Wage growth is low, but at least it’s stopped falling

The Australian Bureau of Statistic released data on wages growth for the first quarter of the year today. Growth was very low, but it stopped falling, which is something.

Senior Economist with ANZ, Jo Masters says the data is actually quite encouraging.

The highlights: wage growth has stabilised, under employment is still a concern and the RBA will most likely rest steady on the interest rates.

Jo Masters tells Alan Kohler real wages are actually declining and she sneaks in an interest rate forecast as well.

Jo, there was a fair bit of data this week on employment and wages and so on, what did we learn?

We learned that wage growth is stabilising but remains at very low levels. Actually it’s quite encouraging to see that it is at least no longer falling. In terms of employment, always quite volatile but we have had a very strong employment result. It is the second that we have had in a row, so that is quite encouraging as well, with the unemployment rate actually slipping to 5.7 from 5.9.

So it is all pretty good news then?

Yes, I think it is all good news, we did see in April a decline in full time employment, so that is probably slightly disappointing but overall the data, I think, is quite encouraging.

What does it mean for underemployment which has been a bit of a focus lately, particularly with large rises in part time employment. The Reserve Bank  was saying that part-time employment is perhaps a personal choice and I wonder whether that is correct or not? Looking at the rise in part time employment and the fall in full time, what do you think it all means for underemployment?

I think we are seeing a structural move towards part-time employment. Whether that is desirable or not from an individual’s point of view is always hard to know, but as you said we do still have very elevated underemployment. They are people that have a job but would want to work more hours and what that means is that wage growth is likely to remain low for quite some time, because from a business point of view, if you see an increase in demand, the first thing that you can do is increase the number of hours that you offer your existing workforce at the same wage rate. It is a key issue and it does sort of suggest that that low wage growth is here for some time to come and that is really underpinning expectations of low inflation is also going to be here for some time to come.

Well, in fact, real wages are declining, aren’t they, because wages growth is below the headline inflation rate.

That is right. We have seen headline inflation pick up faster than underlying inflation, related partly to petrol prices but also increases in energy bills and there are a few more factors that are going to continue to see a wedge between headline and core inflation. It is a challenge for the household, without doubt.

What do you think all this means for interest rates this year?

For some time, we have expected the RBA to remain on hold for the foreseeable future and we are still very much of that view and this week’s data doesn’t really change that. As you have highlighted we have still got high levels of underemployment and in fact even unemployment is above its natural rate and so we have got quite a weak inflation profile and thinking the RBA is on hold.

And there’s still quite a lot of labour market slack, really, isn’t there?

Absolutely, both in the unemployment rate and also in underemployment. So there is plenty of workers out there that either want a job or have a job and what to work more hours.

That’s great Jo. Thanks very much.

No problem. Have a great day.