Chart of the week: Australian wages take a turn for the better

15 November 2018

Bob Cunneen, Senior Economist and Portfolio Specialist

 

Australian spare capacity vs Wages

 

*Spare Capacity measure – Unemployment rate less 5% full employment NAIRU (non-accelerating inflation rate of unemployment) inverted

Source: Australian Bureau of Statistics.

Australia’s nominal wages growth has been struggling over recent years (blue line). This slow and low wages growth reflects a combination of both global and local factors.  Globalisation and technology advances have been a competitive challenge to all workers. Critically, Australia’s elevated unemployment and underemployment rates have also generated job insecurity which cautions workers against pressing for higher wages.

Fortunately there are promising signs that the labour market has turned for the better. Wages growth picked up to a 2.3% annual pace for the September quarter, the highest in the past three years. Stronger jobs growth over the past two years has seen Australia’s unemployment rate grind lower to 5.0%. This suggests diminishing ‘spare capacity’ as the unemployment rate is now at the Reserve Bank of Australia’s (RBA’s) estimate of full employment at circa 5% (inverted red line). Spare capacity is now notionally at zero which bodes well for future wages growth given employees should have more bargaining power.

However there are some caveats to this good news story. According to the RBA, there is no precise measure for where full employment actually is. Australia’s unemployment rate may need to move much lower than the current 5% level before generating significantly higher wages.  Job insecurity amongst workers may also take some time to fade further. So while Australian wages growth has turned for the better, we are still some distance from the 3% annual growth required to support consumer spending and housing affordability.

Source : Nab assetmanagement November 2018  

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