For the first time since the March quarter of 2013, the annual rate of wage growth in Australia (as measured by the Wage Price Index, or WPI) has a number ‘three’ in front of it. In the September quarter 2022, wage growth rose to 3.1 per cent, up from 2.6 per cent in the June quarter.
Back in 2017, the Governor of the RBA was concerned about the persistently low pace of wage gains, and in 2018 he was hoping for ‘a world where wage increases started with a three rather than a two’. It’s taken a global pandemic, the closing of Australia’s borders, a worldwide inflation shock and a fall in the unemployment rate to multi-decade lows – the unemployment rate dropped back down to just 3.4 per cent in October – but we’ve finally seen wage growth meet that ambition. Unfortunately for workers, however, a headline inflation rate of 7.3 per cent means that wages are falling in real terms, and, moreover, are doing so at the fastest rate in the history of the WPI series.
Given that above-target inflation, Martin Place has swapped its pre-COVID concerns regarding low wage growth for fears about the risks of a future wage-price spiral. According to the Minutes from the 1 November Monetary Policy Meeting that were released this week, ‘Given the importance of avoiding a price-wage spiral, the Board will continue to pay close attention to both the evolution of the price-setting behaviour of firms and labour costs in the period ahead.’ So, the central bank will be laser-focused on wage developments from here, especially given the ongoing tightness in a labour market now boasting the lowest underutilisation rate since early 1982. That said, based on its past communications, the RBA should not view wage growth of 3.1 per cent as particularly problematic. The Governor is on record as explaining that with ‘steady state wage increases in this country, it’s good to start with a three.’ Similarly, this week’s Minutes observed that ‘wages growth had not reached levels that would be inconsistent with the inflation target’, although this observation did predate the latest WPI numbers.
All things considered, neither the Q3:2022 wage numbers nor the October labour market results seem likely to shift the RBA from delivering an expected 25bp rate hike at its upcoming December meeting.
Wage growth accelerated to 3.1 per cent in the September quarter of this year
The ABS said that the Wage Price Index (WPI) rose one per cent over the September 2022 quarter (seasonally adjusted) to be up 3.1 per cent in annual terms. That was just a little higher than market expectations for a 0.9 per cent quarterly print and a three per cent annual rise. More strikingly, this was the first time that the annual rate of WPI increase has been three per cent or higher since Q1:2013, while the quarterly rise was the strongest seen since Q1:2012.
Growth in private sector wages drove this quarter’s result: they were up 1.2 per cent over the quarter (seasonally adjusted) and 3.4 per cent over the year. In contrast, public sector wage growth was a more subdued 0.6 per cent quarter-on-quarter and 2.4 per cent year-on-year.
By pay-setting method, increases for jobs covered by individual arrangements made the largest contribution to quarterly wage growth. Of the 1.4 per cent quarterly increase in the WPI on an original (that is, not seasonally adjusted) basis, increases associated with individual arrangements contributed 0.8 percentage points. That’s consistent with the view that this pay-setting mechanism tends to be the quickest to respond to changes in market conditions. The contribution from enterprise agreements was 0.39 percentage points and from awards, 0.21 percentage points. Importantly, the September quarter results were influenced by the results of the Fair Work Commission (FWC)’s Annual Wage Review 2021-22 which increased the national minimum wage by 5.2 per cent and which saw the majority of jobs paid under modern awards receive a 4.6 per cent increase.
By industry, the highest rates of quarterly and annual wage growth (2.4 per cent and 4.2 per cent, respectively) applied to retail trade, where the increases mainly reflected the size and timing of award increases. The Bureau said that jobs in the Health care and social assistance (a 1.5 per cent quarterly rise – again heavily influenced by the FWC decision) and Professional, scientific and technical services (a 1.7 per cent quarterly rise) industries were the main contributors to quarter-on-quarter growth in Q3 this year, reflecting their absolute size in terms of employment, as well as the size of the relevant wage increases.
Signs of intensified wage pressure in the private sector included rises in both the share of jobs enjoying wage increases and the average size of those increases. So, the share of private sector jobs seeing a wage change rose from 33.9 per cent in Q3:2021 to 46.4 per cent in Q3:2022. And the average size of hourly wage increases for those private sector jobs that did record a wage change rose from 2.9 per cent in Q3:2021 to 4.3 per cent this quarter.
As noted above, an increase in the rate of Australian wage growth has been a long time coming, and it’s taken a global pandemic and all the associated disruption to deliver the ‘three point something’ wage growth that the RBA was looking for towards the end of the previous decade. Even that accelerated wage growth was insufficient to keep pace with inflation, with the implied fall in real wages in Q3:2022 the largest in the history of the WPI series. Indeed, in real terms wages are now back at their 2011 level.
Two final points. First, the increase in nominal wage growth in the September 2022 quarter – strong though it is – still looks more consistent with the subdued post-2012 relationship between wage growth and labour market slack than with the more robust relationship that applied in the previous period.
Second, the context for this higher wage growth is obviously very different to that which applied when Governor Lowe was hoping for a pickup back in 2017 and 2018. Then, inflation was too low relative to the RBA’s target. Now, it is too high. Moreover, as indicated in the latest Minutes (see the story below), the central bank remains mindful of the risks of a dreaded wage-price spiral.
Even so, the third quarter’s wage numbers alone are unlikely to change the current trajectory of monetary policy in general, and in particular should not be enough to prompt any switch away from an expected 25bp rate hike in December to, for example, a larger 50bp move. The RBA has previously indicated that wage growth at around this rate is consistent with the inflation target, and that it would only be when aggregate wage increases were being sustained at rates of four or five per cent or higher that it would become concerned.
The unemployment rate has fallen back to 3.4 per cent
The October 2022 Labour Force Australia release showed Australia’s unemployment rate falling by 0.1 percentage point to the 3.4 per cent rate it had previously achieved in July this year. The ABS also reported that the underemployment rate fell by 0.1 percentage points to 5.9 per cent, taking the underutilisation rate down to 9.3 per cent, its lowest level since March 1982. (All figures are seasonally adjusted).
Employment rose by 32,200 in October, up 0.2 per cent over the month (seasonally adjusted), with full-time employment up by 47,100 but part-time employment down by 14,900.
Hours worked increased by 43.2 million hours or by 2.3 per cent (seasonally adjusted) over the month, which the ABS said partly reflected fewer employed people than usual taking leave. The number of people working fewer hours because they were sick was around 30 per cent higher than is usual for October, but that is well-down on the situation earlier this year, when the Bureau was reporting that the number of people reporting worker fewer hours due to sickness was two or three times higher than its historical level.
The participation rate was unchanged from September 2022 at 66.5 per cent (a little below its all-time high of 66.7 per cent) while the employment to population ratio rose by 0.1 percentage points to 64.3 per cent (again, just below its own recent record high of 64.4 per cent).
The October 2022 labour market result was stronger than the median market expectation for an unemployment rate unchanged at 3.5 per cent and an increase in employment of just 15,000. With the labour market remaining resilient and measures of slack still at multi-decade lows, there was nothing here likely to dissuade the RBA from delivering another 25bp rate hike at its December meeting.
The RBA minutes: Restating the case for gradualism
The RBA published the Minutes of the 1 November Monetary Policy Meeting of the Reserve Bank Board, at which the central bank had decided to increase the cash rate target by 25bp to 2.85 per cent. The Minutes set out the factors that persuaded the Board that another increase was needed:
- Inflation in Australia ‘remained too high’, and inflation in the September quarter was ‘a little higher’ than the RBA had expected, contributing to a ‘modest upward revision’ to the central bank’s inflation forecasts.
- While global factors were a key driver of high inflation, strong domestic demand relative to the supply response of the Australian economy was also an important contributory factor.
- At the same time, the Australian economy had ‘continued to grow solidly’, the labour market ‘remained very tight’ and wage growth had started to pick up, with further increases expected.
This was sufficient to offset concerns about a deteriorating global economic outlook and uncertainty over the future path for household spending in terms of making the case of another rate increase.
The Minutes also report the discussion as to whether a 25bp or a 50bp increase in the target rate was more appropriate. The case for a larger rate hike rested on:
- The current high rate of inflation and upside risks to future inflation in the near term arising from the labour market, rents and energy shocks and in the medium term from the potential for changes in price- and wage-setting behaviour that could lead to inflation becoming more persistent.
- Given that backdrop, interest rates ‘were still fairly low in a historical context.’
On the case for a 25bp change the Minutes reported:
- The main argument ‘rested largely on the fact that the cash rate had been increased materially in a short period of time and that there were lags in the operation of policy.’ The full impact on household consumption and the housing market had yet to be felt, with the Minutes having previously noted that ‘given the cumulative increase in interest rates prior to the November meeting, scheduled housing mortgage payments as a share of household income were expected to increase to levels not seen since around 2010.’
- Wage growth, although higher, had not risen to levels inconsistent with the inflation target. (Although note that elsewhere the Minutes did comment that: ‘Given the importance of avoiding a price-wage spiral, the Board will continue to pay close attention to both the evolution of the price-setting behaviour of firms and labour costs in the period ahead.’)
- There was evidence of some easing in global supply chain issues along with a softening in commodity prices.
- Increases in policy rates by other central banks were likely to lower global output growth and reduce global inflationary pressures.
- After having moved by 25bp in October, the Board reckoned that ‘acting consistently would support confidence in the monetary policy framework among financial market participants and the community more broadly.’
As we know, the Board decided that the case for 25bp ‘was the stronger one.’ Yet, given the high level of uncertainty regarding the outlook, Martin Place is keeping its options open:
‘Acknowledging the uncertainty, members did not rule out returning to larger increases if the situation warranted. Conversely, the Board is prepared to keep rates unchanged for a period while it assesses the state of the economy and the inflation outlook. Interest rates are not on a pre-set path…The size and timing of future interest rate increases will continue to be determined by the incoming data and the Board’s assessment of the outlook for inflation and the labour market.’
Overall, the combination of a second successive regular-sized 25bp move earlier this month and the reiteration of the message that the RBA is open to keeping ‘rates unchanged for a period’ indicates that the RBA remains comfortable with its October shift to a more gradual approach to monetary policy tightening.
Forward Guidance: Lower funding costs but ‘considerable reputational damage’
This week also brought the publication of the Review of the RBA’s Approach to Forward Guidance Forward guidance refers to a central bank formally communicating the future course of monetary policy. This can take several forms.
- A ‘weak’ form would involve the central bank giving qualitative commentary about the future likely direction or movement in interest rates.
- A ‘stronger’ version would involve it committing to holding interest rates on a specified path until specific macroeconomic objectives or conditions were fulfilled, such as a given range for the inflation or unemployment rate (state-based forward guidance) or promising to hold interest rates on that path for a specified period, either a particular duration or a particular point in time (time- or calendar-based forward guidance).
The idea in both cases is to influence interest rate expectations and hence actual interest rates out along the yield curve in order to alter financial conditions in the economy.
Prior to COVID-19, the RBA typically pursued a version of the weak form of forward guidance, with a focus on explaining (narrating) current conditions. But during the pandemic, when the cash rate target had been lowered to near-zero and conventional monetary policy ammunition exhausted, Martin Place deployed a stronger version, one that combined state-based guidance with a time element and that applied to the medium term. To pick just one example, in July 2021 the RBA had said:
‘[The Board] will not increase the cash rate until actual inflation is sustainably within the two to three per cent target range. The Bank’s central scenario for the economy is that this condition will not be met before 2024. Meeting it will require the labour market to be tight enough to generate wages growth that is materially higher than it is currently.’
Present here is both state-based guidance (actual inflation sustainably within the target range, materially higher wage growth) and a time element that applies to the medium term (this condition will not be met before 2024).
In considering the RBA’s experience during the pandemic, the Review notes that:
- Forward guidance (operating alongside other monetary policy measures including Yield Curve Control (YCC) and the Term Funding Facility (TFF)) was successful in delivering lower funding costs across the economy, helping push them down to historical lows. That in turn supported total credit growth and economic activity.
- The RBA’s communications regarding the conditionality of its forward guidance were not always clear and not well understood. In particular, the ‘time aspect of the Board’s communication came to dominate the messaging, with many people focusing on the time aspect rather than the economic conditions’ in part because ‘It was more straightforward for people to understand and recall a certain time than a set of statements about conditionality.’ In addition, ‘The repetition of ‘2024’ in the Bank’s communication served to create a strong anchor point, which held considerable sway in the public discussion of the Bank’s intention for the timing of the first cash rate increase.’
- The RBA did consider providing more detail around the uncertainties involved in the policy but worried this could undermine its credibility and therefore effectiveness. There is a trade-off between credibility vs the need for flexibility in the face of unanticipated shocks and for nuance in communications. This trade-off becomes more problematic as uncertainty increases.
- In trying to explain what it meant for inflation to be ‘sustainably’ within the target range, the RBA used the outlook for wages as a key indicator. But this ended up confusing many RBA-watchers as they started to infer the presence of an implicit wage target (wage growth of three per cent or more).
- Policy choices around forward guidance were also complicated by the adoption of YCC. For the yield target to remain credible, forward guidance for the cash rate target needed to be consistent with it. That is, time-based forward guidance and YCC turned out to be closely related. (Readers might recall that in its previous review of its YCC experience the RBA concluded that the probability of using a yield target again in the future was low, and would be considered only in extreme circumstances.)
- ‘The fact that many people interpreted the forward guidance as ‘a promise’ that there would be no rate raises until 2024 led to considerable reputational damage to the Bank. When the cash rate was increased in May 2022, many people saw the Bank as having broken ‘its promise. In hindsight, and focusing only on forward guidance, a less specific timeframe, or one covering a shorter horizon, would have been preferable. Given the outlook was highly uncertain, the Board could have given more consideration to potential upside scenarios, including scenarios that could warrant the Board raising the cash rate earlier than anticipated.’
The Review’s judgment, then, is that the ‘Board’s forward guidance on the cash rate helped achieve its policy goals in the early phases of the pandemic.’ But that ‘in seeking to be transparent, it overly complicated the communication, was misinterpreted and the time-based communication ultimately proved incorrect.’
The policy lessons that RBA draws from this experience are that although there are benefits to the policy, ‘given the inherent uncertainty about the economic outlook, there are risks to communicating complicated messages, imposing a high level of conditionality and providing guidance on the likely path of policy rates over a long horizon.’ As a result:
‘Taking on the lessons of recent experience, the Board now favours a less specific approach than that used during the pandemic.’
Still, the Review does emphasise that a strong form of forward guidance remains a potentially valuable part of the monetary policy toolkit, particularly when rates are at or close to the lower bound, and so:
‘The Board has not ruled out using a strong form of forward guidance again.’
If and when it deems that some version of forward guidance would again be appropriate, Martin Place will prefer to revert back to the pre-crisis weak, quantitative version, with a focus on the short term and a ‘narrative’ approach. In circumstances where a stronger version might be appropriate (such as near the zero bound), the RBA will now take into account the lessons it has learned over the pandemic, including the benefits of flexibility and the importance of considering and discussing a range of scenario outcomes.
The RBA also ruled out publishing its own forecasts of the expected path for the cash rate target (in contrast to say the US Federal Reserve’s approach).
What else happened on the Australian data front this week?
After a run of six consecutive falls and a 10.4 per cent cumulative decline since late September, the ANZ-Roy Morgan Index of Consumer Confidence rose 2.7 per cent last week. By subindex, there were gains for ‘future financial conditions’, ‘current economic conditions’ and ‘future economic conditions’ but falls for ‘current financial conditions’ and ‘time to buy a major household item.’ By State, confidence was up in New South Wales and Queensland, down in South Australia and Western Australia, and unchanged in Victoria. Despite last week’s gain, confidence overall remains at its lowest level since the onset of the pandemic and the early 1990s recession.
From the same release, the ANZ-Roy Morgan measure of weekly inflation expectations fell 0.3 percentage points last week to a still-high 6.5 per cent.
The ABS said that in September 2022 overseas arrivals rose by 43,820 trips to 1,071,520, while overseas departures rose by 98,340 trips to 1,040,550. At 1.07 million, arrivals were well up on the 0.27 million recorded in January this year. But they are still considerably lower than the 1.75 million arrivals recorded in September 2019, before the pandemic. That difference mainly reflects a marked drop in the number of short-term overseas visitor arrivals, from almost 695,000 in September 2019 to less than 372,000 in September 2022.
ABS analysis of COVID-19 Mortality statistics. According to the Bureau, although ‘almost all COVID-related deaths (99 per cent) in the first year of the pandemic had COVID-19 recorded as the underlying cause, this had fallen to 72 per cent by August 2022. Nearly 80 per cent of deaths from COVID-19 have occurred during the Omicron wave.’
New ABS estimates of multifactor productivity for 16 market sector industries.
Listen to the latest episode on The Dismal Science podcast.
Other things to note . . .
- A useful guide to ABS statistics on earnings.
- Two pieces from Peter Martin, one in defence of RBA Governor Philip Lowe and one on how the government could choose to tackle higher energy prices – persuade suppliers to deliver enough gas to lower domestic prices or impose a temporary excess profits tax.
- In the AFR, Geoff Raby reckons that this week’s meeting between Prime Minister Anthony Albanese and China’s President Xi Jinping has changed the tone of the Australia-China relationship. And on the Lowy Interpreter, Melissa Conley Tyler argues that the meeting marked a return to diplomacy as a way of managing bilateral differences.
- ANZ Bluenotes explains why different measures of Australian wage growth tell different stories.
- The Staff Concluding Statement from the IMF’s 2022 Article IV Mission to Australia. According to the Fund’s baseline scenario, ‘Australia is expected to steer clear of a recession, but with significant downside risks.’ Those risks include a deeper slowdown in China and other major trading partners, higher and more persistent inflation leading to a more aggressive monetary policy response, uncertainties around the intensity of the monetary policy transmission mechanism, and the possibility of an acceleration in the fall in house prices. The IMF also thinks that fiscal and monetary policy should both be tightened from here, and that tax reform should be used to improve economic efficiency and lift public revenue, in part by adopting longstanding recommendations including ‘broadening the goods and services tax (GST) base to limit exemptions for healthcare spending, and restricting the capital gains tax exemption for the sale of main residences’. The IMF calls for more structural reform to tackle slow productivity growth and increase economic inclusion and advocates ‘strong policy actions’ to meet the government’s upgraded climate change targets.
- An updated Public Debt Interest (PDI) calculator from the Parliamentary Budget Office.
- The IMF G-20 Surveillance report prepared for the Bali Summit. According to the Fund, the global economy is weakening due to multiple shocks, even as inflation remains elevated. Despite some recent softening in commodity prices, energy concerns have become acute in some economies, particularly in Europe. High food prices have prompted a cost of living crisis. And tighter global financial conditions have highlighted debt vulnerabilities.
- Also from the IMF, this Working Paper reviews the historical data on wage-price spirals. Defining a wage-price spiral as an episode where at least three out of four successive quarters saw accelerating consumer prices and nominal wages, the authors identify 79 episodes in a database covering advanced economies back to the 1960s. They find that ‘the great majority of the episodes identified in this manner are not followed by a sustained acceleration in wages and prices, with only a few exceptions. Instead, inflation and nominal wage growth tended to stabilize in the following quarters, leaving wage growth broadly unchanged…Wage-price spiralling dynamics appear to have short lives.’ They also find that sustained wage-price acceleration is even harder to find if they only consider episodes similar to current conditions, where real wages have significantly fallen. ‘In those cases, nominal wages tended to catch up to inflation to partially recover real wage losses, and growth rates tended to stabilise at a higher level…This mechanism did not appear to lead to…a wage-price spiral.’
- Noah Smith pushes back against the idea that we are in a polycrisis. First, he says, it’s not clear that all the crises and shocks currently hitting the world economy are closely connected. And second, the global economic and political systems have buffer mechanisms in place that can help mitigate and offset them.
- An FT Big Read on cracks in the US Treasury Market. The Fall 2022 issue of the Journal of Economic Perspectives includes one symposium on labour market institutions and another on the size of government debt.
- The Economist magazine says the world is learning to break the link between economic growth and higher carbon emissions.
- Do international environmental agreements lead to pollution leakage?
- On the geography of job tasks.
- William Janeway on the rise and fall of the socially beneficial corporation through the prism of R&D and innovation.
- The market failure approach to executive pay.
- Democracy by lottery for the United States? A case for abolishing elections and replacing them with sortition.
- This new NBER paper attempts to model the future of global economic power.
- From Rudolf Hilferding to NFTs: the rise of influencer capital.
- The Australia in the world podcast looks back over the Chinese Communist Party’s 20th Party Congress, the Biden Administration’s introduction of new controls on exports of advanced technologies to China, and the Japanese PM’s visit to Australia.
Already a member?
Login to view this content