Slow wages to keep RBA on hold well into 2019

A sluggish start to wages growth in early 2018 is raising speculation the Reserve Bank of Australia will keep the official cash rate on hold until well into 2019.

Wages again missed expectations, rising 0.5 per cent in the March quarter from the previous three months, leaving annual growth at 2.1 per cent, which is close to a record low.

The official Australian Bureau of Statistics measure fell short of market expectations for a 0.6 per cent rise.

Lacklustre growth in household incomes is often blamed for Australia's weak consumption growth figures and has forced the Reserve Bank to delay its plans to normalise ultra-low official interest rates.

"The labour market has clearly weakened since the start of the year, with wage growth lower, full-time jobs declining and hours worked also falling," Morgan Stanley economist Daniel Blake said.

This is expected to keep household incomes under pressure and the "RBA comfortably on hold until the third quarter of 2019".

While Reserve Bank officials, including governor Philip Lowe, say there is growing anecdotal evidence that wages pressures are picking up in certain sectors, the latest data show these are largely confined to the public sector, education, health and administration jobs.

Education, training and health care jobs were the biggest contributors to overall lift in the wage price index, while the weaker sectors, such as retail sales, are largely confined to the private sector.

"It was another dour quarter for Australian households," said Callam Pickering, an economist for the job website Indeed.

"Progress is likely to be slow and much slower than predicted in the recent federal budget.

"The simple reality is that there remains a high degree of slack across the Australian labour market. Job seekers have little bargaining power and to some extent soft wage growth may have become ingrained in their expectations."

The government forecast in last week's budget was that the wage price index would average 2.25 per cent through the 2017-18 financial year, before accelerating to 2.75 per cent in 2018-19 and 3.5 per cent by 2021-22.

While public sector wages rose 2.3 per cent from a year earlier, versus 1.9 per cent in the private sector, both categories recorded a soft 0.5 per cent increase in the March quarter.

Despite last year's strong employment growth, which saw more than 400,000 jobs created, Australia's unemployment rate has been stuck at around 5.5 per cent, well above the 5 per cent level the Reserve Bank says is needed for shortages of skilled labour to drive up wages.

Deputy governor Guy Debelle said on Tuesday that one of the risks facing the outlook may be the possibility – as has been the case abroad in many advanced economies – that the jobless rate will need to be even lower than 5 per cent to generate wage pressures.

"The reduction in the unemployment rate has stalled for some months," he said, pointing to an increase in labour force participation, particularly among women and older workers staying in jobs for longer.

"There is a risk that it may take a lower unemployment rate than we currently expect to generate a sustained move higher than the 2 per cent focal point evident in May wage outcomes today," Dr Debelle said.

Research published by the Reserve Bank on Wednesday found there was no evidence that the "small, incremental" wage increases in award wages between 1998 and 2008 have had any negative impact on hours worked or triggered job losses.

The report's author, James Bishop, said the study was one of the "few credible estimates" of the effects of minimum wage hikes on the labour market.

"I find that small, incremental adjustments to awards are mostly passed on to wages in award-reliant jobs," he writes.

However, he cautioned that his findings did not measure impacts on junior workers, and could not be applied to "large, unanticipated" pay hikes.

"There will always be some point at which the minimum wage adjustment will begin to reduce employment."

He also concluded that while he could find no "statistically significant" evidence that small pay hikes caused job losses, he couldn't rule out any negative effects on employment.

"For instance, the adverse consequences of higher wage floors may be borne by job seekers, rather than job holders," he said.

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