Data released last week showed that wages growth continues to slow in Australia. To be clear, wages are still growing, but at a slower pace, the slowest pace in fact since the ABS started to compile this data back in 1997. At a practical level, a “slow-down in growth” is potentially a subtle signal to pick up on. How much do households really notice a “slow-down” in growth? We are now into the fourth year of slowing wages growth and the trend data suggests more of the same. Add to that historically weak employment growth and growing consumer prices. The more sobering perspective is that on a CPI adjusted basis, real wages have declined over the last two quarters. That starts to become ‘noticeable’. On an industry level, slowing wages growth is affecting the highest paid (AWE’s) industries such as Mining and Professional, Scientific & Tech Services. As employment levels in these industries fall (as mining investment slows), then a large source of income and consumption growth is likely to start to diminish.
Since the downturn in 2009, annual growth in wages has continued to slow and growth is now at its lowest/slowest point since the series was started back in 1997. Unfortunately, there isn’t more data available in this particular series to analyse wage growth during specific downturns, such as in the early 80’s and 90’s.
From 2000 until 2005/6, wages growth accelerated in Australia. Part of this was related to growth in mining wages, but actually, all industries experienced a similar trend of increasing wages growth, especially the Public sector. The GFC hit Private wage growth harder than Public, but both have slowed consistently since then. The latest quarterly growth data suggests that the slow-down in wages growth stabilised in the last two quarters Dec 13 & Mar 14, but driven by the Public sector. Total Private sector wage growth remains on its lows.
An important factor to consider when thinking about wages growth is the level of growth in consumer prices in the economy. In our case, whilst wages growth has been slowing, consumer prices have been rising:-
On an annual basis, real wages have actually declined for the last two quarters. This essentially means that annual wage growth is not keeping pace with growth in consumer prices. On an annual basis, the CPI is growing at 2.9%, but the latest quarter growth has slowed somewhat. As long as CPI growth continues to abate, the pressure will be off the RBA to review its current interest rate stance.
The slowing wages growth has been exacerbated by (or is a function of?) relatively weak employment growth. The latest data for April ’14 has annual growth in total employed persons at +96k persons. The average over the last ten years is actually +209k growth – we are sitting well below this level of employment growth. As a result, the employment to population ratio has fallen from a high of 62.8% in June 2008 to 60.9% in April 2014. That means a smaller proportion of a bigger population is now employed.
Underlying this data is the fact that the composition of employment has also changed – a shift from FT to PT employment. This has increased from 28.4% (avg) in 2008 to 30.4% (avg) during the first four months of 2014. The proportion of PT employed persons to total employed persons is at its highest point since data was collected. On its own, this continued trend will have an impact on household income, but together with slowing wages growth, makes the situation more concerning.
There is an important inconsistency in the latest employment data at April ’14. Growth in total employed persons for April (v March ’14) was +13k FT and +4k PT persons. What is hard to reconcile about this report is that hours, especially FT hours, have been declining on a monthly and annual basis for at least the last 3 months. Hours are often quoted as the ‘leading’ indicator of future employment change – but employment has actually been improving over the last few months. For the moment this is one inconsistency to keep an eye on.
The chart below shows the slowing growth in hours worked – it’s not dissimilar to the trend in slowing growth in wages, especially since the GFC.
One way to look at the impact of these factors on households is by looking at whether the economy has been able to produce higher living standards. The chart below measures, on a quarterly basis, the annual change in nominal GDP per person deflated using the CPI. It essentially calculates the change in how much every consumer can buy, quarter on quarter.
Source: ABS, The Macroeconomic Project
That ‘change’ has been negative for the five (5) quarters from Sept 12 through to and including Sept 13 – suggesting that on average, consumers have not been able to “buy” more. Part of the improvement during the last quarter Dec 13 is due to the CPI growth abating somewhat.
Wages Growth by Industry
Before looking at wages growth by specific industries, I want to start by looking at the current level of wages by industry. Below is a chart by industry of current Average Weekly Earnings (AWE’s) for full time adults. This snapshot of AWE’s highlights part of the nature of our two speed economy with Mining AWE’s at well over twice the level of that of Total AWE’s.
Whilst Mining has a significantly higher level of AWE’s, it is one of the smaller industry groups as measured by total employment – see chart below.
Despite its relatively smaller total employment, mining has been an important driver for the economy via investment, exports, higher export prices and relatively higher AWE’s. This flowed through to local economies (WA especially) in the form of higher prices and higher profits, helping to boost overall National retail sales, house prices, rental prices etc. This situation is set to come to an end as the more labour intensive investment phase of the mining boom starts to wind down – meaning fewer people employed in Mining and, as the data suggests, growth in Mining wages under pressure.
So what is the situation with wages growth for with the bigger employers in the economy? Our top five industries by employment size are Health Care & Social Assistance, Retail, Construction, Manufacturing and Professional, Scientific and Tech Services – employing over 5m people.
Of these top five industries by employment size, only Professional, Scientific & Tech Services has a level of AWE in excess of the average, whilst AWE’s in Construction is on par with the average of AWE’s for all industries. Whilst we may be able to rebalance investment in a post Mining world, I doubt we’ll be able to ‘rebalance’ the high AWE’s of Mining in the same way.
In terms of the cross over between wages growth and the bigger industries by employment, wages in Construction, Manufacturing and Health Care & Social Assistance are growing faster than the average. This is a good thing, as AWE’s for Health Care & Social Assistance and Manufacturing sits below the average for all industries. This chart below also highlights that growth in wages has slowed quite significantly for our two highest AWE industries – Mining and Professional, Scientific & Tech Services.
Even as late as 2012, wages growth in Mining was as high as +5% – it’s now growing at +2.4% – well below the current annual level of CPI growth of 2.9%. One of the bigger industry employers, and with the second highest level of AWE’s, Professional, Scientific & Tech Services, has also seen a significant slow-down in wages growth over the last two years – from a high of +4.5% during late 2012 to now +1.9% in the latest Mar ’14 quarter – the lowest annual growth of all industry groups in March 14.
In other big industries by employment, such as retail, wages growth has continued to lag behind the growth of all other industries and AWE’s remains well below the AWE’s for all industries. As mentioned, of the bigger employers, Construction, Manufacturing and Health Care & Social Assistance show a slightly more positive trend in wages growth. The main point is that wages growth in the largest industries by employment has been slowing along with the total trend.
Lower wages growth and a relatively soft employment market provides a weak backdrop for sustained growth in consumption, lending and asset prices. There are two sources of spending growth in the economy – income plus the change in debt. In a previous post I argued that growth in new credit or growth in new income (not just growth in debt or income) is required to generate spending growth. If wages growth is slowing in the current economic context, then there will either be continued/greater reliance on growth in new debt to fund spending and consumption growth or, consumption growth will start to slow. Do weakening fundamentals around income and employment make for good bank loan customers? For the moment, lending, especially for investment housing, remains strong. But if the trend in wages and employment continues, then lending, consumption and asset price growth are likely to come under pressure. If that is the case, the RBA may resume its path of interest rate cuts, but if CPI growth remains at the upper end of the band, the RBA may be limited in its policy response.