since the onset of the global financial crisis and their demands might seem to have been answered.

However, looking more closely at the data it becomes clear that the latest increase in wages is concentrated in particular pockets of workers.

Economists have cautioned that these wage hikes have the potential to embolden other workers to demand higher pay. Something the Reserve Bank is said to have been worried about since it began raising interest rates in May 2022.

Angela Jackson - Impact Economics and Policy Lead economist - told ABC News that this "healthy" wage growth comes off the back of "really low unemployment".

But this was only one of the factors the ABS pointed towards when it gave its reasons for the lift in wage growth.

"In the private sector, higher growth was mainly driven by the Fair Work Commission's annual wage review decision, the application of the Aged Care Work Value case, labour market pressure, and CPI rises being factored into wage and salary review decisions," the ABS said. Making it clear that the boost to wages growth was driven largely by legislative intervention.

"The strength in the industry level data is skewed toward sectors most exposed to the award/minimum wage changes," JPMorgan reportedly said in a research note.

"Wages in the hospitality, health and education sectors - industries where wage outcomes are largely governed by legislated wages and EBAs - reported the strongest rates of annual growth ranging between 4.5 per cent and 5.6 per cent."

At the other end of the spectrum, JPMorgan said, "The financial sector is now the economy-wide underperformer with wages running just above 3 per cent".

The Australian government has done what it said it would do.

"We are closing the gap that we inherited from those opposite," Treasurer Jim Chalmers stated during Question Time on November 15.

"3.4 per cent real wages fall under them, 1.4 [per cent they fall] in the numbers today but the second consecutive quarter of real wages growth on our watch, Mr Speaker. This isn't accidental," he said.

"Wages growth is a deliberate design feature of our economic plan. It's why we supported an increase to the minimum wage. It's why we supported decent pay for aged care workers. And that was recognised in today's release, Mr Speaker."

Yet one significant problem comes with stronger wages growth: the rising cost of living is hurting millions of Australians.

The issue is that when one group of workers receives a big pay rise, however equitable and well deserved, it emboldens other workers to achieve the same outcome. David Bassanese - BetaShares chief economist - explained.

"Considering that around 20 per cent of workers got a 6 per cent wage boost in the quarter, the results suggest wage growth among the other 80 per cent of workers remained remarkably muted - despite an unemployment rate near 50-year lows," Mr Bassanese says.

"The concern for the RBA is that the longer inflation remains high, the greater the risk that more workers use their bargaining muscle in a still-tight labour market to demand ever higher wages — and the more workers are granted large inflation compensating wage gains, the greater the risk others will be goaded into demanding the same treatment."

The bitter truth is reportedly that although a boost to wages helps workers make ends meet, it is exactly what the Reserve Bank has been warning about for more than a year.

The RBA needs inflation to return to 2 to 3 per cent by the end of 2025 and it can still achieve this with wages growth of 4 per cent.

Four per cent is where the Reserve Bank expected wages growth to be right now. But the bank needs to see a significant improvement in productivity at the same time to be comfortable with wages growth at this level.

"Wages growth has picked up over the past year but is still consistent with the inflation target, provided that productivity growth picks up," Michele Bullock - RBA governor - wrote following the Melbourne Cup interest rates decision.

Productivity

A key part of both the inflation story and interest rates lies in the Australian workforce’s levels of productivity.

Labour productivity reportedly decreased by 2 per for the whole economy in the June 2023 quarter, resulting in an expected 3.2 per cent fall in productivity from 2021-22 to 2022-23, according to the Productivity Commission's September bulletin.

Therefore there is a chasm between where productivity needs to be and where things currently stand.

"It does not help that measured labour productivity growth remains weak, meaning a given level of wage growth is boosting unit labour costs to a greater degree than usual," Mr Bassanese told ABD News.

"Annual growth in non-farm unit labour costs, for example, recently surged to over 6 per cent. As such, signs of firming wage growth will continue to test the patience of the Reserve Bank.

"It's precisely why the bank can't wait forever for inflation or the labour market to gradually ease, or for labour productivity growth to begin to recover," he said.

Source: ABC News

(Links and quotes via original reporting)