Economic and Financial Market Update: The wage debate

Summary:

• Wages growth is picking up;
• But not as quickly as the financial markets or the RBA had forecast;
• This should increase confidence that inflation will not get out of hand;
• But there will be at least another two quarter percentage point rate hikes on the way.

Everyone is interested in what is happening to wages

For financial markets and economists understanding the size of wage rises matters. Wages is the major source of income for most households. So the higher wages growth the more money consumers have to spend. Wages growth is also the largest cost for many firms. Any rise in labour costs must either be absorbed by business or passed onto customers..

On both counts, movements in wages growth can have a significant influence on inflation. The difficulty is that movements of inflation can also influence wages growth. Workers would like compensation for price movements. Further, periods of rising inflation typically signal that demand in the economy is rising more strongly than supply. Typically, this demand-supply imbalance will not only impact the market for goods and services but also the jobs market. So the factors that lead to higher inflation also can drive higher wages growth.

So movements in wages growth can have significant macroeconomic implications. And for this reason they are one of the most watched pieces of economic data, particularly during periods of rising inflation. This was particularly the case with the Q4 Wages Price Index (or WPI, the best measurement of wage movements) given the RBA has become more concerned about the inflation outlook.

The outcome was that wages growth is rising but not at the rate that the RBA and financial markets had been anticipating. The quarterly growth rate of 0.8% is only modestly stronger than it was at the end of 2021. The annual wages growth rate of 3.4% is consistent with a return of inflation of 2-3%. One reason that wages growth has not been stronger has been the lid being kept on public-sector salaries. But wages growth in the private sector still only rose by 3.6% over the year to December 2022 (and 0.9% in the quarter). And wages growth was above 4% in only two sectors in 2022 (wholesale trade and manufacturing).

To read my full update, click here.

We live in interesting times.

Regards,

Peter Munckton - Chief Economist