Wages still weak in the June quarter, despite tighter labour markets

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Despite Australia’s unemployment rate falling to its lowest level in a decade in June, wage pressures were still failing to build, new data show.

And economists say that, after the New South Wales government lost control of the virus, which has caused billions of dollars of economic damage nationally, the unemployment rate will be rising again.

Bureau of Statistics data show the wage price index (WPI) — which measures the rate of growth in wages and salaries — slipped to 0.4 per cent in the June quarter, down from 0.6 per cent in the March and December quarters.

Economists said the result was disappointing.

They said the unemployment rate fell to 4.9 per cent in June — its lowest level in a decade — but it still wasn’t enough to generate wage pressures and now the economy is shrinking again.

“Conditions have clearly deteriorated substantially since the June quarter,” said Sarah Hunter, Chief Australia Economist for BIS Oxford Economics.

“The ongoing lockdowns and tight restrictions in NSW, Victoria and the ACT will result in a substantial contraction in gross domestic product (GDP).

“[There will be] a sharp fall in employment/rise in unemployment, and [a] decrease in labour market participation in the September quarter,” she said.

“In addition to the forced closure of many firms, the deterioration in business and consumer confidence will weigh on hiring intentions, although we expect conditions to improve as vaccination rates rise and the economy moves closer to re-opening.”

Ms Hunter said the “bumpy ride” for the economy through the rest of this year and into 2022 would drag on wages momentum.

Wage suppression policies working

The annual pace of wages growth is sitting at 1.7 per cent, and the current rate of inflation is running at 3.8 per cent (after emergency free childcare ended and fuel prices bounced back from last year’s nadir).

That suggests the purchasing power of workers’ pay-packets has eroded recently, albeit temporarily.

However, the ABS data show government wage suppression policies also contributed to the weakness in wage growth in the June quarter.

Despite the Reserve Bank governor saying stronger wage growth will be necessary to lift inflation back into its 2-3 per cent target band, which it needs to normalise interest rates, governments are deliberately holding public sector wages back.

According to the ABS, ongoing enterprise bargaining negotiations, capped wage increases and pay freezes dampened public sector growth in the quarter.

Public sector wages rose by 0.4 per cent in the June quarter, with the annual rate falling to 1.3 per cent.

It was the lowest annual rate of growth for the public sector since the WPI series began 24 years ago in 1997.

“The public sector through-the-year growth has continued to decline over each of the last five quarters and reached a series-low rate of 1.3 per cent in June quarter 2021,” the ABS said.

The annual wages growth in the private sector lifted to 1.9 per cent in the June quarter, up from 1.4 per cent in the March quarter.

“The annual rate of private sector wage growth was influenced somewhat by the initial dip in wages recorded in June quarter 2020, when the first impacts of the COVID-19 pandemic were recorded in the WPI,” said Michelle Marquardt, Head of Prices Statistics at the ABS.

The Community and Public Sector Union (CPSU) sent an email to its members after the release on Thursday, explaining why more wage weakness could be coming.

“In November last year, the government adopted the private sector WPI as the new pay cap for federal public sector pay rises,” the email said.

“Capping your pay rises to the private sector WPI will hold back economic recovery and wage growth for all workers.

“The new maximum pay rise that will apply for the next 12 months is 1.9 per cent,” it said.

Cost of lockdowns continues to grow

Meanwhile, the economic cost of the Sydney outbreak continues to grow.

RBA governor Philip Lowe has warned the economy will shrink in July, August, and September, and it’s an open question if economic activity will keep shrinking after that.

A lot depended on the rate of vaccination in every state and territory in coming months, and the ability of health officials to stop the virus spreading, he said recently.

However, Shane Oliver, the chief economist of AMP Capital, says he now estimates the lockdowns since May will cost the economy $18.5 billion, which is worse than economists were estimating a few weeks ago.

“This allows for the two-week extensions of the Victorian and ACT lockdowns,” he wrote in a note to clients on Wednesday.

“However, if the NSW lockdown (which is now costing around $1.25 billion a week) is extended for, say, another six weeks, it will bring the total cost to around $26 billion.”

Dr Oliver said it was a “bit of a moving feast,” but the hit to September quarter GDP could now be -3.5 per cent.

And even if we assumed a strong bounce back in growth in the December quarter, it would still see through-the-year GDP growth this year of just 1.5 per cent.

“This is well below the 4 per cent growth the RBA is assuming,” he said.

“And allowing for a strong but potentially slower recovery as Australia ‘learns to live’ with a high number of new daily coronavirus cases, even after vaccine reopening targets are met in October and November, will mean that the profile for GDP will be lower and … unemployment through next year will be higher, than the RBA is assuming,” he said.

How is the wage price index measured?

The WPI is a key economic indicator.

The principle purpose of the WPI is to measure changes in the price of wages and salaries (in hourly terms) for employers in Australia’s labour market.

The WPI survey covers 3,000 businesses and around 18,000 jobs within those businesses. The ABS sends survey questions to employers, asking them to detail all of their labour costs.

As you can see from the framework below, the WPI focuses on changes in the price of wages and salaries.

It does not include employers’ superannuation contributions, redundancy payments, payroll taxes, or wage subsidies (such as JobKeeper).

Those things fall outside the conceptual boundary for the WPI.

Wages growth has been weakening for years.

In April 2019, before the climate change bushfires and the COVID pandemic, the Parliamentary Library published a report on the causes of the wage growth slowdown in Australia.

It said the WPI grew at an average annual pace of 2.2 per cent in the five years between December 2013 and December 2018.

In the five years between December 2008 and December 2013, it grew by 3.3 per cent annually.

When looking at real wage growth (which takes inflation into account) it said things were starker.

It said the ABS’s average weekly earnings data showed real wages (as measured by average weekly ordinary time earnings of adult employees working full-time) increased by just 2.6 per cent (or an annual average of roughly 0.5 per cent) in the five years to November 2018.

That compared to real wage growth of 9.4 per cent (or an annual average of roughly 1.8 per cent) in the five years to November 2013.

“By this measure, we could conclude that the economy had underperformed more recently compared with other periods of sustained economic growth when growth in real wages was much stronger,” the report said.

By business reporter Gareth Hutchens (Original ABC Article)