Justin Smirk, Research Analyst at Westpac suggests that outside the minimum wage boost there is little else to drive a broader acceleration in Australian economy.
Key Quotes
“As the labour market recovers wages lag behind.
Wages continue to lag behind the recovery in the Australian labour market. In the year to July the Australian economy added 239.3k new employees to the workforce of which the vast majority were full-time (197.7k vs. 41.6k part-time). At the same time the unemployment rate eased from 5.9% in February and March to 5.6% in July well off the July 2015 high of 6.3%. This is a clear tightening in labour market conditions which should drive an upward push in wages. From the latest Wage Price Index private sector wages grew just 0.4% in the June quarter taking the annual pace down to 1.8%yr from 1.9%yr. At three decimal places, the quarterly rise is only just above the record low of 0.395% in Q3 2009 while the annual pace of 1.784% is a record low. At the national level it has been public sector wages that have been holding up the national average. Public sector wages grew 0.6% in Q2 holding the annual pace around 2.4%yr.”
“A 0.4% boost to Q4 wage inflation but not much else coming.
We are forecasting a 0.9%qtr rise in the September quarter Wage Price Index which will lift the pace of annual wage inflation to 2.5%yr. How much more will we see passed through via informal employment contracts linked to the minimum wage? It is hard to say, as often these contracts are associated with over award payments and there is scope for those overpayments to be used to absorb the impact of this increase. In addition, it is likely to trickle through as contracts are re-negotiated rather than a once off mass impact in the September quarter. This is an ongoing area of research for Westpac Economics.
The labour market is not as tight as the headline numbers suggest but even allowing for broader measures of labour market slack, wages are clearly underperforming economic fundamentals. The boost to the minimum wage is a circuit breaker but its impact is limited as its scope is restrained. We do see wage inflation drifting up to 2.6%yr though 2018 but struggle to see how it will get much higher. This level of wage growth does not pose a threat to the inflation outlook nor is it anything but a very modest boost to the growth in household income.”
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