Australian wages growth came in stronger than expected in the December quarter, while the annual pace remained around record lows. The ABS reported that wages growth in the quarter was boosted by firms rolling back short-term freezes and reductions that were implemented at the onset of the pandemic, and by the partial effects of the Fair Work Commission's latest wage review decision.
Wage Price Index — Q4 | By the numbers- The headline WPI (total hourly rates of pay ex-bonuses) advanced by 0.59% in the December quarter, stronger than the 0.3% pace expected and well up from 0.07% in Q3.
- Annual growth lifted fractionally (when taken at 2 decimal places) to 1.42% from 1.36% but remains around record lows, though it was forecast to slow further in Q4 to 1.1%Y/Y.
Wage Price Index — Q4 | The details
The headline increase in the WPI in Q4 of 0.59% was its strongest quarterly rise since Q2 2019, with the annual pace little changed at 1.42%. Wages growth in the private sector outperformed rising by 0.67% in the quarter (strongest result since Q1 2014), taking the annual pace off its record low to 1.36% from 1.21%. Public sector wages growth was 0.29% in Q4, with base effects establishing a new record low for the annual pace (1.61%). The relative outperformance in private sector wages points to the effects of earlier wage freezes and reductions dissipating with the economic recovery gaining momentum over the second half of the year.
Across the industries, the standout was in professional services where wages growth lifted by 1.21% in Q4—its strongest quarterly rise in 8 years—elevating the annual pace to 1.52% from 0.76%. Over the first half of the year, wages growth in professional services was negative (-0.08%) reflecting the impacts of freezes and temporary reductions, but over the second half, wages growth rebounded by 1.6% as these were wound back with the economy reopening.
Some of the industries heavily affected by the onset of the pandemic also saw wages growth pick up over the second half compared to the first half; other (household services) -0.22% in the 1st half to 1.67% in the 2nd half, construction -0.23% to 1.29%, health care 0.65% to 0.94%, retail 0.23% to 0.77% and accommodation and food services 0.08% to 0.23%.
However, as the chart below shows, it is a grim analysis when comparing the current pace of wages growth to the same point a year ago in a pre-coronavirus economy. While that is not surprising, we need to remember that slow wages growth was a significant concern for policymakers before the pandemic. In the short run, the impact of the slowdown in wages has been swamped by the extraordinary fiscal and monetary stimulus response and the level of household saving is now very elevated as a result. At an aggregate level, this should help support spending as the fiscal stimulus through JobKeeper and enhanced JobSeeker payments are withdrawn, though it is far from clear if that is what will happen and if savings are kept higher than anticipated, then concerns about wages growth will again (if it isn't already) be prominent. The RBA has been vocal about wanting to see a tighter labour market generating higher wages growth and it is clear to see why from this next chart, with those conditions a long way from being met.
Looking at the states, wages growth broadly lifted across the nation as the reopening occurred. Wages growth over the first half in New South Wales was 0.4% and lifted to 1.0% for the second half. In Victoria, it was a similar increase (from 0.3% to 1.0%). For the other states, Queensland picked up to 1.0% in the second half from 0.6% in the first half, while Western Australia (0.9% from 0.5%) and Tasmania 0.9% from 0.6% also advanced, but South Australia was unchanged at 0.7% in both the first and second halves of 2020.
Wage Price Index — Q4 | Insights
The main takeaway is that with the economy reopening and activity rebounding, earlier wage freezes and reductions appear to have been wound back, which is clearly a positive. But a much stronger labour market will be needed to drive wages growth higher from here.
