Wages Growth

Australian labour market conditions continue to weaken – Oct 2016

There are, unfortunately, several concerning trends coming out of the October 2016 labour market report. Employment on a National level is declining, annual full-time (FT) employment is declining, part-time (PT) employment growth is slowing and the size of the labour force is declining as a result of falling participation. On the surface it looks like the falling number of unemployed persons is a bright spot in the report. That would be great if it was so, but falling participation is likely masking a higher number of unemployed persons. We don’t know the exact reasons why people are leaving the labour force, but I’m more likely to take a negative view of this outcome due to the number of declining employed persons. The implications of a weak labour market for private sector growth and budget outcomes is important. Slowing private sector credit growth, rising mortgage interest rates and a weak labour market is a combination that doesn’t bode well for private sector growth in Australia.

As always, I use trend data to analyse the labour force. The data points will move around from month to month, but it’s the broader trends that are important to focus on.

Annual growth in employed persons has slowed from +290k in Oct 2015 to +108k in Oct 2016

What a difference a year makes.

The chart below shows how employment growth has been distributed over the last 36 months. The most negative change has occurred over the last 12 months (if you add the monthly change for each of the last 12 months, you’ll get the annual change in employed persons of +108k).

The monthly growth in employed persons has slowed from a peak of +33k in Sept 2015 to National employment declining by -1k persons in the latest month.

Source: ABS

There are two important points about this chart.

Firstly, even though employment growth is declining, it is declining slower than the labour force. This means that, despite the point that employment is declining, the total number of unemployed persons is also declining. This is the labour market situation in a nutshell at the moment. Rather than be counted as ‘unemployed’, people are leaving the labour market and participation is falling. Declining unemployment isn’t a clear sign of an improving labour market when both employment and labour force participation are also declining.

There is a second important point. Declining National employment, even on a monthly basis, is a relatively rare event. Below is the monthly change in total employed persons going back to 1979 – there are only seven (7) periods where National employment declined on a monthly basis:-

Source: ABS

Since 1979, the periods when the monthly change in employed persons was negative were – 81/82, 90/91, 2000, 2003, 2008, 2013 and now. While only two of these periods were officially ‘recessions’, it easy to link each of these periods back some more general economic weakness. The most recent period of ‘weakness’ during 2012/13 (ToT falls/end of mining investment phase, GFC fiscal stimulus was wearing out and the impact of the European sovereign debt crisis), prompted the RBA to cut rates twelve (12) times, or 325bps, between Nov 2011 and Aug 2016. This helped indebted households as well as residential construction and the real estate market. We no longer have twelve rate cuts available to deal with any economic weakness.

Clearly, this current episode of declining employment is not anywhere near the severity of previous periods. But the direction remains concerning.

It would be easy to argue that this is a ‘one month’ data point and is more likely to result in revision in the following month due to the nature of the trend data. But you can break down this National employment trend to FT and PT trends and further still, down to state trends, to see that this is not a recent phenomenon. Some of the larger states have recorded declining employment well before the most recent month – NSW since August 2016, QLD since Jan 2016 and WA since Apr 2016. Employment growth in ACT has just started to dip into negative territory.

The number of FT employed persons declined by 50k over the last year

This is a disturbing part of this current labour market situation – the persistent decline in FT employed persons throughout 2016. This has been the driver behind the decline in overall employment.

Source: ABS

Growth in FT employed persons has been slowing since Sept 2015, turned negative in Jan 2016 and has stayed negative since. Until Sept 2016, the decline in FT employed persons was at least off-set by the growth in PT employed persons. The growth in PT employed persons peaked back in May 2016. Since then, growth in PT employed persons has been slowing such that the decline in FT employment equalled and exceeded any PT employment growth in the last two months. If there is a glimmer of hope, its that the cycle of decline in FT employed persons may have peaked in Sept looking at the chart above.

The state data shows how widespread the decline in FT employed persons has been. On an annual basis, only VIC, SA and ACT have seen any growth in FT employment. But in the latest quarter, the state picture worsens – only SA recorded any FT employment growth:-

Source: ABS

Australia is becoming increasingly reliant on part-time employment. Of total employed persons, 32% are PT employed – this is the highest proportion of PT workers in the data history. The underemployment rate has reached a new high in the August 16 quarter of 8.6%, highlighting that an increasing proportion of the labour force are available for and want more hours of work. It’s a telling point that suggests the shift to PT is not entirely by choice.

Unemployment is declining…but so is labour force participation

In the latest month, total unemployed persons declined by a further 4.15k persons. In the last 12 months, the total number of unemployed persons declined by -45k persons.

Source: ABS

This should be a great highlight of the labour force data – the falling number of unemployed persons. But we are in a situation where employment is declining at a slower rate than the labour force. Going back to the first chart in this post highlights this relationship:-

Source: ABS

The difference between the blue line (employment) for Oct 16 (-1.05k) and the orange line (total labour force) for Oct 16 (-5.2k) equals the monthly change in unemployed persons of -4.15k. As mentioned, this declining unemployment isn’t a clear/consistent sign of an improving labour market when both employment and labour force participation are also declining.

Labour force participation falls to 64.5% – almost back to where it was ten years ago

The other way to measure the changes in the labour force is to estimate what population growth adds to the labour force plus changes in participation. This perspective highlights the severity of the current round of declines in the labour force participation:-

Source: ABS, The Macroeconomic Project

As mentioned in previous posts, its best to ignore the two most recent estimates for underlying population growth – they are always low for the most recent months.

In the last year, I’ve estimated that underlying population growth has added approx. 185k persons to the labour force and the decline in participation has resulted in -122k persons leaving the labour force. This equals the annual growth in the labour force of +63k persons. On a monthly basis, the labour force size has been declining for the last 3 months – driven by declines in participation.

As of Oct 2016, the labour force participation rate is 64.5% – almost back to where it was ten years ago. Since Dec 2015, participation has declined sharply and I estimate this resulted in -125k persons leaving the labour force since then. This has been driven by both male and female workers leaving the labour force, but mostly males (-78k males left the labour force over the last year).

Source: ABS

The decline in participation is potentially masking the real rate of unemployment. If over the last year, participation had remained constant, and employment had continued to fall, it would mean that our unemployment rate could have been as high as 6.5% – not the 5.6% that is quoted. The important point here though is that we don’t know exactly WHY people are leaving the labour force. I’ve previously looked at the decomposition of participation declines by age and gender and by state to at least understand whether we are seeing ‘boomers’ retiring from the labour force or if there was a geographic element to the trends. It will be worthwhile revisiting this analysis once updated data is available.

Looking at the state distribution of participation rate changes shows that the bigger changes in participation have occurred in key mining states such as WA and QLD, but participation is down in all states except VIC on an annual basis:-

Source: ABS

Part of the reason for the fall in participation in WA & QLD is likely to be the result of workers transitioning to other states or jobs as the more labour-intensive investment phase of the mining boom continues to wind down. The latest quarter data suggests some improvement with participation higher in VIC, TAS & NT.

Hours worked confirms the FT and PT employment growth

Hours worked continued to grow for PT employed persons and continued to fall for FT employed persons:-

Source: ABS

The trend in hours worked still looks lacklustre. Even though there is growth in PT employed persons, the growth in PT hours worked is only just above the longer term average. The year on year change (decline) in FT hours worked is well below the longer term average growth in FT hours worked.

Implications

The implications on spending and taxation are large.

We are a few weeks away from understanding the impact of the weakening labour market on tax receipts at the MYEFO. We are well into the first half of the 2016/17 budget year and wages are growing below growth assumptions, participation was forecast to remain at 65% – it’s now fallen to 64.5% and employment was forecast to grow at 1.75% and so far, on a seasonally adjusted basis, employment has fallen by -0.21%. It’s going to take quite a shift in activity to see these trends reverse and accelerate higher by the end of the financial year.

The household budget/income seems vulnerable right now:-

  • Employment has started declining
  • The ongoing shift from FT to PT employment will likely result in lower household income
  • Continued slowing wage growth, where real wages are not increasing fast enough (on aggregate) to sustain the same level of disposable income

The other important source of spending growth in the economy is credit – and private sector credit (driven by business) is not accelerating. This suggests lower private sector growth and employment growth in the near term.

None of this would be a problem, except that we are more indebted than ever before – and we are now also looking down the barrel of rising interest rates. Rising mortgage interest rates will impact those households with variable rate mortgages. If deposit rates also rise, then it will help those with some interest income.

Wage growth in Australia keeps slowing – Sept 2016

The Wage Price Index data for the Sept 2016 quarter shows that wage growth in Australia has yet again slowed to its lowest level since the data was first collected.

The annual nominal growth in total hourly rates of pay excluding bonuses (seas adj) for the year to Sept 2016 was +1.88%. Growth in the latest quarter was +0.4%. This includes both public and private sector hourly rates of pay. The public sector wage price index is growing at a faster rate than that of the private sector, but is clearly also slowing:-

Source: ABS

In real terms, the change in the Wage Price Index is much lower and is barely positive. Annual growth is +0.14% and the latest quarter growth is +0.05%:-

Source: ABS (deflated using trimmed mean CPI)

Since late 2012, the wage price index in real terms, has been flat – growth in hourly rates of pay have (barely) kept pace with growth in core CPI.

Source: ABS

This most likely means that disposable income has not kept pace with CPI growth. For disposable income to remain constant in real terms, wages growth must actually exceed CPI in order to account for the impact of taxation. The chart above clearly shows that real total hourly rates of pay have been flat since the end of 2012.

The slight uptick that is obvious from June 2015 is the result of core CPI falling, rather than wage growth picking up.

Implications for growth

Putting this into context of where spending growth will come from (debt and/or income), highlights that we might expect private sector demand growth to come under pressure in the near term.

Wage growth is just barely ahead of core CPI and most likely, disposable income has been falling (slightly) over the last few years. There has been “relief” for those managing a mortgage because variable rates have gone down. But on the flip side, low rates have hurt those relying on interest income. Globally, interest rates have started rising and, if this continues, this will place greater pressure on spending by indebted households where disposable income/wage growth has not kept pace with inflation.

The other important source of spending growth, credit creation, has recently started showing clear signs of deceleration. This is an early warning sign that private sector growth in Australia may slow further. Read more about the credit impulse in Australia – Sept 2016.

Growth may be increasingly reliant on increases in government spending. At the same time, government borrowing rates have already started rising. The other issue for the government is the ongoing slow-down of wages growth and what it means for the budget. The 2016/17 budget assumptions had the wage price index growth accelerating to 2.5%. We end the first quarter of the financial year well below that assumption.

Growth in wages & consumer prices still low

The latest data on consumer prices and wages for the March 2015 quarter highlights that price pressures across the economy continue to abate. Headline CPI growth for the March quarter, and for the year to March 2015, was very low, mostly as a result of the large fall in fuel prices over the previous two quarters. Adjusted for outliers, the measures of core or underlying price changes have remained fairly stable and are just below the middle of RBA 2-3% target range. Over the last few years, CPI growth has been trending down and this latest CPI data is in line with that trend – still reflecting softer demand conditions. Wage price growth confirms that weaker demand for labour still exists despite some recent indications that there has been a pick-up in the labour market.

In the past I’ve argued that slower CPI growth was one piece of a bigger picture showing that the Australian economy has been growing too slowly as it transitions away from the investment phase of the mining boom. While some argue that economic growth is reasonable at current levels, unemployment and underemployment have continued to grow and income growth has stalled as a result of significant falls in the Terms of Trade (ToT). Hampering the transition for the non-mining sector, has been a persistently high AUD despite the falls in the ToT.

Across a range of indicators there isn’t much evidence of inflationary pressure in consumer prices the economy, although there is some risk that further falls in the AUD will result in higher imported inflation.

Underlying CPI growth remains in the middle of the RBA range and is stable

The headline measure of CPI for the quarter grew by a mere 0.3% and by +1.33% over the year (seasonally adjusted). That’s a very low level of CPI growth and sits well outside of the RBA’s 2-3% band. But the large outlier in that data is the fall in fuel prices over the last two quarters.

Source: ABS

The trimmed mean and weighted median, which are the preferred measures of core or underlying price growth trends, removes these types of outliers. The chart below reveals that while headline CPI growth has slowed considerably, both measures of core CPI sit well within the RBA band, ticking up slightly in the latest quarter:-

Source: ABS

Annual growth of the weighted median is now +2.43% and the trimmed mean is a little lower at +2.32% – the trimmed mean is the preferred measure of the RBA.

On a category basis, we can start to get an idea of the outliers driving this much lower headline figure:-

Source: ABS

Over the last two quarters in particular, petrol has had the single largest negative impact on headline CPI. Falling fuel prices have helped to offset growth in prices across a range of categories. Fuel is also a production input.

Unfortunately, continued declines in fuel prices are not going to last. According to official data collected by the Australian Institute of Petroleum for the week ending the 3rd May 2015, the benchmark price for fuel in Australia (Singapore prices for 95 Octane petrol) has increased by approx. 20% since it bottomed in late January/early February 2015. This will likely show up in the next quarter CPI – reducing the stimulatory impact on both households and businesses.

Growth in Education in the latest quarter is largely the result of seasonal factors (start of the new school year).

Housing (mostly the purchase of new dwellings) continues to contribute to price pressure throughout the domestic economy. Of all the categories that make up the CPI, the purchase of new houses by owner occupiers has made the largest contribution to growth in the CPI in the last year of +0.64% points of the 1.4% point increase.

Strangely enough, the only categories that didn’t contribute to price growth over the last couple of quarters were those with some exposure to the recent falls in the AUD – Communication, Furnishings & Household Equipment and Clothing and Footwear all have high imported content. Some more on this shortly.

An insightful view of the drivers of price pressures in the economy is that of tradable versus non-tradable categories. This helps to isolate the price changes in the domestic economy (“non-tradables”) from those impacted by global exchange (“tradables”). Changes in non-tradable CPI is thought to reflect changes in the domestic economy such as labour costs and productivity.

Non-tradables continue to be the main contributor to CPI growth

During the investment phase of the mining boom, higher demand for labour and other productive inputs placed greater pressure on prices in the domestic economy (“non-tradables”). As we transition to the production phase, non-tradables continues to be the main contributor to CPI growth but domestic price pressures are now well below the decade long average, picking up somewhat in the latest quarter:-


Source: ABS

More than half of the domestic price growth in non-tradables over the last year is coming from a concentrated core of four categories – these are: Purchase of New Housing by Owner Occupiers, Medical and Hospital Services, Rents and Domestic Holiday and Travel.

The growth in non-tradable CPI is likely to have more to do with the ongoing rise in house prices (new home sales in this case), fuelled by none other than lower interest rates.

Separating out price changes for goods versus services is also a good way to ascertain the role that labour might be playing in driving consumer prices (services contain a higher labour cost component). Historically, prices within the Services component of CPI have grown at a faster rate than Goods, but that trend has shifted over the last three years:-


Source: ABS

Looking at the change in prices for market goods and services ex volatile items, growth in Services prices has slowed, especially over the last year, and at the same time growth in Goods CPI has increased. Both are now growing at the same rate annually, around 2%. This suggests far less pressure from labour/wage growth within the economy.

Growth in wages remains at record lows

Last week the ABS released the Wage Price Index data for March 2015 and this confirmed that wage growth continues to slow down. Wages are growing at the slowest rate since data collection on this series commenced. If you use core CPI to deflate the series, then real wages are not growing at all.

Source: ABS

The slowing wage growth data confirms that tight labour market conditions are not driving domestic price growth.

The latest slowdown in the growth of wages is widespread across industries. Only a handful of industry sectors recorded either no growth or an increase in the annual rate of wages growth between December and March quarters. These were: Info media & telecoms (0% pt change), ‘Other services’ (+0.07% pt change) and Mining and Retail Trade wage growth declined only slightly by 0.1% points.

In a speech earlier this week, Deputy RBA Governor, Philip Lowe stated that “restraint in aggregate wage growth” will assist in the transition of the economy as mining investment declines and we look to non-mining activity to fill the void. Restraint in wage growth may be required, but current low growth is the result of the relatively high levels of unemployment and underemployment that currently exists in the labour market – in other words, less demand for labour. The RBA is focused on doing what it can to support business via lower wage growth, a lower dollar and lower interest rates in the hope that this will lead to higher employment growth. As the economy is experiencing, these measure take time to embed. That said, there have been some encouraging signs of improvements in the labour market. Mostly, there has been improving levels of male participation and, for the first time in a few years, there have been consecutive months of a slight reduction in the total number of unemployed persons. These have been welcome improvements, but they have been moderate at best. There still remains significant excess capacity in the labour market, which is why wages growth continues to slow. If this improvement in key labour market metrics continues and accelerates, we may start to see growth in wages, but only once some of this excess capacity is reduced.

While lower growth in wages may help to improve the competitiveness of local business, in the short term it could also limit consumption growth and borrowing capacity.

In the past, lower growth in wages could easily be ‘supplemented’ with a dose of debt-driven consumption via lower interest rates. Forces are combining to place pressure on this model working as successfully as it did in the past – interest rates are already low, household debt is already high both as a % of GDP or as a % of income, wages growth is low and importantly, concerns about unemployment are at high levels. The recent NAB Quarterly Consumer Anxiety Index for March 2015 shows that consumer spending intentions in the face of these challenges are focused on non-discretionary items.

Source: NAB

Increases in intentions to pay off debt and to save/add to Super and investments highlights a more conservative approach to spending and consumption. Yet at the same time, intentions between the last two quarters have also increased for ‘use of credit’. This suggests some pressure already on the household budget – especially given the obviously low, and falling, level of spending intentions in the more discretionary areas (eating out, entertainment, personal goods etc.). While these pared back intentions are likely to keep a lid on consumption growth, a reasonably favourable Federal budget seems like it could boost confidence.

“It is, however, unlikely to be in Australia’s long-term interests to engineer a consumption boom by encouraging people to borrow large amounts against future income. This is especially so when debt levels are already high and prospects for future income growth are not as positive as they once were”, Deputy RBA Governor, Philip Lowe, 18 May 2015, Managing Two Transitions

Despite falls in the AUD, tradable CPI growth remains low even after adjusting for fuel

Since the start of the decline in the ToT (during the Dec 2011 quarter) the AUD has remained persistently high. The RBA has continually tried to talk down the AUD, claiming that it was overvalued given the large falls in the ToT and commodity prices. The AUD peaked back in mid-2011 and remained elevated for some time (above parity with the USD). The most substantial falls have occurred during two periods 1) early-mid 2013 and 2) Aug 14 to Mar 15. Since its peak, the AUD has fallen by 30% against the USD and is currently trading at around US79c – the RBA wants the AUD lower, closer to US70c in order to provide support for non-mining export and local importing competing industries.

“The Australian dollar has declined noticeably against a rising US dollar over the past year, though less so against a basket of currencies. Further depreciation seems both likely and necessary, particularly given the significant declines in key commodity prices. “RBA Governor, Glenn Stevens, May 2015 Statement on Monetary Policy Decision


Source: RBA

On a trade weighted basis, the AUD has fallen by approx. 20% and the AUD trade-weighted exchange rate index, adjusted for relative consumer price levels has fallen by approx. 15%.

From a prices perspective, the theory goes that as the currency falls, import prices rise. The surprising thing is that there has been less negative impact on tradables than expected, given the declines in the AUD so far. According to the Westpac 2015/16 Budget Report (page 12), import prices are not as heavily weighted to the USD as our exports. According to Westpac, approx. 70% of our exports are denominated in USD.

Several trade exposed categories have in fact experienced ongoing deflation i.e. technology products. Upon closer inspection, there is some evidence that imported inflation has been picking up.

In March 2015, annual CPI increased by 1.4% points over the year prior. This increase was made up of non-tradables contributing 1.77% points to that increase and tradables contributing -0.37%points to that increase. As mentioned, the decline in contribution of tradables over the last two quarters has been driven by lower fuel prices.

Source: ABS

Even adjusting for the decline in fuel over the last 2 quarters, tradables would continue to make a smaller, albeit positive, contribution to overall CPI growth. The contribution of automotive fuel to the total CPI has been quite stable over the last several years (prior to the recent fall in oil prices), so the average back to June 2011 is fairly representative. Using this average in place of the actual index for fuel over the last two quarters shows that tradable CPI would still be making a smaller and slowing contribution to overall CPI growth.

Going back to the examples of consumer durables with high imported content – motor vehicles, furniture & furnishings, clothing & footwear and audio, visual & computing equipment, the view of the RBA is –

“for much of the past five years or so the pace of deflation for these items had been more than expected given movements in the exchange rate, partly as a result of a reduction of margins along the supply chain“, Source: RBA Statement on Monetary Policy, May 2015 .

Work completed by the RBA on retailer margins (RBA Statement on Monetary Policy – Recent Developments in Retail Prices and Margins, February 2014) suggested that retailer margins had not been decreasing and instead retailers had more success in negotiating lower prices via wholesalers, bypassing wholesalers altogether within the supply chain and/or sourcing cheaper alternatives globally. Pressure not to pass on higher import prices to consumers is also the result of softer trading conditions domestically. There is evidence to suggest that local firms have taken advantage of improvements in technology and global wage disparities to source and deliver cheaper products, even in the face of a falling AUD. For example, retailers such as Target, K-mart or H&M can import ladies t-shirts manufactured in Bangladesh, retail them in Australia for $5 a unit and make a profit – rather than source them locally.

Looking at the Import Price Index, there is clearly some price pressure within these categories as a result of the recent fall in the AUD. The point is that some of the price pressure from a lower AUD doesn’t show up in the CPI – which doesn’t mean it isn’t there. In the latest quarter, Fuel was the off-setting factor, but most other categories, especially the larger categories by weight/import volume, saw increases in import prices. In fact, the two largest categories by weight in the index – Misc. Manufactured Articles and Machinery & Transport Equip made the largest contribution to the overall increase in import prices in the latest quarter:-

Source: ABS

The price index for Machinery and Transport Equipment, which accounts for over 40% of the import price index by weight, jumped by 5% in the latest quarter. This category is made up specialised machinery for industry, power generating machinery, telecoms, road vehicles (including air cushion vehicles), electrical machinery and other transport equipment. The correlation between the change in import price and the change in the AUD is strong at -0.89. This is how the relationship has been trending:-

Source: ABS

The other significant contributor is Misc. Manufactured Articles, which accounts for approx. 14% of the import price index by weight. This price index increased by 5.4% in the latest quarter. As the name suggests, this category includes misc. articles such as Furniture, Clothing, Footwear, Prefab Buildings and Structures, Professional, Scientific and Controlling Instruments and Photographic and Optical Goods, among other things. Again, the correlation between changes in the AUD trade weighted exchange rate and import prices for Misc. Manufactured Articles is strong at -0.91.

Source: ABS

For the moment, the AUD remains at around US79c, which will keep further import price increases low for now. But it also might take some time for the effect of recent falls in the AUD to make their way to consumers via higher prices as supply agreements are renegotiated etc.

Inflation expectations remain low compared to historical averages

On balance, inflation expectations have been trending down and remain below historical averages. This reflects expected lower wage growth, excess capacity in the economy and lower economic growth. This is likely to keep expectations for future interest rates low.

Source: RBA

As we transition from mining investment boom to the production phase, growth has slowed and this has resulted in excess capacity across the broader economy. Lower CPI growth and higher unemployment reflect these relatively weaker conditions. Is growth likely to improve? The economy has received several boosts recently – a significant, and somewhat unexpected drop in fuel prices (which is now reversing), a fall in utility pricing related to dropping the carbon tax, a decline in the AUD and two further interest rate cuts so far in 2015. It would be difficult to argue that these have not had some positive effect on various parts of the economy – house prices aside. The economy certainly hasn’t fallen into a heap, but despite these measures, the outlook remains soft. How much powder do we really have left should things worsen from here?

  • Employment, demand and confidence are already soft – a worsening in any of these elements could hit a tipping point.
  • The Government deficit is already high and any requirements for a solid stimulus spend might see the AAA rating removed.
  • Household debt is already high and with wage growth slowing, there is less capacity for households to take on more debt to stimulate the economy.
  • To that end, interest rates are also low and seem to be losing their ability to generate a productive investment response outside of housing speculation. But interest rate cuts are good for households strapped by mortgage repayments.

The one area of potential is business. Debt levels remain well below historical levels, so there is capacity to take on debt to invest. The federal budget was certainly favourable to small business – at least in encouraging small business to go out and buy (on credit) equipment to write-off immediately. There may be a good sugar high from that. The effect of falls in the AUD on local competitiveness will likely take some time to manifest. Fingers crossed business decide now is the time to ‘have a go’.

 

Wages & Employment – A weak backdrop for future growth

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.

Source: ABS

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:-

Source: ABS

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.

Source: ABS

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.

Source: ABS

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.

Source: ABS

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.

Source: ABS

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.

Source: ABS

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.