Wages Growth

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<p>GUEST OBSERVER</p>
<p>There has been a marked improvement in the Australian labour market with a lift to total employment, of which the largest share has been full-time, and a drop in the unemployment rate.</p>
<p>Despite a clear tightening in labour market conditions we are yet to see a lift in wage inflation.</p>
<p>Firms do not appear to be under pressure to lift wages to attract staff while rising underemployment and relatively high unemployment expectations suggest household are not confident enough to bargain for stronger wage rises.</p>
<p>Since 2015 wages have underperformed the historical relationship but this underperformance is less clear in Victoria. The relationship is still broadly holding in SA.</p>
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<p>It is not yet clear if we have seen a shift in the curve or a breakdown in relationship. Regardless, we expect any lift in wage inflation to be modest and gradual. </p>
<p>A meaningful improvement in the labour market conditions.</p>
<p>The Australian labour market went through a soft patch from August to November in 2016 when the average gain in employment was a paltry 2.2k per month. So far in 2017 there has been a distinct uplift in employment. In the three months to May, total employment gained 141.1k, or an average of 47k per month, lifting the annual pace from 0.9%yr to 2.0%yr. Employment growth is now more in line with our preferred leading indicators, the various business survey’s and household demand.</p>
<p>Taking the Labour Force data at face value, you could argue there has been a material tightening in labour market conditions. The quarterly unemployment rate peaked at 6.2% in 2015 Q3 then fell steadily to average 5.7% for the three months to May 2017, pointing to a material tightening. And it is not just unemployment that is pointing to an improvement.</p>
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<p>We have also seen a recovery in full-time employment. Through 2016, full-time employment fell 35k as part-time employment rose 127k. In 2016, all of the growth in total employment came from the significant lift in part-time employment. In the year to May 2017, full-time employment rose 148k for a 1.8%yr pace, so full-time employment growth is now exceeding growth in the working age population, the first time it has done so since February 2016.</p>
<p>And yet wages continue to languish at record lows.</p>
<p>Normally when you observe a tightening in the labour market, you would expect to see an increase in wage inflation. But we have not seen this with wage inflation, as measured by the Wage Price Index (WPI), holding at a historical low of 1.9%yr. One measure of tightness is to compare the unemployment rate to the rate unemployment would be if the economy was at full employment.</p>
<p>The RBA estimates a NAIRU, or Non-Accelerating Inflation Rate of Unemployment, to be currently around 5.0%. So while there is still a gap, the unemployment rate has moved closer to the NAIRU representing a tightening of the labour market.</p>
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<p>Westpac uses a labour gap which is the difference between unemployment and trend unemployment. Historically the labour gap had a two quarter lead to wage inflation. In the year to the June quarter, the labour gap averaged +3ppts; the last time it was this positive was back in September 2012 when wage inflation (as measured by the Wage Price Index) was running at a 33⁄4%yr pace. Wage inflation printed 1.9%yr in the March quarter of 2017.</p>
<p>Employers do not feel under pressure to bid up wages.</p>
<p>Another measure of slack is the “is labour easy or hard to find” question from the Westpac/Australian Chamber business survey. However, whereas from early 2016 the labour gap was pointing to a tighter labour market conditions, this index suggested labour was still relatively easy to find. While it may have become bit harder since, it is still consistent with a neutral response (neither easy nor hard to find) and as such it does not appear that employers are under any pressure to bid up wages.</p>
<p>Underemployment has lifted as job insecurity holds a relatively high level.</p>
<p>Could employees’ employment insecurity have a role to play? Since late 2014, unemployment expectations from the Consumer Sentiment survey has been relatively weaker than its historical relationship with unemployment so maybe workers aren’t confident enough to bid up wages.</p>
<p>There does appear to be some basis for this relatively high level of job insecurity. The ABS has an alternative labour market measure known as underemployment, which is the share of labour that while employed are willing and able to work more hours. From 2015 H2, while the underemployment rate fell from a peak of 6.1% to 5.5%, the underemployment rate rose from 8.3% to 8.8%, with an 8.9% peak in early 2017.</p>
<p>The RBA noted in the February Statement on Monetary Policy that since the 1980’s, the upward drift in underemployment can be explained by the rising share of part-time employment. It also noted that “underemployment rates are higher among groups that have a higher share of part-time employment, such as females, younger workers and older workers”, so as their share of employment rises so too does underemployment.</p>
<p>We would, however, counter with two observations.</p>
<p>Firstly, in the year to May, full-time employment growth accelerated while part-time employment eased, yet underemployment lifted from 8.4% to 8.8% suggesting a genuine broadening in underemployment rather than a compositional shift.</p>
<p>Secondly, combining unemployment and underemployment generates underutilisation, the broadest measure of labour market slack. We have found that this measure has a better relationship with wage inflation than either unemployment or underemployment by themselves. But this still leaves the observation that, since 2015 there has been an underperformance of wage outcomes to underutilisation.</p>
<p>State data reveals some interesting divergences from the national average.</p>
<p>How long can we divert from this historical relationship? To answer we turn to the state labour markets. In NSW the unemployment rate in May was just 4.8%, well below the national average and below the RBA’s estimate of the NAIRU. From the end of 2015, NSW’s unemployment fell from 5.3% to 5.1% (March quarter average) and yet underemployment lifted from 7.5% to 8.0% boosting underutilisation from 12.8% to 13.1%. However, even this softening in underutilisation does not explain the on-going weakness in private sector wage inflation, which printed just 2.0%yr in the March quarter. If wage inflation held the historical relationship with underutilisation, it would just under 3.0%yr.</p>
<p>We should also note that NSW also has the lowest participation and employment to population ratio for any mainland state outside of SA. These factors put into perspective the fact that NSW low unemployment is not a strong indicator of the overall tightness of a labour market.</p>
<p>Compare this with Victoria, where wages have kept something of a tighter relationship with underutilisation. At 15%, underutilisation suggests wage inflation should be running at just under 21⁄2%yr. The state’s WPI printed 1.9% in March which is a smaller wedge to underutilisation than in NSW. Victoria also has a higher rate of unemployment than NSW (6.1% vs. 4.7%) and underemployment (8.6% vs. 8.0%) but that does not necessarily mean Victoria has a weaker labour market.</p>
<p>Total employment has grown just under 4%yr pace in Victoria while in NSW it has grown less than 1%yr. The higher rate of underemployment and unemployment in Victoria reflects that states faster rate of population growth combined with a higher rate of participation (for both males and females). Victoria is also the only state where you can observe a trend rise in male participation since 2014. Other states may show something of a levelling out, or a recovery, since late 2016 but all declining male participation preceding. It has also recently seen the largest jump in female participation for any state.</p>
<p>In Qld, wages are below the curve with an underutilisation rate around 14% pointing to wages growth of at least 3.0%yr. Wages in that state are currently growing at 1.8%yr, a significant wedge to historical outcomes. Male participation has started to lift again in Qld so even if we do see the underutilisation/wage relationship return to the curve, will it be driven by rising wages or rising underutilisation due to rising participation?</p>
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<p>WA is interesting in that while wage outcomes since 2015 are clearly below the longer run relationship with underutilisation, the shape of the relationship still holds - that is it appears that the curve has shifted downwards since 2015. This suggests that while the historical underutilisation/wage relationship would put wages growth around 2%yr (for a 15% underutilisation rate) actual wages growth of just under 1% appears to be holding a shorter term relationship since 2015.</p>
<p>Of all the states SA is holding the tightest long-term relationship for underutilisation/wages. An underutilisation rate of around 17% would normally see wages grow at 21⁄2%yr; the WPI rose 2.0% in the year to the March quarter. We have been watching the relative out performance of wages in SA despite the relatively high rates of unemployment (and underemployment) and wonder if this reflects the relatively more significant contribution manufacturing makes to that state's economic activity compared to the other states.</p>
<p>It is not clear if curve is shifting or breaking down.</p>
<p>The significant underperformance of NSW wage inflation does raise questions not just on the specification of a NAIRU but whether the NAIRU is still a useful concept. It is possible that the breakdown in the NAIRU is due, at least in part, to the Australian economy’s shift away from goods production to services provision, which is more dominate in NSW than it is in Vic and SA, and as such the breakdown may be temporary.</p>
<p>The downward shift in the WA curve suggests this may be the case as that state has seen it economy experience a rapid and significant shift away from the resources sector. But the significantly different participation rates between the states may also point to something more structural. As such, to assume that a falling unemployment rate will drive an uptick in wages may lead to an overstatement of the outlook for wages, household income growth and thus inflation and consumption. Currently Westpac is taking a cautious view that while wage inflation may have found a base, any uptick will be modest and gradual. </p>
<p class="p1"><span class="s1">Justin Smirk is ‎senior economist, Westpac Group and can be contacted <a href="https://www.westpac.com.au/about-westpac/westpac-group/"><span class="s2">here</span></a>.</span></p>
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Australian wages underperforming current labour market conditions: Justin Smirk

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<p>GUEST OBSERVER</p>
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<div class="column">Wage growth is holding near 2 percent and it clearly is a win-win situation. Lower growth of wages has encouraged employers to take on more staff. And while low nominal growth of wages is positive for employers, wages are still growing at a faster pace than prices – positive for consumers.</div>
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<div class="column">In fact inflation is just 1.3 percent and wages are growing at a 1.9 percent annual pace (although dragged down by the Mining sector). It is clear that real wage gains are still boosting consumer purchasing power.</div>
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<img src="/images/2016/11/17/Screen%20Shot%202016-11-17%20at%208.10.29%20AM.png" alt=""><br>The Reserve Bank Governor appears an even more reluctant rate-cutter than the former Governor. Simply, Philip Lowe believes that there is no value in just cut, cut, cutting. The Reserve Bank believes that the economy will continue to grow faster than the ‘speed limit’ and that will serve to lift inflation. And despite the headlines, the Reserve Bank Governor is encouraged by the more prudent behaviour of consumers. There are no warnings on debt, just the conventional wisdom that higher debt means higher risks. </div>
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<p>What do the figures show?</p>
<p>Wage price index</p>
The wage price index rose by 0.4 percent in the September quarter after a 0.5 percent rise in the June quarter. Annual wage growth eased at a record (18-year) low of 1.9 percent (2 percent in original terms) although influenced by just 1 percent growth in mining wages.<br><p>Private sector wages rose by 0.4 percent in the quarter while public sector wages rose by 0.6 percent. Annual growth of private sector wages eased to a record low of 2.0 percent in the quarter. Annual growth of public sector wages was 2.3 percent.</p>
<p>Including bonuses, wages rose by 0.6 percent in original terms in the September quarter to be up 1.7 percent on a year ago.</p>
<p>Private sector wages including bonuses rose by 0.6 percent in the quarter to be up 1.6 percent on a year ago. Public sector wages including bonuses rose by 0.9 percent in the quarter and by 2.3 percent over the year.</p>
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<div class="column">Industries with fastest annual wage growth: Health care &amp; social assistance (up 2.4 percent); Electricity, gas, water and waste services, Education &amp; training and Accommodation &amp; food services (all up 2.3 percent).</div>
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<div class="column">Industries with slowest annual wage growth: Mining (up 1.0 percent); Administrative &amp; support services (up 1.2 percent); Professional, scientific &amp; technical services (up 1.6 percent).<br><p><a href="/images/2016/11/17/Screen%20Shot%202016-11-17%20at%208.11.58%20AM.png" target="_blank">Click to enlarge</a></p>
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<p>  Annual wage growth across States &amp; Territories:</p>
<p>NSW, 2.1 percent; Victoria, 2.0 percent; Queensland, 1.9 percent; South Australia, 2.3 percent; Western Australia, 1.7 percent; Tasmania, 2.2 percent; Northern Territory, 2.2 percent; and ACT, 1.9 percent.</p>
<p>New vehicle sales:</p>
According to the Australian Bureau of Statistics (ABS) new vehicle sales fell by 2.4 per cent in October after a 2.4 percent rise in September. Passenger car sales fell by 2.3 percent, while sales of sports utility vehicles fell by 1.2 percent and sales of “other” vehicles (includes utilities, panel vans, cab chassis, goods carrying vans, rigid trucks, prime movers, non-freight carrying trucks, and buses) fell by 4.7 percent.</div>
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<br>Across states/territories in September: NSW (-1.0 percent); Victoria (-1.3 percent); Queensland (-2.8 percent); South Australia (-9.1 percent); Western Australia (-4.2 percent); Tasmania (-2.6 percent); Northern Territory (- 10.9 percent); ACT (-4.4 percent).</div>
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<div class="column">New vehicles sales were up by 1.2 percent over the year. Passenger car sales in October were down by 4.6 percent over the year while SUVs sales were up by 6.9 percent and “other vehicles” were up by 2.7 percent.<br><p>In rolling annual terms, 1,178,688 new vehicles were sold over the year to October. Sales of SUVs (440,060) hit record highs in annual terms, while annual sales of “other” vehicles stood at a record high of 248,710. Sales of passenger vehicles fell to a 20-year low of 489,918 in the year to October.</p>
<p>What is the importance of the economic data?</p>
The Wage Price Index has been compiled since September quarter 1997 and measures quarterly changes in wage and salary costs for employees. The index is based on a representative sample of employees, and includes measures of non-wage costs including superannuation, payroll tax, public holiday and workers compensation. The Wage Price Index is useful in measuring wage pressures in the economy. While strong growth in wages would boost domestic spending, it could also serve to lift employer costs and prices and add to economy-wide inflationary pressures. The wage price index is a measure of hourly pay rates (excluding bonuses).<br><p>The Australian Bureau of Statistics provides seasonally adjusted and trend estimates of industry data. The Federal Chamber of Automotive Industries releases estimates of new vehicle sales on the third business day of the month. The figures highlight the strength of consumer spending as well as conditions facing auto &amp; components companies.</p>
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<p>What are the implications for interest rates and investors?</p>
Wages continue to outpace prices. Add in the strong flow of dividends from companies, lower interest rates, cheaper petrol and higher home prices and there is plenty of latent spending power to boost sales at retailers.</div>
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<div class="column">The Reserve Bank Governor has laid out clearly why rates don’t need to go lower. The economy is expected to grow above its ‘potential’ rate, inflation is tipped to lift to the Reserve Bank target band and lower rates could encourage excessive borrowing. </div>
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<p><em>Craig James is the chief economist at <a href="https://www.comsec.com.au/default.aspx" target="_blank">CommSec</a>.</em></p>
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Upbeat Reserve Bank, wages ahead of prices: CommSec's Craig James

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<p>GUEST OBSERVER</p>
<p>The June quarter Wage Price Index rose 0.5 percent quarter on quarter or 2.1 percent year on year. This was as expected and leaves wages growth at a record low for the Wage Price Index (which dates back to 1997).</p>
<p>Private sector wages are up 2 percent yoy and public sector wages are up 2.4 percent yoy.</p>
<p>By industry, wages growth ranges from just 1.3 percent yoy in the mining sector (the big surprise is that it’s not negative!) to a high of 2.5 percent yoy in the utilities and health care sectors.</p>
<p>By state, wages growth ranges from 1.8 percent yoy in WA to 2.2 percent yoy in NSW and SA.</p>
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<p><img src="/images/2016/08/17/image006.png" alt=""></p>
<p><span>Source: ABS, AMP Capital</span></p>
<p>Ultra-low wages growth reflects ongoing spare capacity in the labour market (with unemployment and underemployment at 14.2%) and low corporate revenue growth which is flowing through to low budgets for wages growth. </p>
<p>Continuing record low wages growth means ongoing downwards pressure on inflation as it contains cost pressures for businesses. As such it adds to the risk that inflation will stay below the RBA’s target range for longer than the RBA is currently projecting. </p>
<p>Low nominal wages growth also means ongoing softness in growth in household income which in turn limits consumer spending. Fortunately, real wages are rising because inflation is even weaker, but they are only rising by 0.5 percent yoy and its likely that nominal growth has a greater impact on how households feel.</p>
<p>The continuing weakness in wages growth and the risks it poses to inflation are consistent with our assessment that the RBA will cut interest rates again this year, but probably not until November when we see the cash rate being cut by another 0.25 percent taking it to 1.25 percent.</p>
<p><em><span><a href="https://www.propertyobserver.com.au/https://plus.google.com/110172465327488162875?rel=author" target="_blank">SHANE OLIVER</a></span> is head of investment strategy and economics and chief economist at <a href="https://www.ampcapital.com.au/home" target="_blank">AMP Capital</a> and is responsible for AMP Capital's diversified investment funds.</em></p>
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Wages growth drives expectation for one more RBA rate cut: Shane Oliver

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<p>GUEST OBSERVER<span style="font-size: 12.16px;"> </span></p>
<p>The latest business investment report was certainly a mixed bag.</p>
<p>A sizeable drop in actual quarterly investment and expectations of future investment for 2016/17 and 2017/18 were weaker than a year ago. However the focus should be on the breakdown of investment, which was largely due to an ongoing slide in mining investment. In fact investment in the non-mining space rose by 1.9 percent in the December quarter. The improvement in commodity prices may help to soften the weakness in mining activity.</p>
<p>In addition investment rose in five of the eight states and territories, with the weakness more dominated in Queensland and Western Australia. In contrast the Northern Territory, ACT, and Tasmania recorded a double digit lift December quarter investment.</p>
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<p>More importantly the near term shift in expected investment plans was also encouraging. The fifth estimate for investment in 2016/17 came in at $112.6 billion, up 4.6 percent on the fourth estimate and up almost 22 percent in the past nine months.</p>
<p>Encouragingly the lift in investment plans over the last couple of quarters, suggests that a shift in momentum is taking place. Certainly the lift in business conditions in recent months may be supportive of a lift in investment plans – especially in light of the surge in commodity prices and improvement in the global economy. No doubt the rebalancing across the economy is also being supported by the weaker Australian dollar – an outcome that should garner further traction in coming quarters. But as we have seen in the past, business may plan for future investment but then mothball projects if the economic landscape doesn’t improve.</p>
<p>Business spending looks like continuing to be a weight on Australia’s economic growth performance in the medium term. The Reserve Bank could cut rates again, but it is far from certain that this would have a measurable impact in further lifting business spending. The Reserve Bank is more forward-looking and is likely to maintain its neutral bias on a more upbeat medium term growth outlook.<span style="font-size: 12.16px;"> </span></p>
<p>As highlighted yesterday by the wage price index, wage growth at present is modest. Wages are still growing, and out-pacing inflation. The “average worker” has an extra $1,711 in the pocket compared with a year ago, equating to almost an extra $33 week. Real wage growth exists, while higher home prices, subdued petrol prices and lower borrowing costs are also supporting spending power.</p>
<p>While modest real wage growth causes consumers to price-check more often, the modest growth in earnings restrains the wage bill of employers, leaving them inclined to maintain or boost employment – as indeed has been happening. Modest wage growth is one reason why the unemployment rate in at 26-month lows in trend terms.</p>
<p>Overall policymakers will keep a close eye on how business investment evolves over the coming year. The forward looking indicators suggest activity levels are lifting and we believe that interest rates are likely to remain unchanged.</p>
<p>What do the figures show?</p>
<p>Private business investment<span style="font-size: 12.16px;"> </span></p>
<p>Overall: Business investment (spending on buildings and equipment) fell by 2.1 per cent in the December quarter after falling by 3.3 per cent in the September quarter. Spending on buildings fell by 4.1 per cent in the quarter while spending on equipment rose by 0.4 per cent. Investment is down 15.5 per cent over the year with buildings down by 25.5 per cent while equipment was up by 1.5 per cent.</p>
<p>Sectors: Mining investment fell by 9.3 per cent in the December quarter (tenth straight decline), while manufacturing spending rose by 3.2 per cent, spending by “other selected industries” rose by 1.8 per cent.</p>
<p>States: In seasonally adjusted terms investment fell in five of the eight states and territories in the December quarter. Investment rose the most in the Northern Territory (up 16.1 per cent), followed by the ACT (up 11.1 per cent), Tasmania (up 10.8 per cent), NSW (up 2.3 per cent), Victoria (up 2.0 per cent). Investment fell the most in Queensland (down 6.1 per cent) followed by Western Australia (down 3.7 per cent), and South Australia (down 2.9 per cent).</p>
<p>Prices: The overall deflator for investment goods rose by 0.3 per cent in the December quarter after falling by 0.2 per cent in the September. The cost of buildings and structures rose by 1.1 per cent while the cost of equipment fell by 0.7 per cent. Over the year, the cost of investment goods fell by 0.7 per cent – the largest fall in just shy of 5 years. The cost of buildings rose by 1.1 per cent while the cost of investment equipment fell by 3.4 per cent.</p>
<p>Forecasts: The fifth estimate for investment in 2016/17 is $112.55 billion, down 9 per cent on the fifth estimate for investment made for the previous (2015/16) financial year. However the investment expectation is up 4.6 percent on the fourth estimate made for the current 2016/17 financial year.</p>
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<p>The first estimate of investment in 2017/18 is $80.625 billion and is 3.9 per cent lower than the first estimate for 2016/17 – the smallest decline for a first estimate reading in five years.</p>
<p>Average Weekly Earnings:</p>
<p>Average weekly ordinary time earnings rose by 1.1 per cent in the six months to November 2016 to be 2.2 per cent higher than a year ago. Male wages rose by 1.8 per cent over the year while female wages rose by 3.2 per cent. </p>
<p>Average weekly total earnings rose by 2.2 per cent over the year.</p>
<p>The average wage in November 2016 was $79,737.</p>
<p>Wages rose most over the year in Arts and Recreation services (up 5.8 per cent), Information, Media and Telecommunications (up 5 per cent), and Electricity, Gas, Water and Waste services (up 5.4 per cent).</p>
<p>Wages were weakest over the past year in Manufacturing (down 1.5 per cent), Retail trade (up 0.6 per cent), Public Administration &amp; Safety (up 1.5 per cent) and Finance &amp; Insurance (up 1.7 per cent).</p>
<p>Across states &amp; territories, we have calculated average annual wages as follows: NSW $79,862, Victoria $78,005, Queensland $77,069, South Australia $75,192, Western Australia $88,566, Tasmania $69,945, Northern Territory $85,202 and ACT $90,844.</p>
<p>The highest average wage can still be found in the Mining sector at $133,765 per year. Next highest is Finance &amp; insurance services ($95,706) followed by Information media &amp; telecommunications ($95,082), and Professional, scientific &amp; technical services ($92,851).</p>
<p>The lowest average wage is obtained by workers in the Accommodation and food services sector ($57,632), followed by Retail trade ($58,963), “Other services” ($63,554) and Administrative and Support Services ($67,844).</p>
<p>What is the importance of the economic data?</p>
<p>“Private New Capital Expenditure and Expected Expenditure” is released quarterly by the Bureau of Statistics. The figures show both actual and expected spending by businesses on tangible assets such as new buildings, machinery and office equipment. The figures are obtained after sampling 8,000 private business units.</p>
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<p>The ABS publishes the Average Weekly Earnings (AWE) series on a six-monthly 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.</p>
<p>What are the implications for interest rates and investors?</p>
<p>The great unwinding of mining investment continues although the lift in commodity prices may result in more of a soft landing in coming quarters.</p>
<p>The latest data confirms that wages are only growing modestly. In broad terms, wages are modestly ahead of prices, with the simple conclusion that inflationary pressures are contained. The Reserve Bank should be in no rush to move interest rates in any direction. </p>
<p>Savanth Sebastian is an economist for <a href="https://www.commsec.com.au/" target="_blank">CommSec</a>.</p>
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Subdued business investment: Savanth Sebastian

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<p>GUEST OBSERVER</p>
<p>Our model suggests that private sector wages growth is a little lower than it should be given the degree of labour market slack.</p>
<p>Nonetheless the current level of labour market underutilisation is consistent with wages growth of just above 2 percent.</p>
<p>Our model suggests that a steady decline in the underemployment rate to around 7 percent, would see wages growth return to normal in early 2019.</p>
<p>For Q1 2017, the model points to an outcome of 0.5 percent, which would see the annual rate tick up to 1.9 percent.</p>
<p>Private sector wages growth has been on a downward trend for the past four years. Wages growth was just 1.8 percent over the year to QIV, which was the lowest result in the history of the series. It is lower than would be expected given the level of the unemployment rate and the strong gains in commodity prices over the past year.</p>
<p>There are many explanations for low wages growth, including rising spare capacity in the labour market, heightened job security concerns, low inflation rates and declining commodity prices from the peak in 2011.</p>
<p><a href="https://www.propertyobserver.com.au/images/2017/03/29/11.jpg" target="_blank">Click to enlarge </a></p>
<p><img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2017/03/29/11.jpg" width="600" height="598"></p>
<p>Spare capacity in the jobs market has been rising since early 2011. While the unemployment rate has come down a little over the past year, there has been a steady increase in the underemployment rate. Underemployment measures people that have a job but would like to work more hours. The underemployment rate is now at a record high of 8.7%. Job security concerns also remain elevated. The combination of underemployment and job security concerns means that people are unwilling to push their employers for a pay increase.</p>
<p><a href="https://www.propertyobserver.com.au/images/2017/03/29/12.jpg" target="_blank">Click to enlarge </a></p>
<p><img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2017/03/29/12.jpg" width="600" height="598"></p>
<p>Slowing inflation rates have also contributed to low wages outcomes. While we typically think of low wages contributing to low inflation outcomes the reverse is also true. That is because low inflation outcomes can result in a drop in expectations about future inflation. And inflation expectations impact on actual inflation outcomes. Also, many wages are set with the CPI outcome in mind. Awards and minimum wage outcomes set by the Fair Work Commission are heavily influenced by the CPI. And the RBA has said that two-thirds of the firm’s in their liaison program have indicated that the CPI was a primary determinant in wage-setting.</p>
<p>Wages growth is also correlated with movements in commodity prices. The decline in commodity prices from the peak in 2011 until QII 2016 reduced company profits and constrained wages growth. The sharp lift in commodity prices since mid 2016 would suggest that wages growth should be picking up by now. However previous commodity price booms have typically occurred alongside rising mining investment. And this time mining investment is still falling, not rising.</p>
<p><a href="https://www.propertyobserver.com.au/images/2017/03/29/13.jpg" target="_blank">Click to enlarge </a></p>
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<p>We estimate a Phillips curve (PC) model to explain wages growth. This relates wages inflation to labour market utilisation. Higher labour market utilisation should lead to higher wage inflation and vice versa. We use the underemployment rate to measure labour market utilisation as the unemployment rate has not fully captured the degree of spare capacity in recent years.</p>
<p>We include the quarterly change in the underemployment rate. And also the inverse of the underemployment rate. This allows the underemployment rate to have a larger effect on wages as it gets lower. We also include the lagged value of wages growth, as wages growth is related to it past values. We also estimate the model including lagged values of the CPI or inflation expectations but find that these variables don’t improve the fit of the model.</p>
<p>The model captures the trends in wages growth well. However it suggests that over the past few years wages growth has been a little lower than would be expected given the amount of spare capacity in the economy. Nonetheless the model points to annual rate of wages growth of just above 2% in the December quarter, which is well below the long run average.</p>
<p>RBA research says that recent low wages growth in Australia appears to be only partly explained by spare capacity in the labour market, the decline in inflation outcomes and the fall in the terms of trade from the 2011 peak. Using micro-level data on wages they also find that since 2012 wage increases have been less frequent than in the past. They have also found that wage growth outcomes have become more similar across jobs. This explains why wages growth is also weak in NSW and VIC, the States where the jobs markets are the strongest (see here for our note on labour market slack by State).</p>
<p>Wages growth in Q1 2017</p>
<p>We already have the underemployment rate for Q1 so we can use our model to forecast wages growth for the March quarter. The model is pointing to a 0.5% rise in private sector wages. This would see the annual rate of growth tick up to 1.9%.</p>
<p>When will wages growth return to normal?</p>
<p>We can also use our model to forecast the future path of wages growth. Our forecasts are for the unemployment and underemployment rates to fall gradually from here. A steady decline in the underemployment rate to around 7% in early 2019 would see wages growth returning to its 10 year average of 3%. It would take a sharp drop in the underemployment rate to around 5%, from its current value of 8.7%, to see wages return to a 3% growth rate this year.</p>
<p>These projections line up with the RBA’s forecasts, which show inflation only slowly returning to target. The Bank’s central forecast is for underlying inflation to remain below the bottom of its 2-3% until 2019. And the RBA is not expecting wages growth to begin to recover until late 2017.</p>
<p>Despite these forecasts, the RBA is unlikely to lower interest rates any further in this cycle. And that is because of financial stability concerns stemming from the rising level of household debt and strongly rising house prices in Sydney and Melbourne. The RBA would prefer to see a slow return of inflation to its target rather than cut rates and see inflation rates increase but household debt rise even further. The RBA have expressed some concern around these issue since late last year. And the rhetoric is getting stronger, with an acknowledgement in the latest Meeting Minutes that “there had been a build-up of risks associated with the housing market.” </p>
<p class="p1"><span class="s1">Kristina Clifton is economist, Commonwealth Bank, and can be contacted <a href="https://www.commbank.com.au/"><span class="s2">here</span></a>.</span></p>
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Where to for wages growth? CBA's Kristina Clifton

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<p>EXPERT OBSERVER<a href="http://petewargent.blogspot.com/2019/02/vic-closes-in-on-full-employment" style="font-family: Helvetica, Arial, sans-serif; font-size: 13px;"> </a></p>
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<div><strong><span style="text-decoration: underline;">Wages tick along</span></strong></div>
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<div><span>More wages weakness reported in the December 2018 quarter, though I doubt it'll be enough to move the needle for the Reserve Bank's view too much. </span></div>
<div><span> </span></div>
<div><span>Wages growth was +0.6 per cent for the private sector, and +0.6 per cent for the public sector, seasonally adjusted, decimal point quibbles aside. </span></div>
<div><span> </span></div>
<div><span>Annual growth in private sector wages of +2.29 per cent was still plenty slower than in the public sector at +2.53 per cent.</span></div>
<div><span> </span></div>
<div><span>However, this was the 'fastest' annual pace of growth in private sector - if you can justifiably use the word fast in this context - in the four years since December 2014.</span></div>
<div><span> </span></div>
<div><span>And it's also well ahead of headline inflation, which could feasibly sink to just 1½ per cent next quarter on lower fuel prices. </span></div>
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<br><div>As noted here previously (h/t Justin Smirk, Westpac) Victoria has been creating a thunderous volume of job openings and is nipping along nicely towards full employment, so wages will almost certainly pick up here. </div>
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<br><div>Indeed, at the state level for all sectors Victoria (+2.7 per cent) and New South Wales (+2.4 per cent) have accounted for most of the improvement since the nadir, while sprightly Tasmania (+2.6 per cent) is resurgent from a low base. </div>
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<br><div>Not much joy here in Western Australia, though we should acknowledge that WA has seen by some margin the greatest increase in wages over the past two decades, so a bit of post-boom payback was perhaps due. </div>
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<br><div>At the industry level the strongest wages growth was seen in healthcare and social assistance (+2.8 per cent), and electricity, gas, water, and waste (+2.8 per cent), while the weakest growth was in IT &amp; Telcos (+1.6 per cent). </div>
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<div><strong><span style="text-decoration: underline;"><span>The wrap</span></span></strong></div>
<div><span> </span></div>
<div>
<span>Still pretty sluggish overall, but skilled job vacancies came in at a near </span><span>7-</span><span>year high today, so there's still probably just enough evidence that the jobs market might pull through, provided credit flows a bit more freely in 2019. </span>
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<em>PETE WARGENT is the co-founder of AllenWargent property buyers (London, Sydney) and a best-selling author and <a href="https://petewargent.blogspot.com/" target="_blank">blogger</a>.</em> </div>
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pwargent-M4siyDbqQY

More wage weakness but VIC close in on full employment

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<div>Wages grew by just +0.48 per cent in the September 2017 quarter, to be +2.01 per cent higher over the year.</div>
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<div>Superficially this looks like a bit of an improvement, and at least it can be said that wages are growing a bit ahead of the rate of inflation. Just. </div>
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<div>And including bonuses the annual increase was a slightly more upbeat +0.7 per cent for the quarter, and +2.2 per cent for the year. </div>
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<div>However, the result this quarter was pumped up by the minimum wage increase, and you can see in the chart below that a number of industries (such as accommodation &amp; food) how this inflated the quarterly numbers. </div>
<div> </div>
<div>Over the year the industries with the most robust wage price growth included healthcare &amp; social assistance (+2.7 per cent), arts &amp; recreation services (+2.7 per cent), and education &amp; training (+2.4 per cent).</div>
<div> </div>
<div>On the other hand wages growth in the mining sector (+1.2 per cent) remains very low, as it does in professional, scientific, &amp; tech services (+1.5 per cent). </div>
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<div>Annual wage price growth in the private sector remains super-low at just +1.86 per cent, with wage price growth in the public sector some way higher at +2.37 per cent. </div>
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<div>The public sector index has outpaced the private sector since the peak of the resources construction boom. </div>
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<p><br><strong><span style="text-decoration: underline;">Resources states slow</span></strong></p>
<div><strong><span style="text-decoration: underline;"> </span></strong></div>
<div>At the state level Queensland, Victoria, and Tasmania each recorded wages growth of +2.2 per cent, while New South Wales (+2.1 per cent) also recorded reasonable growth. </div>
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<div>However, there were considerably weaker results in Western Australia (+1.3 per cent) and the Northern Territory (+1.4 per cent). </div>
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<div>Western Australia recorded the fastest pace of wages growth through the mining boom, but is now coming back to the pack. </div>
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<p><br><strong><span style="text-decoration: underline;">The wrap</span></strong><br><br></p>
<div>Overall, while it's positive to note annual wages growth moving a bit higher and ahead of the rate inflation, in reality this was a very soft result which missed expectations, having been puffed up by the minimum wage increase.<br><br>Not much in the way of pre-Xmas cheer to be found here! </div>
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Wages growth at snail's pace: Pete Wargent

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<p>The Wide Bay region in Queensland has the highest regional unemployment rate in the nation with the jobless rate averaging 10.5% over the year to October.</p>
<p>Regions with lowest jobless rates: Sydney’s Northern Beaches had a jobless rate of 2.5% in the year to October – the lowest in the nation.</p>
<p>Mining regions suffer: Jobless rates in the Hunter Valley and Mackay have broadly doubled in the past 2-3 years.</p>
<p>The Australian Bureau of Statistics provides regional job market data each month. The good news is that over 90 regions are covered by the statistics. The bad news is that the data is not adjusted for seasonal variations and not provided in an easily digestible format.</p>
<p>CommSec has assessed the average unemployment rates over the twelve months to October and presented tables showing the 15 regions with the highest unemployment rates and the 15 regions with the lowest unemployment rates.</p>
<p>NSW regions dominate both lists – the regions of high and low unemployment. NSW leads the state and territory economic performance rankings but job markets clearly differ markedly across the state.</p>
<p>When assessing national and state economic performance, the variations in performance across regions tend to be downplayed. But while the data may be harder to get and analyse, policymakers need to be mindful of the regions facing the most challenging conditions. Regional Queensland is doing it tough – especially in the north. And mining regions are suffering.</p>
<p>Interestingly, Tasmanian regions don’t feature in either of the lists of high and low jobless rates. Across Tasmanian regions, unemployment was between 6.1- 7.5% over the past year.<span style="line-height: 1.3em;"> </span></p>
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<p><span>High unemployment regions</span></p>
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<p>The region with the highest jobless rate over the past year was Wide Bay with a 10.5% jobless rate over the past year. The good news is that unemployment was recorded at 6.2 per cent in October, below the short-term average and the 15-year average of 8.7%.</p>
<p>The downturn in the coal industry has clearly affected the job market in the Hunter Valley. Over the past year the jobless rate averaged 10.2% – well above the 5.8% average over the past 15 years.<br>The Hunter Valley also has the highest variation between the short and longer term jobless rate – 4.4 percentage points (pp) between the 12-month average jobless rate and 15-year average. Next highest is Murray, NSW (3.5pp); Mackay, Qld (3.1pp); and South-east South Australia (3.1pp).</p>
<p>Other regions with high unemployment are Richmond Tweed, NSW (9.8%), Mandurah, WA (9.1%) and Murray, NSW (9.0%).</p>
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<p style="line-height: 1.3em;"><span style="line-height: 1.3em;">Low unemployment regions</span></p>
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<p>The region with the lowest jobless rate over the past year was Sydney’s Northern Beaches at 2.5%. That is probably not overly remarkable as the jobless rate has averaged 3.0 per cent over the past 15 years.</p>
<p><br>Five other Sydney regions are also on the list of the regions with the lowest jobless rates in the nation.<br><br>Victoria has two entries on the list of low jobless rates: Warrnambool &amp; South West (2.9%) and Melbourne – Inner South (4.5%).<br>Ballarat has the lowest variation between the short and longer term jobless rate. The 12-month average jobless rate is 2.1pp below the 15-year average. Next best is Warrnambool and South West (-1.9pp); and Sydney – South West (-1.4pp).<br><br>What is the importance of the economic data?</p>
<p>The Australian Bureau of Statistics (ABS) provides detailed labour market figures one week after releasing ‘top level’ statistics of employment &amp; unemployment levels across states and territories. The detailed data is useful in identifying broader underlying trends and instructive about the health of the economy.</p>
<p>What are the implications for interest rates and investors?</p>
<p>There are good reasons for the Reserve Bank to maintain an easing bias. While the economy is improving, too many parts of Australia and still struggling with relative high jobless rates – 78 of 99 regions have short-term average jobless rates above longer-term averages. Mining areas are doing it especially tough.</p>
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<div class="column"><em>Savanth Sebastian is an economist for <a href="https://www.commsec.com.au/" target="_blank">CommSec</a></em></div>
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