- Wage growth has picked up from its 2020 lows;
- But it remains too low for the RBA to feel comfortable about raising rates;
- There are a growing number of reasons to expect wages growth to be north of 3% in 2023;
- And that is when we enter interest rate hike territory.
The September quarter wages data was for financial markets the most eagerly anticipated piece of economic data for the remainder of 2021. The outcome (measured as excluding bonuses) came in at a 0.6% rise (2.2% over the past year), close to expectations. That was a pretty good outcome given that about half the country was in lockdown for much of the third quarter. But the quarterly increase was in line with the pace recorded in the first half of 2021. Part of the pickup of wages will be ‘catch up’, a payback for the wage freezes last year when uncertainty about the pandemic impact was at its peak.
Assuming that wages growth does pick up from here at best it will be 9-12 months before it would breach the 3% mark nominated by the RBA. And there are reasons to think that the pickup of wages growth will be slower. For a start enterprise bargaining agreements and public service pay caps limit how quickly national wages growth can rise over the next 6-12 months.
There is still an excess supply of labour. The unemployment rate can fall further. The underemployment rate is also well above long-term average. There is also likely to be a rise in the participation rate. But past the next 6-12 months it will be the return to higher levels of immigration that will be the most significant issue for the supply of workers.
In recent years workers have not been expecting big pay rises, partly reflecting a period of low inflation. That could change if prices go up at a 3%-plus for an extended period. Firms’ expectations about profit margins have also been pretty subdued in recent years, leaving them little room to pay higher wages. But sustained strong demand may again lead to firms becoming very comfortable about the profit outlook. One reason why profit margins have narrowed in recent years has been an extended period of weak productivity growth. But it looks like we are in for a run of strong business investment. And that should lead to a bounce in productivity growth in coming years.
With some luck with COVID the economy looks like it will be in for a good run over the next couple of years. This should lead to declines in the unemployment rate and (eventually) wages growth north of 3%. Once that happens we enter interest rate rise territory.
To read my full update, click here.
We live in interesting times.
Peter Munckton - Chief Economist