Wages inflation continues to probe new record lows: Westpac's Justin Smirk
GURST OBSERVER
Wage inflation in Qld has moderated down to the pace in WA even though the mining invesment hit is greater in the latter state.
Total hourly wage rates ex bonuses (WPI) lifted 0.4 percent in Q1, less than market’s expectation for a 0.5 percent rise. Westpac forecast was for a 0.4 percentqtr rise in the WPI. This follows on from a rise of 0.5 percent in Q4 and 0.6 percentqtr rise in each of the two quarters before.
The annual pace is a new record low for the Index at 2.1 percentyr. This is a moderation from 2.2 percentyr in Q4 and the recent peak of 2.5 percentyr in 2015Q4. The WPI started in the September quarter of 1997.
More dramatic has been the deceleration in private sector wage inflation. Lifting just 0.4 percentqtr this followed a 0.5 percentqtr rise in each of the previous four quarters. Before that it had a run of three quarters printing 0.6 percentqtr each quarter. As such, the annual pace has hit a new record low of 1.9 percentyr. Private sector wage inflation recent peak was 4.0 percentyr in 2011Q1 and has been moderating ever since.
There was, however, some more positive news. The annual pace of growth in wages rates when you also include bonuses lifted to 2.5 percentyr in Q1. But before you get too excited this was more to do with base effects than an improvement in the underlying pace. In the quarter, total wages included bonuses lifted 0.4 percent compared to 0.5 percent in Q4 and 1.0 percent in Q3 but as it is up on the surprising 0.2 percent in 2015Q1 it boosted the annual pace.
The moderation in wages may also be due to the shifting composition of employment gains, from mining and construction to hospitality and other household services. These sectors seem to be able to draw in a greater supply of labour (noticeable in the rising female participation) and tend to have weaker collective bargaining power.
Public sector wage inflation printed 0.5 percent in the March quarter from 0.5 percent in the December quarter and an average of 0.7 percentqtr in the previous four quarters. The annual pace was flat at 2.5 percentyr which is a moderation from the recent peak of 2.7 percentyr in 2015Q3. Post the GFC, public sector wage inflation peaked at 3.9 percentyr in 2010Q4.
Wage inflation lifted a touch in WA to 2.0 percentyr as Qld held a 1.9 percentyr pace to now have the lowest rate of total wage inflation for any mainland state. ACT overall holds the award for the lowest rate of wages growth at 1.8 percentyr. However, at 1.6 percent WA has the lowest rate of private sector wage inflation. NSW wages growth was flat at 2.1 percentyr while Vic wages growth was also flat but at a higher pace of 2.4 percentyr. SA spit the difference of the two recording a 2.2 percentyr pace.
Wage inflation is underperforming what the broader labour market indicators are suggesting it should be. Wage pressures are well contained as the temperature cools in the former hot sectors and industries. This presents a very benign outlook for inflation and one that is set to remain so given modest job gains, increasing market competition in the retail space in particular, declining inflation expectations and rising supply of workers in the sectors that are expanding (as exemplified by rising female participation).
Depending on which deflator you use, real wage inflation is benign at 0.8 percent/yr (headline CPI) or 0.5 percentyr (using average of the RBA core measures).
Justin Smirk is senior economist, Westpac Group and can be contacted here.