Australian wages growth measures tell different stories. What’s going on?

{CF_VIDEO}

Wage growth in Australia, according to the Wage Price Index (WPI), has been disappointingly slow despite the very tight labour market, rising just 2.6 per cent over the year to the end of June.

“Essentially, the data are telling us the best way to get a bigger pay increase is to change jobs - either by switching to higher paying occupations, moving to higher paying roles with other employers or getting promoted.”

But there’s a nuance here: the WPI measures the wage for the job - not the worker. And that makes a difference.

Australia’s WPI is well behind comparable international indicators. The US’s Employment Cost Index was up 5.0 per cent and New Zealand’s Labour Cost Index was up 3.7 per cent in the third quarter.

Wage growth: Australia, NZ and the US

{CF_IMAGE}

But in contrast to the WPI, Australia’s non-farm average earnings per hour has risen 5.0 per cent over the year to the end of June, almost double the pace of the WPI. This is also the strongest annual growth in over a decade. So why is there such a big difference?

Average earnings per hour vs wage price index

{CF_IMAGE}

Essentially, the data are telling us the best way to get a bigger pay increase is to change jobs - either by switching to higher paying occupations, moving to higher paying roles with other employers or getting promoted.

These trends are more common at the moment which has boosted average earnings per hour. But they don’t affect the WPI, unless the wage for the specific role increases.

Many more people than usual are moving into higher paying occupations and therefore boosting their pay packet.

Since the onset of the pandemic, employment is up 13 per cent in the 40 per cent of occupations that earn the most but down 2 per cent for the 60 per cent of occupations that earn the least.

Employment by occupation earnings

{CF_IMAGE}

So the rising share of workers in higher paying occupations is a big reason why average earnings per hour is rising so much faster than the WPI.

Stronger average earnings per hour growth is a real positive for these workers. It improves their household’s ability to cope with rising interest rates and living costs.

It also goes some way in explaining the resilience of household spending, and therefore demand for business goods and services.

Total ANZ-observed spending

{CF_IMAGE}

But many workers will have missed out on larger pay rises, especially those who do not have the skills or experience necessary for higher paying occupations.

The recent, larger increase in minimum and award wages will help some of these workers and we do expect WPI growth to accelerate above 3 per cent year on year by the end of the year.

But the job vacancy rate is still close to record highs and more than 90 per cent of businesses report they can’t get enough staff which suggests wage growth needs to lift further.

Difficulty finding labour vs wage price index

{CF_IMAGE}

As we have noted before, for several decades, the labour share of income has trended downwards while the profit share of national income has risen quite significantly.

For the economy to grow sustainably and for the benefits to be distributed across businesses and workers - including the lowest paid - we need to see stronger wage growth going forward.

Catherine Birch is a senior economist at ANZ.