Are Wages Really Increasing like We’ve Been Told?

If you’ve been checking up on the stock markets or reading any finance news, you’ll be well aware of the declines in the markets recently.

This has some investors worried, some analysts saying ‘I told you so’ regarding a market crash in the near future, and others claiming that this is just a blip or correction and the market will steady itself soon.

So financial news has been quite confusing in recent weeks.

However, there may be some relief on the way. No, I’m not talking about the markets, but rather for your bank account.

Population growth is booming — find out how you can make the most of a massive global infrastructure rush in this free report. Get access now.

Wages are on the rise, but will it last?

Just this week it was released that wages grew by 2.3% in the year to September. This is the fastest wage growth in Australia in three years. But you’d be correct in thinking that that’s not a lot. There’s still a way to go until Australians really feel the impact of an increase in income.

In the last quarter wages increased by just 0.6%.

According to the ABC, wage increase could also be propped up by the 3.5% increase to minimum wage, and public sector growth was higher than the private sector, 2.5% and 2.1% respectively. So we’re not looking at this through rose-coloured glasses.

According to ABS chief economist Bruce Hockman, an improved labour market is to blame for the rise, stating:

There was a higher rate of wage growth recorded across the majority of industries in comparison to this time last year, reflecting the influence of improved labour market conditions.’

So while it wasn’t a large increase, it could tell us a lot about what’s to come in the future.

Bonuses might be the key to keeping workers in the private sector. While wages were up 2.1%, add in bonuses and they were actually up 2.8% in the private sector.

What the economists are saying…

CBA’s Gareth Aird supports this idea, claiming ‘[t]he data suggest that the use of bonuses, possibly to retain staff as the labour market tightens, may be more prevalent’.

Wage growth may have increased year-on-year, but as the economists run their eyes over the data, wage increases in the future will rely on a tight labour market.

Currently, the job market is slack. With the private sector far behind the public sector over the past five years.

Callam Pickering, Asia-Pacific economist with the global job site Indeed doesn’t see wages increasing dramatically in the current labour market, stating:

The underutilisation rate [the combination of the jobless rate and workers looking for more hours], which is highly correlated to wage growth, remains above 13 per cent.

It is unlikely that wage growth will exceed 3 per cent until the underutilisation rate tumbles below 11 per cent.’

Tom Kennedy, senior Global Fixed Income Strategist for Global Wealth Management at JP Morgan, stands by the notion that a tightened labour market helped improve wage growth, however he believes that the unemployment rate still needs to decrease before we will see significant wage growth.

According to Business Insider, Kennedy states that:

This is obvious when examining Australia’s Phillips curve which has flattened considerably in the past five years and suggests the jobless rate is now required to fall further than historically has been the case to deliver a given level of wage growth.’

Dr Shane Oliver, Head of Investment Strategy and Economics and Chief Economist, AMP Capital summarised that minimum wage increase was the reason for the mini boom in wage growth. If it weren’t for that, we would’ve only seen a roughly 2% increase. However, he did have some positive thoughts on the matter, stating:

At least the uptick in wages growth to 2.3% when inflation is just 1.9% means that real wages growth is at least positive. That said, at 0.4% year on year, real wage growth is still very small and won’t provide much of a boost to consumer spending.’

Like Kennedy, Oliver sees wage increases coming when unemployment decreases.

Like Kennedy and Oliver, ANZ’s Head of Australian Economics David Plank and NAB economist Kaixin Owyong both agree that further tightening in the labour market could see an increase in wages. But for that to happen, inroads into unemployment and underemployment need to be made.

This week in Money Morning

In Monday’s Money Morning, Harje opens with saying investing is a game of predictions. You’re working with known unknowns and unknown unknowns. It’s why the market likes certainty. Even when investors stumble across a good idea, they often do very poorly by taking that idea to extremes. It’s very hard coming up with great ideas at will. Finding and understanding a good business is one thing. Then you have to find out whether the stock is worth the price it trades for. It’s why when investors do find a good idea, they get infatuated with that idea. The subscription business model is one example. To find out more about this model, and how Amazon has used it to their advantage, go here.

In Tuesday’s Money Morning, Harje writes about the hard part of investing. It isn’t accumulation of knowledge. The hard part is reprograming your natural instinct. One example is what happens when investors hold a losing position. It hurts. Humans focus on the negative. We’re always looking for possible dangers and trying to avoid them, whether it is a lion on the savanna or a declining tech stock on the NASDAQ. It’s why you might feel uncomfortable holding a losing position. Nature is telling you to get out and that your original investment thesis is wrong, whether that’s true or not. It’s why Harje believes to be a complete investor you need to build up mental models over time. Ideas that transverse multiple disciplines to help you evaluate businesses, avoid potential problems and thwart your own biases. To find out more about this, go here.

On Wednesday, Harje talked about how much can change in a short time, unexpected events, and how the mainstream media tends to stick to very short-term predictions partly because of this. But that makes it hard or impossible to find stocks that rise five or 10 times in value. And it can lead you to pay too much for stocks in an overpriced market because you’re not thinking beyond the next quarter. But all of that is creating massive opportunities for you in the technology sector right now. Some tech stocks have been beaten down on short-term fears, despite having amazing long-term prospects. You could wait for the big names in tech, like the FAANGs, to fall to good buying levels. But Harje suggest readers could look for lesser known opportunities right now. To find out more about this, click here.

In Thursday’s Money Morning, Harje looks at how Scott Morrison’s government is looking at funding small businesses that don’t pass the banks’ initial test. But that opens up the allowance for banks to now take more risk as it will be the Morrison government buying the securitised loans off their balance sheet. And of course, this will be done with taxpayer’s money, meaning it’ll be your taxpayer dollars footing the bill, again. To find out more about why the Morrison government is looking to do this and how it has worked in the US, go here.

In Friday’s Money Morning, Harje opens with introducing Stewart Horejsi, who ran a welding family business, and after 50 years prices steadily declined and the business started failing. Using the cash from the business, Horejsi bought Berkshire Hathaway Inc. [NYSE:BRK] stock. And he has never sold his shares, while others usually would’ve. What Harje is trying to say is that you want to buy good companies when pessimism is at its peak. So even though everyone knows stock XYZ is a good stock, they’ll be selling it away. To find out more about how you could potentially replicate Horejsi’s trading style, go here.

Kind regards,

Alana Sumic,
Editor, Money Weekend

PS: In this free report, economy expert reveals four ways you could cash in on the global infrastructure boom. Download now.

Alana Sumic is part of the editorial team here at Money Morning. She contributes to bringing you Money Morning each day, along with all of Fat Tail Investment Research’s many other publications.

As the Editor of the weekend edition of Money Morning Alana brings you a summary of the news for the week, and her own take on the week’s most important story in markets. She is also a writer and editor for Fat Tail Investment Research’s political publication, The Australian Tribune.

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