Australia: Labour market not strong enough to drive a wages breakout - Westpac

Wages continue to lag behind the recovery in the Australian labour market, according to Justin Smirk, Senior Economist at Westpac.

Key Quotes

“In the year to July the Australian economy added 239.3k new employees to the workforce of which the vast majority were full-time (197.7k vs. 41.6k part-time). The recovery is even more startling when you consider that in the last six months there has been a gain of 198.0k or 33.0k per month. Compare that with the gain of just 66.5k in the six months to December when the economy averaged just 11.1k per month.”

“At the same time the unemployment rate eased from 5.9% in February and March to 5.6% in July well off the July 2015 high of 6.3%. This is a clear tightening in labour market conditions which should drive an upward push in wages. From the latest Wage Price Index private sector wages grew just 0.4% in the June quarter taking the annual pace down to 1.8%yr from 1.9%yr. At three decimal places, the quarterly rise is only just above the record low of 0.395% in Q3 2009 while the annual pace of 1.784% is a record low. At the national level it has been public sector wages that have been holding up the national average. Public sector wages grew 0.6% in Q2 holding the annual pace around 2.4%yr.”

“The labour market is not as tight as the headline numbers suggest but even allowing for broader measures of labour market slack, wages are clearly underperforming economic fundamentals. The boost to the minimum wage is a circuit breaker but its impact is limited as its scope is restrained. We do see wage inflation drifting up to 2.6%yr though 2018 but struggle to see how it will get much higher. This level of wage growth does not pose a threat to the inflation outlook nor is it anything but a very modest boost to the growth in household income.”