A below consensus increase of 0.8% (vs 0.9% forecast) in Australia's Wage Price Index (WPI) in the September quarter saw annual wages growth retrace below 4% for the first time since the middle of 2023. Wage pressures are easing across the labour market with conditions past cycle tights and as wage-setting processes adjust to slower inflation. Annual wages growth slowed from 4.1% to 3.5%, well down from the highs of 4.3% seen at the end of last year. In both 3- and 6-month annualised terms, wages growth is now at 3.2%.
While the RBA judges the labour market to be tight relative to full employment (more insights will be available in tomorrow's labour force survey for October), today's report suggests that inflationary pressures generated in the labour market are cooling. If a return to trend rates of productivity growth of around 1% can materialise, wages growth at the current pace would - on paper at least - be broadly consistent with inflation at the midpoint of the RBA's 2-3% target band.
The WPI - a measure of the growth in base wages (excluding bonuses and other incentives) across a fixed basket of jobs in the domestic labour market - increased by 0.8% for the third consecutive quarter in Q3. This is notable because the wage-setting process in Australia typically generates a spike in wages growth in Q3, incorporating the increases to the national minimum wage and end-of-financial-year wage reviews for employees on individual agreements. Although this spike still occured in 2024, these factors boosted wages growth by less than last year.
The Fair Work Commission - a statutory body independent of the political process that as part of its remit determines minimum wage and award rate settings in Australia - settled upon a 3.75% rise in the minimum wage in its 2024 decision, down from a 5.75% increase in 2023. Minimum wage decisions tend to have spillover effects on pay rates in other parts of the labour market. The ABS reported that an almost identical share of jobs received a pay rise in Q3 this year (45%) compared to last (46%); however, the average size of that pay rise in 2024 was 3.7%, significantly below the peak of 5.4% in 2023. Moreover, the distribution of wage rises now sees the largest share of jobs (34.1%) receiving a pay rise in the 3-4% range; whereas a year ago, this was sitting in the 4-5% range (for 27.4% of jobs).
By sector, growth in private sector wages is cooling noticeably. The quarterly rise in Q3 was 0.8%, with annual growth slowing from 4.1% to 3.5%, a 2-year low. The average pay rise in the sector has slowed across the past year from 5.8% to 3.9%. Even if bonuses are included, private sector pay saw a more moderate increase of 1.7% quarter-on-quarter and 3.6% year-on-year than in 2023 (2.1%q/q, 4.3%Y/Y).
In the public sector, wages increased by 0.8% in the latest quarter to be up by 3.7% through the year, softening from 3.9% previously and below the 4.2% cycle high. The average pay rise going through in Q3 was 3% compared to the high of 4.3% in the final quarter of last year.
At the industry level, wages growth is now decelerating at a faster pace across major parts of the labour market. Of particular focus for the RBA has been wages growth in the services sectors. Based on the latest inputs, my measures of wages growth in business and household services show an easing from 3.7% to 3.2%Y/Y and 4.5% to 3.7%Y/Y respectively.
