Australian wage growth remains sluggish and that's unlikely to change anytime soon

• Australian wage growth remains weak, increasing by a little over 0.5% in the three months to March.

• For the past nine months, annual growth in wages has remained stuck at 2.3%. The RBA expected wages to increase 2.4% in the year to June.

• Private sector wages are picking up a little but remain low. Public sector wages actually grew at a slower pace compared to prior quarters.

• Average annual wage growth ranged from just 1.6% in Western Australia to as high as 2.7% in Victoria.

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Australian wage growth slowed in the March quarter, driven by weakness in the public sector.

There was better news for private sector wages, however.

According to the Australian Bureau of Statistics (ABS) Wage Price Index (WPI), average hourly wages excluding bonuses rose by 0.54% after seasonal adjustments, undershooting expectations for a larger increase of 0.6%.

The quarterly increase was unchanged from the pace seen in the final three months of 2018 but below the levels seen in the middle of last year.

Despite the soft quarterly result, average wage growth over the year rose to 2.34%, up from 2.27% in the December quarter. It was the fastest increase since the December quarter of 2014.

With consumer price inflation growing by just 1.3% over the same period, real wage growth over the year stood at a respectable 1%, a level not seen in over five years.

Image: BI

Average private sector wages rose 0.54% over the March quarter, the same pace seen in the three months to December last year. That left average wage growth over the year at 2.35%, the fastest increase since the final three months of 2014.

In contrast to the private sector, average public sector wages grew by a slower 0.45% last quarter, down from 0.6% in late 2018. It was the weakest quarterly increase since early 2000.

From a year earlier, public sector wage growth slowed to 2.37%, well below the 2.53% level seen in the December quarter.

Across the country, average annual wage growth ranged from just 1.6% in Western Australia to as high as 2.7% in Victoria before adjustments for seasonality.

Image: BI

The chart above shows the movement in average wage growth over the past decade. The lines for New South Wales and Victoria are slightly wider than the others states given they currently have the lowest unemployment rates nationally.

While tighter labour market conditions in Victoria saw wages growth increase further in the March quarter, the same cannot be said for New South Wales where the annual pace slowed, providing a mixed signal as to just how far unemployment needs to fall before wages growth begins to lift meaningfully.

"The key for higher wage growth is the ongoing decline in labour market slack," said Callam Pickering, APAC economist at global job site Indeed.

"While the unemployment rate, at 5%, is reasonably low, it is actually the underutilisation rate, at 13.2%, that is key going forward.

"That needs to ease towards 12% before wage growth of 3% or higher is likely. That won’t happen overnight nor is it likely within the next year."

Underutilisation measures the proportion of Australia's workforce who are unemployed or have a job but would like to work more hours.

By individual industry, the ABS said annual wage growth over the year ranged from 1.8% for construction and information, media and telecommunication services industry workers to 3% for those employed in the health care and social assistance industry.

Image: ABS

"Wage growth is below its decade average in all but one industry," Pickering said.

"Healthcare and social assistance is defying the broader trend, reflecting the strong demand for services across this sector owing to Australia’s ageing population."

Of note, average pay increases for retail and construction workers -- the largest employers in Australia behind healthcare -- grew by less than 2% over the year.

Despite the modest acceleration in private sector wages over the past year, and positive increase in real wages for all workers, Sarah Hunter, Chief Economist at BIS Oxford Economics, described the latest wage update as "disappointing".

"Although the recent drop in inflation means that the average worker is now enjoying relatively robust growth in real wages, the data are disappointing," she said.

"They also confirm that despite robust jobs growth, there is very little upward pressure on wages in the labour market. And with employment growth set to slow as the residential construction downturn really starts to bite, momentum in wages is unlikely to pick up until well into the 2020s."

With annual pay growth stuck at around 2.3%, a level inconsistent with a meaningful pickup in inflation or household spending, Hunter says today's report will add pressure on the RBA to cut official interest rates in the months ahead.

"Given their focus on the labour market and its recent strong performance we don’t expect them to cut at their next meeting in June, but it’s looking increasingly likely that cash rate cuts will materialise in the second half of the year," she said.

Following today's wage report, attention will now turn to the release of Australia's April jobs report on Thursday.

The RBA has made it clear that only a further improvement labour market conditions will likely be enough to help lift inflation back to the bottom of its 2-3% medium-term annual target.