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Australia’s jobs market is changing and Deutsche Bank thinks it’s time for wage inflation

Australia’s jobs market is changing and Deutsche Bank thinks it’s time for wage inflation

Sydney : There’s not been much joy for Australian workers when it comes to pay increases in recent years.

In many instances, pay levels have actually gone backwards in real terms.

Australia’s wage price index (WPI) — a measure of the average increase in hourly pay rates excluding bonuses — shows wages for private sector workers grew by just 1.99% in the year to June, less than the 2.1% increase in inflation over the same period.

While public sector workers did a little better with average hourly wages increasing 2.41% from June 2017, combined with private sector wages, the average pay rate rose at the same pace as inflation.

This is at a time when the economy is growing at the fastest pace since 2012, with unemployment falling to the lowest level in four years.

Surely if wages increases were to occur, now would be the time, right?

There’s a problem. Despite above-trend economic growth and lower levels of unemployment, the proportion of Australian workers who are underutilised — either unemployed or in a job but who want to work more hours — remains elevated.

Put bluntly, despite strong employment growth in recent years, the number of people in Australia’s workforce has increased nearly as fast, meaning there’s still an ample supply of workers for employers to choose from, helping to keep wage increases, from a broad perspective, at paltry levels.

Many suspect that for wage pressures won’t truly emerge until Australia’s unemployment rate falls below 5%, below its current level of 5.3%.

Given the evidence from other major nations in recent years where labour market conditions are substantially tighter than here, some suspect unemployment will need to fall as low as 4% in Australia before workers wages start to stir.

Even policymakers at the Reserve Bank of Australia (RBA) — renowned for being glass-half-full types when it comes to Australia’s economic outlook — believe that a pickup in worker wages is only likely to be gradual in the years ahead.

Based on the prevailing view, it could be a tough period ahead for anyone hoping for a big pay rise.

But not everyone shares that view.

Tim Baker and David Jennings, Strategists at Deutsche Bank, are optimistic on what lies ahead for wages, predicting that Australia’s wage price index could accelerate to an annual pace as high as 2.75% in the not too distant future.

While nowhere near the levels seen either side of the GFC, such a result would undoubtedly be welcomed by not only workers but also the RBA who are relying upon larger wage increases to boost inflationary pressures.

Baker and Jennings point to recent economic data to explain their view.

Firstly, they say the proportion of underutilised workers, while still elevated compared to historic norms, is now starting to fall quite sharply, a good thing when it comes to fostering wage pressures.

“In [the September quarter], underemployment, and underutilisation, dropped to a four year low. That’s good news for the wage recovery thesis,” they say.

“Our work has found that it’s labour force underutilisation, not unemployment, that explains wage growth.

“Updating our wage model for this suggests wage growth should rise to 2.75%, compared to 2% at present.”

As shown in the chart below showing the relationship between Australia’s unemployment and underutilisation rates and the wage price index, it’s the latter, rather than unemployment, that has a better relationship with explaining annual growth in wages.