Weak growth in wages continued in Q3 (+0.5% q-o-q, +2.0% y-o-y) and was surprising given the mid-year minimum wage determination granting a 3.3% wage increase and more evidence of strong growth in employment. It is possible that wages growth will rise more normally eventually in response to tightening labour market conditions, but it is also possible that special factors are leading to low wages growth persisting. Special factors that may be in play start with impact of demographics – a bulge in higher paid baby boomers retiring while the jobs being created are predominantly for younger and lower paid workers.
Other special factors include technological change reducing relatively higher paid positions for middle management ranks; the proliferation of lower paid service positions; and the “uberisation” of the economy with more workers on minimum wages or below; and still the winding down of very high paid jobs related to the resource investment spending boom.
There are also some special factors that should help to lift wages including the scarcity of trades personnel to service the tail of the housing construction boom and the early stages of the infrastructure building boom. The special factors helping to lift wages, however, seem to be outweighed by factors depressing wages growth for the time being. It is a fair bet that wages growth will continue to face a head wind from a net balance of special factors depressing wages.
Eventually the tightening labour market will overwhelm factors holding wages down. Over the year ending October 2017 employment rose by 3.0% y-o-y or by 355,700. Most of those additional positions were full-time, up 3.7% y-o-y or by 297,900. Total employment rose much faster than in the year ending October 2016, up 0.9% y-o-y and much faster than the average annual employment growth rate over the last twenty years of about 1.9% y-o-y. Very strong employment growth has been sufficient to reduce the unemployment rate from a recent peak of 5.9% in both February and March 2017 to 5.4% in October, the lowest rate since December 2012.
There is probably still some slack in the labour market to be taken up, but if employment grows as fast over the next year as it has over the past year – by no means a silly proposition given very high job vacancy readings and that labour has become a comparatively cheap factor of production by dint of the long period of low wages growth – the unemployment rate could push below 5% nationally presenting a signal that spare capacity is much more limited.
Inevitably it will be the tightening labour market that eventually tips the balance in favour of factors lifting wages rather than factors depressing wages. Timing exactly when this will occur is tricky but it seems unlikely that annual wages growth will stay quite as weak as it has been for another year.
While wages growth remains unusually weak there are concerns that a negative feedback loop could develop as heavily indebted, income constrained households spend less freely in turn compromising general economic growth. We see a low probability of a negative feedback loop developing. We do not see households as being under undue pressure. Nominal wages growth may not be rising, but real wages are starting to rise. Annual wages growth (2.0% y-o-y in Q3) is starting to run higher than inflation (1.8% y-o-y in Q3). The gap between the two looks set to widen over coming quarters. Also, while wage earning households have been under some constraint, the opposite has been true of households drawing much of their income from capital. Returns on capital have risen much more than wages over the past year. Indeed, relatively low growth in wages in an economy that has grown reasonably well over the past year has primed income growth for owners of capital including many retirees.
While weak wages growth continues it will help to restrain inflation which in turn limits the likelihood of the RBA lifting its 1.50% cash rate in the near term. Our view is that wages growth, while still surprisingly low in Q3, is likely to lift at some point over the next year. Once wages growth lifts it will provide a very clear signal that there is no excess capacity in the economy. It will also provide a very clear signal that the 1.50% cash rate is too low.