Daily Commentary BY THE CURVE TEAM –

Is Wage Growth Finally Coming?

19th of January, 2018

Australia’s run of stronger data continued yesterday with the latest employment data coming in ahead of expectations. It caps off a pretty remarkable year for the employment market. While there is still some work to be done, it appears as if the wages worm might finally be turning.

Yesterday’s employment numbers were stronger than expected yet again. Total employment was up by 34,700 against expectations of a 15,000 increase. It caps off the strongest calendar year of employment growth on record at just over 403,000 and its the second strongest 12 month period of growth.

The composition of growth over the past 12 months has also been encouraging, with a little more than three quarters of the new jobs coming in the form of full time positions. That is a reversal of the trend that we had seen over the post GFC years.

Despite the surge in employment growth, the unemployment rate is only marginally lower over the past 12 months after rising 0.1% in December. The lack of inroads into the unemployment rate despite the surge in employment has been due to a 0.9% rise in the participation rate. This has seen roughly 375,000 new entrants into the employment market over the past 12 months.

There is clearly still some slack in the labour market which partly explains why wage growth remains around record lows. However the worm could be slowly beginning to turn.

A deeper look at the data shows the slowdown in wage growth could be down to the elevated level of underemployment within the labour force, which sits around all time highs.

If we take a look at the underemployment ratio of employed persons and graph it against an inverted wage cost index chart, we can see the two move in the same direction. The wage cost index has around a six month lag when it comes to movement in the underemployment ratio.

The positive sign is that over the past six months, the underemployment ratio has started to edge lower. While it is still early days, it is certainly a positive sign for wages over the months ahead.

How this evolves over the course of the year will be a crucial when it comes to the outlook for monetary policy.

David Flanagan

Director - Interest Rate Markets