Real wages are growing at highest rate since 2020. But it’s unlikely to last

Australians have enjoyed their biggest after-inflation wage increase since the depths of the pandemic, but it is unlikely to last, which keeps an interest rate cut early next year firmly on the cards.

The Australian Bureau of Statistics on Wednesday reported that wages grew 3.5 per cent in the year to September, 0.7 percentage points more than inflation, taking annual real wage growth to its highest level since the same period in 2020, when the federal government made childcare free, which artificially lowered inflation during the pandemic.

Real wages have climbed at the fastest pace since September 2020.Credit: Louie Douvis

A year ago, real wages had fallen by 1.4 per cent. This year, in the September quarter alone, real wages were up 0.6 per cent.

With cost-of-living issues to dominate next year’s election, Treasurer Jim Chalmers seized on the figures to argue the government’s efforts to lift wages and bring down inflation were working.

He said real wages had grown for four consecutive quarters after falling consistently since mid-2021.

“The combination of moderating inflation and stronger and more sustainable wages growth is a good thing for Australians’ pay packets. This is more evidence that there is no wage-price spiral in our economy,” he said.

Despite the strong growth in real wages through the quarter, most Australians are still under financial strain. Since real wage growth turned negative in mid-2021, inflation has climbed by 17.1 per cent. Over the same period, wages have risen by just 11.6 per cent.

The figures also point to a slowdown in wages growth, which peaked at 4.3 per cent late last year.

This year’s increase to the minimum wage of 3.75 per cent was the lowest in three years, suggesting pay increases will not persist despite the tight jobs market.

Job vacancies have fallen by more than a quarter this year, and while unemployment remains low, it has increased from 3.5 per cent in June 2023 to 4.1 per cent in September this year. At the same time, business surveys are showing firms are less likely to increase hiring in coming months.

Jobs figures to be released on Thursday will give a further sign of price pressures within the economy.

Since the Reserve Bank started lifting official interest rates in 2022, it has expressed concern about a “wage-price spiral” as workers sought to increase their pay packets to keep up with inflation.

But its most recent forecasts, released last week, suggest wages are growing slower than the RBA anticipated. It had forecast annual wage growth to ease to 3.4 per cent by December, but to reach that would require an unexpectedly large jump in wages through the final three months of the year.

The lower-than-expected wage growth may bolster the case for an interest rate cut early next year.

AMP economist My Bui said cracks were appearing in the jobs market, which meant wages growth was likely to slow.

“Lower inflation pressures, many weakening labour market indicators and today’s softer wages growth data will open the door to a cut from the RBA early next year,” she said.

JP Morgan chief investment strategist Tom Kennedy said wage growth was driven by the public sector and industries in which wages were mostly set through collective agreements, and that he expected wage growth to continue to moderate this year.

“Looking ahead, we expect wage growth will continue to moderate and finish the year at 3.2 per cent [on an annual basis],” he said. “This is marginally softer than the RBA’s standing forecast of 3.4 per cent and supports our view of a dovish pivot from the RBA.”

The industries with the biggest wage increases were electricity, gas, water and waste services (up 5 per cent), education and training (up 4.4 per cent) and administrative and support services (up 3.9 per cent). The smallest increase was in arts and recreation services (up 2.9 per cent).

Of the states, Tasmania saw the biggest annual wage increase at 4 per cent, while South Australia was the lowest at 3.2 per cent.

Public sector wages grew 3.7 per cent, slightly higher than private sector wages at 3.5 per cent over the year.

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