Wage Price Index — Q4 | By the numbers
- The headline WPI (total hourly rates of pay ex-bonuses) increased by 0.54% in Q4, just below the market forecast for +0.6%. In Q3, the index increased by 0.62%.
- In annual terms, the WPI increased by 2.27%, broadly in line with the consensus of 2.3% and with the pace from the preceding quarter at 2.29%.
Wage Price Index — Q4 | The details
The WPI released by the ABS each quarter effectively measures wage inflation in the domestic economy. It measures changes in the price employers pay for labour associated with particular jobs, keeping characteristics such as hours worked, tasks and responsibilities and qualification levels of workers constant from quarter to quarter. It does not reflect changes in income received by employees.
Overall, there was little change to the pace of wage prices in the December quarter. Rounded to 1-decimal place, the WPI increased by 0.5%; a modestly slower pace than in the previous quarter at 0.6%. The annual pace was unchanged at 2.3%.
Breaking this down further, wage prices in the private sector increased by 0.62% in the quarter, a slightly stronger pace than Q3's +0.55%. Positively, the uptrend in the annual rate continued from 2.14% to 2.29% — its strongest since Q4 2014 — though, the progress remains very gradual considering the solid performance of the labour market in 2018, following on from a stronger year in terms of net employment growth in 2017.
The pace of wage prices continues to be led by the public sector, though there was a very modest easing in the December quarter from +0.68% to +0.6%, while the annual pace was virtually unchanged at +2.53%.
Labour market conditions are not the only factor that impacts wage prices. Minimum wage increases also have a direct impact on employers' wage costs. The Fair Work Commission in its 2018 decision announced a 3.5% increase, which applied from the September quarter onwards, while 2017's increase was 3.3%. These outcomes were notably stronger than in the preceding few years. The headline increase to the WPI in today's data of 2.3%Y/Y includes a boost from the minimum wage rise, likely by around 0.2-0.3ppt.
Adjusting for the impact of inflation, real growth in wage prices continued to remain very modest at around 0.5% in annual terms to Q4, expand chart (below).
One trend that has been noted over recent quarters is the uptrend in the WPI including bonuses, indicating that firms may be using bonuses to assist in staff retention while also keeping wage costs contained. Growth in the WPI including bonuses lifted from 2.67%Y/Y to 2.81%Y/Y in Q4, led entirely by the private sector from 2.69%Y/Y to 2.75%Y/Y. The public sector eased from +2.63%Y/Y to +2.53%Y/Y.
Looking across the industries, the chart (below) shows that wage price increases are running above the national rate in 9 of the 18 surveyed industries, the same ratio as it was in the preceding quarter. Wage costs are running fastest in the healthcare sector (+2.8%Y/Y), a position it has held for most of the past couple of years reflecting strong employment growth, likely associated with the rollout of the National Disability Insurance Scheme.
On a state-by-state basis, wage prices in annual terms were unchanged in New South Wales (+2.4%), Queensland (+2.3%), Western Australia (+1.6%) and Tasmania (+2.6%). Both Victoria (from 2.5% to +2.7%) and South Australia (from 2.2% to +2.3%) saw increases.
The two largest states of New South Wales and Victoria are important to analyse as they have the best performing and tightest labour markets in the nation. Wage price growth in Victoria continues to show a faster trajectory than in New South Wales, though both are probably still below where they might be expected to be given that their respective unemployment rates sit a touch above 4%, which is well below the national rate at 5.0%.
Wage Price Index — Q4 | Insights
Australian wage price growth continues to remain soft at a little above 2% in annual terms. This follows the notable improvements made in the labour market over the past couple of years combined with the strong minimum wage increases. Underlying wage price pressures appear to remain well contained, suggesting that further progress is required in terms of reducing excess capacity in the labour market. While the national unemployment rate has been cut to 5.0% — its lowest since mid-2011 — both underemployment and underutilisation remain at historically elevated levels and will need to tighten to generate faster growth in wages. The Reserve Bank of Australia and most analysts expect this to remain a gradual proposition over the next couple of years. The positives are that private sector wage prices are on an upward trend, while New South Wales and Victoria are likely to see faster increases in the quarters ahead given their tight labour markets.
