- Westpac said signs indicate that wage growth in Victoria is likely to accelerate.
- NSW and Victoria are the only states with an unemployment rate below 4%.
- Capital Economics says Australian wage growth is unlikely to prompt the RBA to raise interest rates until at least the end of next year.
Sydney and Melbourne are leading Australia's housing market downturn.
But recent data suggests that those two markets could be ahead of the pack when it comes to a key indicator of economic performance -- wage growth.
Last week's jobs report was a strong one, as headline jobs growth more than doubled expectations in August.
But what really caught the experts' attention was a fall in the underemployment rate -- defined as those in work who would like to be working more hours.
Quarterly data showed the underemployment rate fell by 0.3%, to a seasonally adjusted 8.1%.
It's still elevated by historical standards, but the decline provided some evidence the labour market is starting to tighten -- a key prerequisite for wage growth.
And anyone with a passing interest in the Australian economy knows wage growth has been below average levels for years now.
Delving into the headline data, Westpac economist Justin Smirk highlighted a pronounced shift in Victoria.
Another month of strong jobs growth saw Victoria's unemployment rate fall to 4.8%.
As a result, the state's underutilisation rate -- the sum of unemployment and underemployment -- has now climbed noticeably from its December 2015 lows:
"History shows that Victorian wages have been responsive to improvements in underutilisation," Smirk said.
"The significant improvement in underutilisation suggests we should very soon see a pick-up in Victorian wages inflation."
What kind of pick-up?
Property market analyst Pete Wargent also highlighted the strong Victorian jobs numbers on his blog. And by his calculations, the indicators point to Victoria's rate of wage growth reaching the long-awaited 3-handle.
"Even allowing for potentially rogue seasonally adjusted figures, the trend improvement points to private sector wages growth in Victoria returning to 3.5% in due course," Wargent said.
Having now fallen to 4.8%, Victoria's unemployment rate leaves it in second place among the states behind NSW, which reported a seasonally adjusted u/e rate of 4.7%.
And Wargent attributed part of labour market trends to a positive feedback loop from immigration.
Australia has one of the highest immigration rates among developed economies, and the lion's share of those new arrivals are settling in Sydney and Melbourne.
"Of course, it adds to the supply of labour, but it also creates demand in the economy," Wargent said. And Australia's tightest labour markets are also "those where most immigrants are heading to".
And while the crackdown on investor lending has taken the heat out of Australia's major east coast housing markets, strong population growth and rising wage aren't typically commensurate with a rapid fall in house prices.
Looking at the jobs market more broadly, Capital Economics chief economist Paul Dales said the pieces are now falling into place for a pick-up in Australian wage growth.
However, he shares the RBA's oft-repeated view that "this is likely to be a gradual process".
He mapped out his forecasts in the following chart, with a timeline for when wage growth can be expected to return to 3% now that the underutilisation rate is falling:
Based on the past two decades, "for wage growth to reach the RBA’s lower bar of 3.0%, the underutilisation rate would need to fall to 13.2%", Dales said.
And if the current trend is maintained, that will happen by early next year.
"Given that the underutilisation rate tends to lead wage growth by about six months, wage growth could then rise to 3.0% late next year."
But Dales is a bit more circumspect about the trend indicators for wage growth, which currently stands at just 2.1%.
So while the fall in the underutilisation rate is positive, "it will probably still be a while before wage growth rises to the 2.5% or so that may prompt the RBA to seriously consider raising interest rates," Dales said.
"On our forecast, wage growth won’t even get close to 2.5% until late 2019 or early 2020."
For now, the details within the headline employment data are further evidence of Australia's two-speed economy, with a clear diversion between NSW & Victoria compared to the rest of Australia on a number of key economic metrics.