Australia's Wage Price Index (WPI) for the December quarter is due at 11:30am (AEDT) today. After accelerating in the previous quarter as increases to the minimum wage and awards came into effect, wages growth is expected to have moderated into year-end. Annual wages growth is likely around its peaks and the RBA forecasts it to slow from the middle of the year as labour market conditions ease.
A recap: Wages growth accelerated sharply in Q3
The WPI posted its fastest quarterly increase on record rising by 1.3% in Q3, lifting the annual pace from 3.6% to 4%, a high dating back to 2009. During Q3, wages growth accelerated as the increases to the minimum wage (8.6%) and award rates (5.75%) determined by the Fair Work Commission came into effect. This extended the rebound in wages growth from the lows reached during the pandemic, driven by very robust labour market conditions, adjustments to pay settings and high inflation.
Sizeable contributions to wages growth in Q3 came from new enterprise bargaining agreements and awards. In addition, individual agreements also boosted wages growth but by a similar magnitude to the same period a year earlier.
In the private sector, base wages lifted by 1.4% in the quarter to be up by 4.2% through the year. By contrast, wages growth in the public sector has lagged through the cycle rising by a more modest 0.9% in the quarter to 3.5% in annual terms. This reflects the effects of pay caps on public sector wages, policies that have been superseded over the past year or so.
Wages growth to moderate in the December quarter
The wage-setting process in Australia conforms to a seasonal pattern where most jobs receive pay increases in Q3, following the completion of the previous financial year. This can be seen in the 'Methods of Pay Setting' chart above. Wages growth then typically eases in Q4. As a result of this, markets forecast wages growth to moderate to a 0.9% rise in the quarter (range: 0.8% to 1.1%), which would hold the annual pace at 4%.
In its recent Statement on Monetary Policy, the RBA forecast that wages growth is currently around its peaks for the cycle. Its outlook for the labour market is for conditions to ease such that the unemployment rate rises to around 4.5% over the next couple of years. This easing of the labour market is anticipated to result in wages growth slowing to the 3s by the end of the year, and this is backed by insights picked up in the Bank's Liason program.
RBA chart