Surge in wage growth and a softening labour market

From Challenger Chief Economist Dr Jonathan Kearns

Wage growth surged in the September quarter but the RBA expects it will slow from here given a rising unemployment rate. However, the labour market remains tight and is only softening slowly. Avoiding further rate rises hangs on the outlook of a softer labour market and slower wage growth being right.

The Wage Price Index increased 1.9% in the September quarter (non-seasonally adjusted). This was 0.5% pts larger than the previous largest quarterly increase (the WPI started in the late 1990s). A big increase was expected given the large rise in the minimum wage and award wages. This brought year-ended wage growth to 4%, the fastest growth since 2009.

The RBA is forecasting that wage growth will slow from here as the labour market softens, and the unemployment rate rises, allowing inflation to ease slowly toward its 2-3% target.

But so far the labour market is remarkably resilient with only tentative signs of softening.

• Job ads and vacancies have declined since the first rate rise in May 2022, but they remain high as a share of the labour force.

• During the pandemic recovery, all the jobs growth had been in full-time jobs, but this is changing with no growth in full-time employment since the first rate rise, with employment growth only in part-time jobs (another sign of softening).

• But other cyclical measures of labour market tightness show minimal change. The youth unemployment rate (15-24 year olds) is up a bit, but is volatile. The underemployment rate (which incorporates people wanting to work more hours) is also up a bit, but the medium term unemployment rate (those unemployed 4-52 weeks), which the RBA has pointed to, has barely changed.

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