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Wednesday, February 23, 2011

Wages wrap: Market reaction to wages growth surprise


"Annual growth in wages is now back to 3.9% (it was 3.0% a year earlier) reflecting the pick-up in labour demand over the past year with wages growth the highest since Q1 09 when growth was 4.2% and the peak just above that level of 4.3% in Q4 ’08; public sector wages growth has decelerated this past year, but this has been more than offset by faster private wages growth

At what level does the RBA begin to worry? Current wages growth in Q3 was already above its longer term average and with underlying productivity growth anaemic, one challenge will now be to ensure that the coming spike in CPI from higher food prices does not unduly lift wages by destabilising wage and price expectations.

The RBA is ahead of the game from a policy point of view but today’s report again highlights the importance of the labour market as an important barometer for monetary policy. In this respect, while the Jan NAB Business survey reported that conditions and capacity utilisation took a hit in the month, underlying wages growth continued apace

It would be a stretch to now say that wages growth remains benign.
Wages will remain very much on the policy watch list for the RBA."


"The Q4 wage price index rose a solid 1.0% q/q (mkt 0.9%, UBS 0.8%), after the 4.8% minimum-wage rise induced a 1.1% lift in Q3 (though Q4 may include some impact). Of the 1%pt pick-up in the y/y pace (to 3.9%), we estimate ½%pt is ‘underlying’, and ½%pt is minimum wage – evident by wages moving faster than implied by the falling unemployment rate. The momentum is mostly private (1.0% after 1.2%, 3.8% y/y), while public is relatively steady (0.9% and 4.0% y/y again)...

Meanwhile, wages were stronger than expected, but rising broadly in line with business surveys – i.e. heading up to 4% y/y (see 12/12/10 AEP: "Are you ready for a wages jump?"). Obviously, many will see this as hawkish. The issue is whether ~4% wage growth was a major driver of inflation through 2007-08, or was more due to large tax cuts that drove disposable income growth to its fastest pace in a generation. The RBA has noted in the past that 4%-4½% wages growth is not inconsistent with its inflation objective. Nonetheless, the evident rise in wages growth is consistent with policy needing to be tighter over time (UBS +25bp in August)."


"Following the sharp slowdown through 2009 and early 2010, wages growth has now turned around sharply. The wage price index rose 1.0% in the quarter (mkt +0.9%, RBS +0.9%), lifting annual growth in this key RBA measure of wages from 3.5 to 3.9%, closer to the peak of 4.3% reached in Q4 2008...

The recovery in the labour market has fed quickly into a turnaround in wages. Just as the weakness in employment in late 2008 and the first half of 2009 fed quickly into slower wages growth, the subsequent recovery in the labour market has seen wages growth return to more normal levels. Unemployment is now back down to 5% and leading indicators suggest that it is likely to fall further from here. Moreover, measures of labour shortages are now turning around sharply. The tightening labour market will see wages growth continue to strengthen, with at least some sectors of the market likely to see a further acceleration in wages growth ahead."


"The industry breakdown of annual wages growth (original data) shows the largest rises have occurred in those industries where skilled labour demand has been strongest, including mining, utilities and professional services. Interestingly, growth in manufacturing wages outperformed the aggregate, despite the challenges currently facing this industry, and suggests that firm margins could be threatened. To maintain such wage rises, particularly in sectors currently being negatively affected by the strong AUD (such as manufacturing, but also retail trade and hospitality), productivity will need to improve significantly (as highlighted by RBA Governor Glenn Stevens in his speech this morning)."


"Solid wage gains spread beyond mining. Above-average increases in the WCI were recorded in utilities, wholesale trade, mining, communications, manufacturing, finance and construction (Figure 3). The cross section of increases shows that rising wage costs are not limited to the resources sector.

Wages growth should accelerate further in 2011. Citi had expected an acceleration in wages in a lagged response to the fall in the unemployment rate. The current growth rate of yearly wages is now more in-line with the traditional relationship with labour market performance (Figure 5). As we expect the unemployment rate to fall further over the course of the year, wages growth is likely to continue accelerating."

JP Morgan:

"While not in the 4.0%-4.5% vicinity that we think starts setting off alarm bells at the RBA, further wage gains are likely in 2011, owing to the significant tightening of the labour market over the last 12 months. The labour market added a remarkable 364,000 jobs in 2010 (a record), with the majority being full-time. As labour market conditions tighten further, wages will become a key channel through which inflation will pop. This creates a worrying outlook for unit labour costs given recent softening trends in labour productivity."