Wage growth returns to below four per cent

This week brought two important updates on Australia’s labour market conditions. First up was the September quarter 2024 Wage Price Index (WPI). That showed the pace of annual wage growth dropping back below four per cent to 3.5 per cent, the lowest rate of increase recorded since the December quarter 2022. Then came the October 2024 Labour force report, which revealed the unemployment rate had remained unchanged at 4.1 per cent for a third consecutive month (or for a fifth month on a trend basis) and the underemployment rate had nudged lower to 6.2 per cent from 6.3 per cent in September.

So, what does this tell us about the health of the labour market? The WPI suggests that nominal wage growth is slowing broadly in line with (or even slightly faster than) the RBA’s expectations. According to the November 2024 Statement on Monetary Policy (SMP) which we summarised in last week’s update, the RBA expects annual growth in the WPI to have fallen to 3.4 per cent by the December quarter of this year. The SMP projections then have wage inflation easing further to 3.2 per cent by the December quarter of next year and to 3.1 per cent by the December quarter 2026.

In the past, the RBA has said it will be happy with a ‘steady state’ wage growth of around 3.5 per cent. This assumes that if labour productivity grows at around one per cent (in the decade to 2020 annual productivity growth averaged about 1.1 per cent), then growth in unit labour costs would run at around 2.5 per cent and be consistent with inflation in the middle of the target band. A case of mission accomplished for the labour market, then? Not quite. In the November SMP, the RBA cautioned that if trend productivity growth has now fallen below its previous rate, the sustainable rate of wage growth will likewise be lower. And it is true our recent productivity performance has not been strong. Granted, the Productivity Commission has warned of the limitations of the quarterly productivity data and there also appears to be quite a bit of noise associated with the post-pandemic unwinding of a pandemic-era ‘productivity bubble’. Even so, recent results have disappointed: labour productivity in 2023-24 – measured as real GDP per hour worked – was flat over the year, after having fallen by 3.7 per cent the year before.

Meanwhile, October’s numbers suggest that the balance between demand and supply in the labour market remains tight. At 4.1 per cent the current unemployment rate is 0.6 percentage points above its June 2023 low but is also 1.1 percentage points lower than its pre-pandemic (March 2020) reading of 5.2 per cent. Likewise, at 6.2 per cent, the underemployment rate stands just 0.3 percentage points higher than its February 2023 low of 5.9 per cent, while remaining 2.5 percentage points lower than March 2020’s 8.7 per cent rate. And at 10.4 per cent, the underutilisation rate is just one percentage point higher than its November 2022 low of 9.4 per cent but 3.5 percentage points below its March 2020 rate of 13.9 per cent.

All of which suggests that labour market conditions look tighter than what the RBA would consider to be ‘full employment’ and therefore consistent with a sustainable return of inflation to target. Readers may recall we discussed the RBA and the relationship between ‘full employment’ and inflation after the September 2024 labour market release. We noted then that – while the RBA says it does not rely on any single labour market indicator to gauge the degree of labour market slack – it has also previously said an unemployment rate of 4.1 per cent is below the central bank’s ‘estimates of the rate consistent with full employment’. Previous estimates have suggested this rate is around 4.25 per cent, although the forecasts in the latest SMP suggest the RBA may now think it is closer to 4.5 per cent. Those same SMP projections have the unemployment rate rising to 4.3 per cent across the full December quarter.

Putting this week’s two results together suggests there might be downside risks to the RBA’s wage forecast and to its unemployment rate forecasts. That in turn suggests either that wage growth can slow at a lower unemployment rate than the RBA currently anticipates or that until the labour market loosens further, the RBA will rightly remain concerned about the prospects for additional disinflation. The upcoming data flow will decide which one holds.

Does the unemployment rate still matter for politics?

One last point on labour market matters. In the aftermath of the US presidential election, one popular take on the political economy implications of the results has been that they show that voters care much more about inflation than they do about unemployment. There is an obvious electoral logic here. Unemployment directly affects a relatively small share of the electorate (remember, those unemployment rates here and in the United States that currently have a ‘four’ in front of them are expressed as a share of the labour force, not the population). In contrast, inflation directly impacts everyone with a vote, regardless of whether they are in or out of the labour force.

Economists sometimes measure economic discontent by constructing a so-called ‘Misery Index’ which combines the inflation and unemployment rates. But if the current consensus is right, rather than equal weighting, maybe the weight placed on the inflation rate should be much higher than the one placed on unemployment. (Alternatively, John Burn-Murdoch in the FT suggests that for rich country electorates it might make sense to swap out the unemployment rate altogether and replace it with a net migration rate.) Based on recent developments, there does seem to be something to the argument, although I suspect that the actual relationship between voting preferences and the unemployment rate is likely to be non-linear/context dependent.

We touch on this debate and much more in a Special US Election episode of the Dismal Science podcast. In addition, there is also our regular episode that includes our discussion on Australian economic developments.

As usual, more detail on this week’s data releases below, plus a quick look at the findings of the AICD’s latest Director Sentiment Index and the linkage roundup. Plus one last note: If you would like to see the selected charts that accompany the main data stories below, please click through to the website version of this email.

Wage growth slows to 3.5 per cent in September quarter 2024

Australia’s Wage Price Index (WPI) rose 0.8 per cent over the September quarter 2024 (seasonally adjusted) to be up 3.5 per cent over the year. That was slightly softer than the market consensus, which had anticipated 0.9 per cent quarterly and 3.6 per cent annual growth outcomes. It also broke a run of four consecutive quarters that had seen annual wage growth running at four per cent or above. As well as marking the first sub-four per cent annual wage growth since the June quarter last year, the result was the lowest since the December quarter 2022.

According to the ABS, while a similar share of jobs (45 per cent) recorded a wage change in the September quarter this year as in the September quarter 2023 (46 per cent), the size of the average hourly wage change fell from 5.4 per cent last year to 3.7 per cent this year. 

For all jobs with a wage change during the previous year, the share that saw annual growth of more than four per cent fell to 31 per cent, down from the previous quarter’s 46 per cent peak.

Wage growth in the private sector was 0.8 per cent in quarterly terms, unchanged from the previous quarter, while the annual rate of wage growth fell from 4.1 per cent to 3.5 per cent, the lowest rate since the September quarter 2022. Quarterly wage growth in the public sector slowed from 0.9 per cent in the June quarter to 0.8 per cent this quarter, while annual growth moderated from 3.9 per cent to 3.7 per cent. The annual growth in public sector wages was faster than private sector wage growth for the first time since the December quarter 2020.

The Bureau highlighted the contribution to lower wage growth arising from the decision of this year’s Fair Work Commission (FWC) Annual Wage Review to increase modern award rates by 3.75 per cent. This was scheduled to take effect from 1 July 2024. The size of increase was down significantly from the previous 5.75 per cent award for the September quarter 2023. As a result, the contribution of Awards to quarterly wage growth (original basis) fell from 0.63 percentage points in the September quarter 2023 to 0.36 percentage points in the September quarter 2024. Enterprise Agreements contributed a further 0.46 percentage points (down from 0.66 percentage points), and Individual Arrangements contributed 0.59 percentage points (down from 0.74 percentage points).

The main industry contributor to wage growth this quarter was the Health care and social assistance sector, which contributed 0.24 percentage points to quarterly wage growth. That was twice as much as the second largest contributor, retail trade, at 0.12 percentage points.

With nominal wage growth running at 3.5 per cent and headline CPI inflation having eased to 2.9 per cent on a seasonally adjusted basis (2.8 per cent in original terms), real wage growth was mildly positive last quarter, which means that real wages have now – slightly – risen in annual terms for four consecutive quarters.  That has not been enough to claw back the ground lost during the post-pandemic surge in inflation, however: relative to the March quarter 2020, real wages are still down by nearly 20 per cent.

Unemployment rate holds steady at 4.1 per cent in October

The ABS said that Australia’s seasonally adjusted unemployment rate remained unchanged at 4.1 per cent for a third consecutive month in October 2024. That was in line with the market consensus forecast. The number of unemployed people rose by 800 people or 0.1 per cent over the month. On a trend basis, the unemployment rate has now remained at 4.1 per cent across all five months starting in June 2024.

The seasonally adjusted underemployment rate edged down to 6.2 per cent in October from 6.3 per cent in September, leaving the underutilisation unchanged at 10.4 per cent.

Employment rose by 15,900 people (0.1 per cent) over the month, with full-time employment up by 9,700 and part-time employment increasing by 6,200. In annual terms, employment growth was 2.7 per cent. The market had expected the economy to add 25,000 jobs last month, so this result was markedly weaker than the median forecast. It was also well down on the big jump of more than 61,000 (revised down from 64,000) recorded in September.

The Bureau noted that October’s 0.1 per cent monthly employment growth was the slowest growth rate since March 2024, when employment had fallen by 0.1 per cent. Over the next six months to September this year, employment growth had averaged around 0.3 per cent.

Monthly hours worked in all jobs were up 0.1 per cent over the month – broadly in line with employment growth for a sixth consecutive month – and 2.5 per cent higher over the year.

The participation rate fell back from September’s record 67.2 per cent to a still-elevated 67.1 per cent, while the employment to population ratio remained at its record high of 64.4 per cent.

AICD’s Director Sentiment Index falls more than 14 points 2H 2024

The AICD’s Director Sentiment Index (DSI) fell by more than 14 points to a reading of -33.6 in the second half of this year. That result marks a fifth consecutive negative DSI reading and returns the index to levels last seen during the pandemic (a reading of -37.5 in 2H 2020).

The negative reading reflects directors’ pessimism regarding current economic conditions and the economic outlook (for the first time since the pandemic, more than half (54 per cent) of respondents perceived the economic health of the economy as weak and more than half (51 per cent) also judged the economy would be weak over the coming year). It also reflects a negative assessment of current business conditions (49 per cent viewed them as weak) and future conditions (47 per cent thought they would remain weak over the year ahead). Strikingly, 46 per cent of directors believe Australia will fall into recession within the next year, up from 31 per cent in 1H 2024 DSI. Similarly, domestic economic conditions were ranked by directors as the joint top issue keeping them awake at night, along with cyber-crime and data security.

Also underpinning those negative results, directors selected the top four economic challenges facing Australian business as the cost of living (cited by 43 per cent of respondents), inflation and high interest rates (42 per cent), productivity growth (36 per cent) and labour shortages (29 per cent). They also expressed concerns regarding a series of structural issues. For example, a strong majority of respondents (83 per cent) think there is still a skills shortage in the Australian workforce, that skilled migration levels are failing to keep up with labour demand (66 per cent) and report that their own organisation has been affected by labour market issues (63 per cent). A significant minority (38 per cent) also report that Australia’s housing market has negatively impacted their business. Productivity growth is now ranked as the most important short-term priority (next three years) for the federal government and the third highest long-term priority (next 10 to 20 years), behind climate change and an ageing population.

The 2H 2024 DSI captured the views of more than 1,300 directors. The supporting survey was conducted between 10 and 20 September 2024. That was shortly after the release of the June quarter national accounts numbers, which confirmed that Australia remained mired in a per capita recession. But it was before a run of softer consumer inflation results, including the September quarter 2024 CPI, which largely put to bed the chances of any further rate rise from the RBA and have sparked something of a recovery in consumer sentiment (see below), albeit while still leaving in doubt the likely timing of any rate cut.

What else happened on the Australian data front this week?

The Westpac-Melbourne Institute Consumer Sentiment Index rose 5.3 per cent to 94.6 in November 2024 and is back to levels last seen in the first half of 2022. The index has now risen 14.4 per cent from its mid-year low and is just 5.4 points below the ‘neutral’ 100 level. According to the detail of the survey, consumers are becoming more upbeat about the economic outlook, as the ‘economic conditions next 12 months’ subindex edged into positive territory (at 100.9) which Westpac said marked a positive result for the first time since the Christmas after the COVID-19 pandemic. Likewise, the ‘economic conditions next five years’ subindex also moved into positive territory (to 104.2). Consumers are also feeling better about the future state of their finances, with the ‘family finances next 12 months’ subindex likewise moving back into positive territory after rising to 104.1 from a reading of 99.7 in October. Supporting those improvements, respondents reported feeling more confident about the labour market outlook (the Westpac-Melbourne Institute Unemployment Expectations Index returned to its best result since last April) and about the future trajectory of interest rates (just over 52 per cent said they expected mortgage rates to be unchanged or lower by this time next year). At the same time, however, current financial pressures on household budgets remain high. Even after the ‘family finances vs a year ago’ subindex rose 6.8 per cent this month, at 78.8 it remained deep in pessimistic territory.

Westpac also noted that since the survey was in the field over the week ending 9 November, it captured consumer reactions to both the RBA’s decision to leave the cash rate target unchanged for an eighth consecutive meeting and the US elections. The results show that sentiment was markedly higher at the start of the week, with an average index read of 99.7. This was not affected by the RBA decision and results then posted a sharp fall immediately following the US election result, before staging a tentative recovery towards the end of the week, producing an average index read of 91.1 among those responses gathered between 6 and 9 November.

The ANZ-Roy Morgan Consumer Confidence Index moved up by just 0.2 points to 86.7 points in the week ending 10 November 2024. The index has now been above the 85 mark for four consecutive weeks, while the series four-week average is now at its highest level since January last year. The four-week average of confidence amongst those who own their home outright and those paying off a mortgage reached its highest level since June 2022. ANZ also noted that the ‘time to buy a major household item’ subindex rose 4.9 points to its highest level since January 2023, which the bank said could be linked to the beginning of pre-Black Friday sales events. Meanwhile, weekly inflation expectations rose to 4.9 per cent. 

According to the October 2024 NAB Monthly Business Survey, business conditions last month were unchanged from September, with the Index steady at +7 index points and close to the series average. Across the subindices, trading conditions rose from +12 to +13 index points, profitability was unchanged at +5 index points and employment slipped from +5 to +3 index points. Meanwhile, business confidence rose by a strong seven points to +5 index points, the highest level for that index since early last year. NAB noted that the improved outlook was relatively broad-based, with most industries reporting an improvement - the exceptions were construction and retail. Forward orders rose from -5 to -3 index points, while capex fell from +9 to +8 index points and capacity utilisation fell from 83.1 per cent to a still above average 82.5 per cent. Input cost pressures softened in October as growth in labour costs (at a quarterly rate) eased from 1.9 per cent to 1.4 per cent, growth in purchase costs slowed from 1.3 per cent to 0.9 per cent and the rate of increase in final product prices ticked down from 0.6 per cent to 0.5 per cent. The exception was growth in retail prices, which increased from 0.6 per cent to one per cent.

The ABS said short-term visitor arrivals rose 7.9 per cent over the year to September 2024 to 630,700. Total arrivals were up 8.1 per cent over the year at 1,733,340.

There were also several releases from the ABS last Friday that came after the Weekly Note’s publication deadline:

• The Monthly Business Turnover Index reported a modest 0.2 per cent monthly gain in the 13-industry aggregate (seasonally adjusted) in September 2024, boosted by a 3.7 per cent rise in turnover for the Construction industry due to major civil and commercial project work. Turnover was down 0.1 per cent in annual terms, with an 11.9 per cent year-on-year fall for mining.

• The ABS said Australians’ life expectancy fell for a second consecutive time in 2021-23. Life expectancy at birth for males was 81.1 years (down 0.1 years) and for females was 85.1 years (down 0.2 years), although over the past decade life expectancy has risen by one year for males and 0.8 years for females. A 60-year-old Australian man can currently expect to live another 24.2 years, while a 60-year old woman can expect another 27.1 years. Across the OECD, Australia is ranked joint fourth in terms of life expectancy at birth. Japan holds the top spot, followed by Switzerland.

• According to Education and Work Australia, of people aged between 15 and 74 years at May 2024, 63 per cent had a non-school qualification (that is, a certificate, diploma or degree) while 11 per cent were currently studying for one. Of the former group, 79 per cent were employed while for those without a non-school qualification, 58 per cent were employed.

• Jobs in Australia reported that during 2021-22 there were 22.7 million jobs, up 9.1 per cent on the previous year. The number of employed persons was 3.9 per cent higher over the same period. Median employee income per job (adjusted to put all jobs onto a comparable full-year duration) was $47,780 and unchanged from the previous year. The total number of jobs worked by migrants was 6.2 million and median employee income for temporary visa holders was $45,394.

• Personal income in Australia reported that median personal income was $55,062 in 2021-22, up four per cent over the year. For 80.1 per cent of people, employee income was the main source of income, with median employee income at $58,260. Median superannuation income was $27,266, with only 1.3 per cent of people receiving superannuation income as their main source of income.

Other things to note . . .

Two speeches from the Treasurer this week. The first was a 13 November speech to the Australian Business Economist on Building a new economy on five pillars of productivity. According to his address, the government is ‘building the next generation of productivity growth on five pillars.’ Those five pillars are:

• Creating a more dynamic, competitive and resilient economy. The Treasurer cited a range of measures including the abolition of nuisance tariffs, competition and merger reforms, strengthening and streamlining approvals processes for foreign investment, and plans to revitalise National Competition Policy.
• Building a skilled and adaptable workforce. He listed university reforms, fee-free TAFE and changes to the migration system.
• Harnessing data and the digital economy. This includes expanding the NBN into regional areas, investing in new technologies like quantum computing, expanding the Digital ID and boosting training for tech jobs.
• Investing in net zero transformation, under which he cited the Capacity Investment Scheme, measures to improve energy efficiency, the introduction of a new vehicle efficiency standard and Climate Risk Disclosure reforms.
• Delivering quality care more efficiently, including by reforming the NDIS to improve sustainability, along with measures to provide more aged care in a home setting and building a ‘world-class’ health technology framework.

The Treasurer also announced he was making up to $900 million available to states and territories through a new National Productivity Fund to incentivise the delivery of ‘meaningful and measurable economic reforms.’

• The Treasurer’s second speech was an 11 November address to the Australian Institute of International Affairs (AIIA) on Australian economic and foreign policy in a new world of uncertainty. In his AIIA speech, the Treasurer noted he had commissioned Treasury modelling on different trade and tariff scenarios following the US election and that ‘Treasury’s analysis demonstrated that we should expect a small reduction in our output and additional price pressures, particularly in the short term.’
• Related, in the AFR Heather Smith on the three challenges facing Australia as the US turns inward.
• Also from the AFR, Canberra’s hidden $180 billion spending boom.
• With COP29 currently underway in Baku, the UN’s Emissions Gap Report 2024 looks at how much countries have to reduce emissions in the next round of Nationally Determined Contributions (NDCs) to keep the world on track for a 1.5C temperature increase. It reckons cuts of 42 per cent by 2030 and 57 per cent by 2035 are required. Otherwise, it estimates the world is on track for a temperature increase of between 2.6C and 3.1C this century. Meanwhile, the Adaptation Gap Report 2024 finds that progress in adaptation financing is insufficient to close the gap between needs and flows.
• FT Alphaville presents a handy guide on how to survive a trade war with the United States. (Note that since Australia runs a merchandise (and overall) bilateral trade deficit with the United States, we currently score quite well on the author’s Measure of American Goods Advantage, or MAGA index.)
• Olivier Blanchard reckons that while the outcomes of Trumponomics will likely disappoint its supporters, they are also unlikely to be the disaster that critics warn of…provided the Fed retains its independence.
• The IMF looks at the macroeconomic implications of violent crime in Latin America and the Caribbean. Despite accounting for only eight per cent of the global population, the region accounts for one-third of the world’s homicides.
• The World Bank examines half a century of commodity market synchronisation. It finds that the early years of the current decade stand out because of ‘a unique combination of global demand and supply shocks, alongside commodity specific disruptions’.
• The FT’s Martin Wolf says manufacturing fetishism is destined for failure. (I also liked the opening conceit of this earlier Wolf Column on the UK’s reform challenges that argues that post-GFC Britain can be seen as ‘an unplanned experiment’ with “de-growth” which then reminded us of a key lesson: ‘a stagnant economy is a recipe for general discontent’. De-growth is not a serious policy strategy.)
• Claudio Borio of the BIS considers the future of inflation targeting as a global monetary standard.
• The WSJ introduces Denmark’s giant national AI supercomputer, the combined product of the technology embodied in Nvidia’s chips and funding derived via Novo Nordisk’s Ozempic and Wegovy drug sales.
• What will become the world’s largest building has broken ground in Riyadh, Saudi Arabia. The Mukaab will cost an estimated US$50 billion and be roughly the size of 20 Empire State buildings.
• The Odd Lots podcast explores how the Internet became infested with garbage.
• The Intelligence Squared podcast has two episodes with John Gray on the US election and a world after liberalism (part 1, part 2). (There is also a part 3 but it’s paywalled and I haven’t listened to it.)
• The Conversations with Tyler podcast hosts Neal Stephenson to talk about his new book, history, spycraft and American-Soviet parallels (It’s been some years now since I read it, but Stephenson’s Baroque Cycle is still one of my favourite all-time reads – hmmm, maybe I should dust down the faded copies on my bookcase…).