The latest ABS wage data reveals a lot about the Australian economy, in particular the future of the RBA’s cash rate.
Basically the story is this — public sector workers continue to make significantly more than private sector workers, and while employment remains ‘low’, inflation will (by the RBA’s own admission) struggle to sit in the target band for the foreseeable future.
ABS wage data shows a narrowing public/private sector wage growth gap for once
According to the ABS, hourly wage growth grew by just .54%, below expectations of .6%.
But the devil is in the details.
A recent study from the Institute of Labor Economics using historical data (2001–2014) suggests that the public/private hourly wage gap has been about 5.1%, controlling for ‘observed characteristics and individual fixed effects’.
This is over a long period of time.
The latest ABS wage data bucks the trend of the past four years, showing wage growth was the same for the two sectors for only the third time in the past 16 quarters:
Source: Australian Bureau of Statistics
Does this suddenly mean the private sector in Australia is experiencing a renaissance?
Not in the slightest.
Business investment in Australia as a percentage of GDP is now in similar range to the Whitlam era:
Source: The Institute of Public Affairs
A big part of this is the fact that Australia has one of the highest corporate tax rates in the OECD.
Simply put, it is hard to do business in Australia and businesses are taking their operations elsewhere.
It shows up in pay-packets as well.
As a result, you get a list of the top 10 companies by market cap in Australia that has all the hallmarks of a sclerotic economy:
- Comm Bank (1911)
- BHP (1885)
- Westpac (1817)
- CSL (1916)
- ANZ (1835)
- NAB (1858/1834)
- Macquarie Group (1969)
- Woolworth’s (1924)
- Telstra (1901 under Postmaster’s General Department)
- Wesfarmers (1914)
As you can see, with the exception of Macquarie Group, all of the companies have histories that stretch back around 100 years or more.
This demonstrates that entrepreneurship in this country is in decline.
So structurally Australia’s economy is facing some serious headwinds.
RBA thinks wages and inflation will eventually catch up
Take a look at the chart below:
In a nutshell, it shows that inflation is lagging while unemployment is falling.
Under normal circumstances, according to the Phillips Curve, a tight labour market leads to wage increases, which then leads to inflation as companies charge more for the products to cover the costs.
It seems to all be going haywire at the moment.
As Phillip Lowe, the head of the RBA says:
‘At some point, I haven’t given up on the idea, that as the labor market tightens and firms start competing more aggressively for workers, wages will move.’
The problem is there is a lot of slack in the labour market courtesy of the underemployment rate, which sits at an elevated 8.3%.
This means that companies will pull from this pool of workers before we see a reduction in the unemployment rate.
Companies don’t need to raise wages, because the underemployed will still be competing with the unemployed.
As such, I wouldn’t find it likely that inflation will sit in the target band of 2–3% for a while yet.
And as a consequence of this, I believe the next move by the RBA will be a cut.
For Money Morning