December 2021

The September quarter wages data was for financial markets the most eagerly anticipated piece of economic data for the remainder of 2021. That is because the RBA made it clear that for interest rates to rise they would need to be satisfied that inflation will sustainably be 2-3%. And in the RBA’s view for that to occur will require wages growth to be above 3%.

The outcome (measured as excluding bonuses) came in at 0.6% rise (2.2% over the past year), close to expectations. That was a pretty good outcome given that about half the country was in lockdown for much of the third quarter. Analysis conducted by the ABS indicated that the pattern of wage increases has returned to pre-COVID norms.

Professional services led the way. Partly that would have been the pay hikes we read about for lawyers and accountants. It also might reflect strong demand for areas of IT. Higher pay though was a feature in a number of sectors. Accommodation and Food Services was one, reflecting the massive demand for workers as the sector re-opens for business in NSW and Victoria. Wage rises apparently have been lower in mining, curious given that by some measures it is the sector facing the most severe worker shortages.

Part of the pickup of wages will be ‘catch up’, a payback for the wage freezes last year when uncertainty about the pandemic impact was at its peak. It also reflects the high demand for labour.

The demand for labour is currently very strong. But there is still an excess supply of labour. The unemployment rate can fall further. About a third of the unemployed say the reason they haven’t been able to get a job is that there are not enough vacancies or there have been too many applicants. In the current environment, you would expect these factors to be less of a problem. The underemployment rate (the proportion of people who are employed but would like to work more hours) is also well above long-term average.

There is also likely to be a rise in the participation rate. The RBA believes that a proportion of the people have only temporary left the labour force and are likely to return once the economy re-opens. Given that the participation rate was at a record high as recently as March, this appears to be a reasonable argument. We will find out in the next few months.

But past the next 6-12 months, it will be the return to higher levels of immigration that will be the most significant issue for the supply of workers. There has been steps to open up the borders to international students. Decisions about a more expansive opening of the international borders appears likely to wait until sometime in 2022. Substantially higher immigration will require not only our international borders to be open but also that of other countries, notably China.

There has been discussion that higher immigration leads to lower wages growth. The evidence is mixed. In the noughties immigration was strong and wages growth was decent. By contrast, in the 2010’s there were periods of strong immigration growth that coincided with weaker wages growth. The difference in the two decades was the economy was very strong in the 2000’s creating a very strong demand for labour that high immigration could only partially fill. But the economy was not as strong in the following decade.

The RBA has good reasons to expect modest wages growth over the next 12-18 months. With some luck with COVID the economy looks like it will be in for a good run over the next couple of years. This should lead to declines in the unemployment rate and (eventually) wages growth north of 3%. Once that happens, we enter interest rate rise territory.