Preview: Wage Price Index — Q3

The ABS is scheduled to release the September quarter update of its Wage Price Index (WPI) at 11:30am (AEDT) today. The WPI measures the price change of wages and salaries paid by employers, excluding factors such as quantity and quality of work performed and other compositional characteristics. Wages growth has key implications for the Reserve Bank of Australia's outlook for household consumption growth and inflation and has, therefore, become an increasingly influential consideration within its policy decisions throughout 2019.      

As it stands | Wage Price Index

Australian wages growth was slightly stronger than expected in Q2 rising by 0.6% in the quarter (expected was 0.5%), though the annual pace remained subdued and was unchanged at around 2.3%. 

The pace of wages growth is being restrained by an elevated level of spare capacity in the labour market. While employment growth was strong at around 2.5% over the year to September and clearly outpaced growth in the working-age population at around 1.7%, little progress was made in lowering the unemployment rate (currently 5.2%), while underemployment (8.3%) and underutilisation (13.5%) have also proved difficult to reduce given that the workforce participation rate has lifted sharply from where it was a year earlier. Weakness in productivity growth has also been a structural headwind.   

Growth in public sector wages spiked by 0.8% in the quarter, driven mostly by a once-off recalibration for healthcare workers in Victoria, which lifted the annual pace from 2.4% to 2.6%. In the private sector, wages growth was more modest lifting by 0.5% in the quarter and 2.3% through the year.

Wages growth inclusive of bonuses increased by 0.4% in Q2, with the annual pace slowing from 2.6% to 2.5%. Again, the public sector outperformed at 0.6% for the quarter and 2.5% year-on-year compared to a 0.4% quarterly rise and 2.4% annual pace in the private sector.

A full review of Q2's report is available here 

Market expectations | Wage Price Index

Another subdued outcome is expected by markets in today's release. Bloomberg's median estimate is for the WPI to rise by 0.5% in Q3 (individual forecasts range between 0.4% and 0.7%), resulting in the annual pace easing from 2.3% to 2.2% (range: 2.1% to 2.4%).

What to watch | Wage Price Index

Some upside risk is attached to the quarterly outcome for the headline WPI in today's release. Firstly, the 2019 decision from the Fair Work Commission (FWC) to raise the national minimum wage by 3.0% took effect from the start of the quarter and will thus provide a boost to wages growth in the quarter. According to the FWC, 21% of Australian employees are award-reliant, while there is also an additional portion of the workforce that have their pay linked to changes in the minimum wage in some way. Secondly, as last week's RBA Statement on Monetary Policy highlighted, some workers in the retail sector, which is the second-largest employer in Australia according to the ABS's estimates, have faced an enduring period of wage freezes while new Enterprise Bargaining Agreements (EBA) were either being negotiated or awaiting FWC approval. Over the past year, a number of new retail-related EBAs were approved and came into effect from the start of Q3, so this will also provide a boost to the quarterly figure.