After what has been a solid month for equities and bond investors, month end flows have probably play their part in the price action overnight, US equities have lost momentum, UST have led a rise in core global bond yields and the USD is stronger. US and European inflation releases favoured the notion the Fed and ECB are done with their respective tightening cycles.
AMW: Wages to accelerate despite gradual lift in WPI
In this weekly, we explain why other wage indicators are lifting more strongly, including from NAB’s own business survey.
Analysis: Wages will accelerate even though the WPI is only lifting gradually
- Market forecasts and media commentary have been repeatedly disappointed by the gradual pick up in wages growth evident in the headline WPI. In this weekly, we cover why that should not be a surprise, and explain why other wage indicators are lifting more strongly, including from NAB’s own business survey. Our conclusion is that private WPI should lift by 0.8/0.9% q/q in Q3 and Q4, which should take private WPI to around 3-3¼% y/y by the end of 2022 from its current 2.6% pace.
- Why has the lift in WPI only been gradual to date? Australia’s headline wages measure is a narrow measure of base wages designed to measure changes in wage rates for a given quantity and quality of labour. Multi-year enterprise bargaining agreements brings inertia into the system (covering around 40% of workers), as do those workers reliant on award or minimum wages which are reviewed annually with any changes taking effect from 1 July (covering around 25% of workers).
- Those on individual agreements (around 40% of workers) are seeing a notable lift in wages growth. The average private sector wage increase rose to 3.8% in Q2, its highest since 2012, and the share of jobs seeing an increase was higher than recent June quarters. In Q3 those on award or minimum wages should see a notable lift given the rise in award wages of 4.6-5.2%.
- As for enterprise bargaining, as these mature and are renegotiated wage increases are also likely to increase. Agreements so far lodged in July have an average annual pay rise of 3.2%, above the 2.6% in March quarter agreements. The increase in WPI is ongoing, but base wage increases take time to adjust. The inertia within the system also means WPI tends to remain sticky higher as well.
- In terms of wage indicators, the NAB Business Survey’s wages bill question hit a record high in July at 4.6% (quarterly rate), well above its long-run average of 1.1%. Some of the rise in July no doubt reflects the higher minimum wage taking effect, but notwithstanding this, The NAB Survey suggests the wages bill has been growing by around 3% since March.
- The NAB survey also shows a clear broadening out of wages pressure. Pressures were first felt in the construction industry from April 2021, which then spread to the professional services industries (skills shortages due to the closed international border a factor). As Australia emerged from lockdown from late 2021 and as services activity returned to pre-covid levels, labour costs in rec & personal services rose.
- Overall, we conclude wages growth is picking up, with the WPI reflecting this with a lag. Importantly there is upside risks to the RBA’s outlook for a pickup in WPI wages to 3.0% y/y by the end of 2022, which we note can reached with the award wage increase and a lift in the frequency of wage increases back to mining boom levels alone. Should wage indicators lift further, clear upside risks would emerge with policy needing to go further into restrictive territory.