6345.0 - Wage Price Index, Australia, Sep 2018 Quality Declaration 
Latest ISSUE Released at 11:30 AM (CANBERRA TIME) 14/11/2018   
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FEATURE ARTICLE: UPDATE ON THE SIZE AND FREQUENCY OF WAGE CHANGES
By James Bishop, Senior Research Economist, Reserve Bank of Australia (on secondment to the ABS)


INTRODUCTION

This article provides an update of earlier research on the frequency and size of wage changes in Australia (Bishop 2016, Bishop and Cassidy 2017). The purpose of the current article is to shed light on recent trends in wages growth, by incorporating Wage Price Index data up to the September quarter 2018.This analysis is the result of a collaboration between the Reserve Bank of Australia and the Australian Bureau of Statistics using micro data on wage growth for around 18 000 jobs.

ANALYSIS

Using the job-level Wage Price Index data, it is possible to decompose aggregate wage growth into the frequency and average size of wage changes (see Bishop 2016 for further details). Since the time these estimates were last compiled in late 2016, the average frequency of wage changes – or alternatively, the fraction of jobs receiving a wage change – has increased (Graph 1). In 2018, around 23.3% of all wages were adjusted each quarter, compared to around 20.4% of all wages in 2016.1 This increase in average frequency accounts for all of the increase in aggregate wage growth since 2016. In contrast, the average size of wage changes has remained broadly stable at around 2.4% in recent years.


Graph 1
Graph 1 shows in 2018, around 23.3% of all wages were adjusted each quarter, compared to around 20.4% of all wages in 2016. In contrast, the average size of wage changes has remained broadly stable at around 2.4% in recent years.


The increase in the frequency of wage changes since 2016 follows earlier declines between 2011 and 2016. This rise in the average frequency could reflect fewer wage freezes by firms, or that some of the wage contracts that had previously experienced a delay in renegotiating pay and conditions have been finalised.2 The recent increase in average frequency has been observed in more than 80% of all industry divisions.

The average size of wage changes (conditional on there being a wage change) has stabilised at a below-average level since late 2016. The recent stability in the average size of wage changes mainly reflects that the share of jobs receiving ‘large’ wage increases – defined here as an increase greater than 4% – is no longer declining as rapidly as was the case in previous years. As Bishop (2016) demonstrated, the share of jobs in this 4%-plus category has a disproportionately large effect on aggregate wage growth because the average wage rises in this category tend to be relatively large.

Since late 2016 there has also been an increase in the share of wage rises between 3–4%, which has been matched by a decline in the share of wage increases of between 2–3%.3 One driver of this is the Fair Work Commission’s annual adjustments to award wages, which were in the 3–4% range in 2017 and 2018 and in the 2–3% range between 2012 and 2016. The share of jobs receiving a rise of 0–2% has remained broadly stable, as has the proportion of jobs experiencing wage falls (a wage change of less than 0%).

Graph 2
Graph 2 shows that since late 2016 there has been an increase in the share of wage rises between 3–4%, which has been matched by a decline in the share of wage increases of between 2–3%.


CONCLUSION

Wages growth has picked up since 2016. Analysis of the job-level Wage Price Index data indicates that this rise largely reflects an increase in the frequency of wage increases, rather than an increase in the average size of the increases.

FOOTNOTES

1 In this analysis, any wage changes of less than 0.1% (in absolute value) are classified as having a zero change, given that such small changes are more likely to reflect rounding errors than a true change in wages.
2 Renegotiation lags matter because wages are often frozen during the negotiation period. It is difficult to disentangle the impact of renegotiation lags and other (more explicit) forms of wage freezes using the Wage Price Index data
3 The 3–4% wage range includes wage increases of exactly 4%, but excludes wage increases of exactly 3%. Similar rules are used for the 0–2% and 2–3% categories

REFERENCES

Bishop, J and Cassidy, N 2017, ‘Insights into low Wage Growth in Australia?’ RBA Bulletin, March Quarter

Bishop, J 2016, ‘The Size and Frequency of Wage Changes’ ABS Feature Article (Wage Price Index), September quarter 2016.

Wage Price Index, Australia September 2018 (cat. no. 6345.0).