Independent Australian and global macro analysis

Tuesday, August 17, 2021

Australian Q2 Wage Price Index 0.4%; 1.7%yr

Australia's Wage Price Index came in below estimates in the June quarter with annual growth at 1.7% still short of returning to its pre-pandemic pace. Growth in private sector wages is rebounding from record lows at a gradual pace, though public sector wages have slowed to a new series low, weighed by ongoing caps and freezes following the pandemic. 

Wage Price Index — Q2 | By the numbers
  • The headline WPI (total hourly rates of pay ex-bonuses) was softer than expected rising by 0.4% in the June quarter against the median estimate for a 0.6% rise. The WPI rose by 0.6% in each of the two previous quarters. 
  • Annual growth in the WPI firmed from 1.5% to 1.7% but was weaker than the 1.9% pace expected.
  • Private sector wages moderated slightly from the previous two quarters to a 0.5% rise in Q2, with the annual pace advancing from 1.4% to 1.9%. 
  • Growth in public sector wages held at a 0.4% pace in Q2, though the annual pace slowed from 1.5% to a new record low of 1.3%. 

Wage Price Index — Q2 | The details 

Australian wages growth firmed by a weaker-than-expected 0.4% in the June quarter, with the annual rate ticking up to 1.7% after hitting a record low (1.36%) in the September quarter of last year. The main theme in today's report was the divergence between wages growth in the private and public sectors. Prior to the current cycle of lockdowns, conditions were normalising somewhat with restrictions being rolled back, helping to support the strong economic recovery underway.

In that context, businesses were continuing to revisit wage reviews that had been put on hold due to the pandemic. As a result, wages growth in the private sector lifted further in Q2, albeit at a modest pace (0.5%) and slower than in the previous two quarters (0.6%). Annual growth in private sector wages lifted from 1.4% to 1.9%, in part boosted by base effects going back to the depths of the pandemic in 2020, though it has yet to return to its pre-pandemic pace just above 2%. In the public sector, wages growth lifted by 0.4% for a 3rd consecutive quarter, though the annual pace has slowed to a new record low of 1.3%, continuing to be weighed by the implementation of wage caps and freezes. 

In response to the economic recovery, there were signs that bonuses were returning in the private sector. Some of this would have been driven by sales commissions in an environment of robust household spending, though businesses may have also been using non-wage strategies to hold onto or recruit staff as they reopened and activity picked up, rather than lifting wages and adding to the cost base. The private sector WPI measure including bonuses had lifted by 0.6% and 0.4% in the final two quarters of 2020 before advancing by 0.8% in Q1 of this year. However, the pace slowed noticeably in Q2 back to 0.1%. In annual terms, growth was only modestly higher rising from 1.9% to 2.0%. 

The next chart shows wages growth for each industry in quarterly and annual terms, as well as their annual pace prior to the onset of the pandemic. For the June quarter, wages growth was strongest in rental, hiring and real estate services, reflecting robust housing market conditions. Overall, what the chart below highlights is the lack of wages pressure across the economy. There are only 3 industries where annual wages growth is exceeding its pre-pandemic pace: professional, scientific and technical services 2.5% vs 2.2%, other services 2.6% vs 2.1% and construction 2.2% to 1.8%. Consistent with this, the ABS noted in today's release that wage pressures are limited to only select areas where there are particular skill requirements. Wages growth remains very subdued either side of 1.5%Y/Y in an number of industries hardest hit by the pandemic including accommodation and food services, transport and retail trade, while the pace is even weaker in arts and recreation at 0.9%Y/Y.  

Turning to the states, the rebound in the WPI at the national level has not been broad based. Wages growth in New South Wales and Victoria continued to firm, rising from 1.5% to 1.8%Y/Y for both states. 

Wages are rising fastest in Tasmania at 2.2%Y/Y, while Queensland (1.7%) has been on a similar trajectory to New South Wales and Victoria. However, wages growth in South Australia and Western Australia is only fractionally above their pandemic lows. 

Wage Price Index — Q2 | Insights

Australian wages growth continues to rise from record lows associated with the pandemic but the uplift has been very gradual and has not been broad based across the economy. This is despite a very strong recovery in the labour market with the unemployment rate now lower than it was prior to the pandemic and employment having more than recovered from last year's significant falls. Labour demand remains very strong — take today's reading from the federal government on skilled vacancies for example that showed internet job advertisements were 46% higher than pre-pandemic levels despite a 3% decline in July due to the current lockdowns (chart below). Rates of wages growth around the 3% level though necessary by the RBA to hold inflation within its target band still seems a long way off.