Only one industry currently meets the RBA's wage test for rate rises

Kieran Davies

Coolabah Capital

An analysis of the industry split of wages shows why the RBA is sceptical that wages can accelerate fast enough to justify market expectations of rate hikes next year.

Wages picked up a little in Q3, up 0.6% after a 0.4% increase in Q2, with annual growth increasing from 1.7% to 2.2% as a near-zero increase last year dropped out of the annual calculation.

This modest growth is in line with the increases seen in the years leading up to COVID and contrasts with the early stages of the pandemic when many companies either temporarily cut wages and/or introduced wage freezes.

This pick-up in wages growth is very welcome as it indicates that companies are looking past the economic hit from the Delta outbreak, but growth is still well short of the “materially higher” pace the RBA would like to see before it starts taking back last year’s rate cuts.

Governor Lowe has been clear on this point, arguing that rate rises are unlikely before 2024, or 2023 at a stretch, stressing that the RBA wants to see wages growth of 3% or more – allowing for trend growth in labour productivity of 1% – to ensure that inflation is sustainably back at the 2½% midpoint of the inflation target.

The scale of the task faced by the RBA is brought home by Coolabah's analysis of the industry split of wages growth.

This shows that only 1 sector out of a total of non-farm 18 industries – namely, professional services – currently meets the RBA’s test of wages growth of 3% or more.

Weighting each industry by their share in total non-farm employment tells the same story, with this one industry accounting for about 10% of jobs.

Early on in the pandemic, the health sector was posting wages gains of 3% or more, but the last time the bulk of industries were posting strong wages growth was 2012.

This long history of pervasively slow wages growth underscores the challenge faced by the RBA and is one reason why Governor Lowe is deeply sceptical that total wages growth can accelerate fast enough to justify market pricing of rate hikes starting in the middle of next year.

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Kieran Davies
Chief Macro Strategist
Coolabah Capital

Based in Sydney, Kieran Davies joined Coolabah Capital in 2020, an asset manager than runs over $7 billion in fixed-income strategies, and is responsible for macroeconomic research and investment strategy, contributing to the investment decisions...

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