Chief economist update: Low unemployment, low wages growth conundrum

"Annual wages in seasonally adjusted terms grew 2.3% for the third quarter in a row. The main contributors to growth over the quarter were regularly scheduled wage rises in the health care and social assistance and education and training industries, as was the case in the previous March quarter."

That's Australian Bureau of Statistics (ABS) Chief Economist Bruce Hockman take on the results of the Wage Price Index (WPI) report that showed wages - total hourly rates of pay excluding bonuses - grew by 2.3% in the year to the March quarter - the same annual rate of growth recorded in the September and December quarters of 2018.

Yes, Virginia - wage growth would have been weaker if not for the "regularly scheduled wage rises." Nothing organic!

Private sector wages grew by 2.4% in the year to the first quarter, up from 2.3% in the December 2018 quarter. Public servants' annual pay growth decelerated to 2.4% in the March quarter from 2.5% from 2.6%, in the fourth and third quarters of last year, respectively.

The continued lacklustre growth in wages bodes negatively for inflation. Recall Glenn Stevens' declaration when he was at the helm of the RBA: "As wages are the largest component of business costs, the outlook for wage growth is particularly important for the inflation outlook."

This has become more crucial especially given the latest inflation reads - headline CPI eased to an annual rate of 1.3% in the March quarter from 1.8%; the trimmed mean measure down to 1.6% from 1.8%; the weighted median measure down to 1.2% from 1.6% - heading farther away from the RBA's inflation target.

Then again, and as the RBA statement indicated at its May board meeting, the  Australian central bank's bias is tilted towards the relatively low unemployment rate than below-target inflation as its forward guidance suggests, "the Board will be paying close attention to developments in the labour market at its upcoming meetings".

We'll get the latest update on the state of the country's labour market later today. Economists expects the unemployment rate to tick up to 5.1% in April from 5% in March and employment to grow by 14,000 after the addition of 25,700. These guesstimates could be on par, better or lower than the actual numbers.

However, the leading indicators and surveys of the Australian labour market point to a weakening trend.

Although the Westpac/Melbourne Institute consumer confidence survey showed improved consumer unemployment expectations in May, the employment index in the NAB business survey dropped from a reading of +6 in March to -1 in April.

Australian consumers can be as positive on the outlook of them finding a job as they want but businesses are the ones doing the hiring.

Not only this, the employment components of AiG performance of industry indices point to further labour market weakness - manufacturing employment down 5.1 points to a reading of 51.5 in April; services down 6.2 points to 46.0 (contraction); construction down 6.9 points to 39.2 (deep contraction levels).

But even looking at the labour market glass as half-full as the RBA does, which would provide "some further lift in wages growth" that, in turn, would lift inflation ... is just not happening.

Indications from the negative correlation between wages growth and the unemployment rate gap - unemployment rate less NAIRU (non-accelerating inflation rate of unemployment) - shows annual wages should be growing at around 3%-3.5% at this time.

Having said that, I wonder whether an RBA interest rate cut or cuts would get the wages party going? Especially if you consider the US and UK experience - where the unemployment rates have dropped to multi-decade lows and yet wages growth, though accelerating, remains relatively slow.

Read more: Australian Bureau of StatisticsBruce HockmanGlenn Stevens
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