Where to for wages growth? CBA’s Kristina Clifton

Our model suggests that private sector wages growth is a little lower than it should be given the degree of labour market slack.

Nonetheless the current level of labour market underutilisation is consistent with wages growth of just above 2 percent.

Our model suggests that a steady decline in the underemployment rate to around 7 percent, would see wages growth return to normal in early 2019.

For Q1 2017, the model points to an outcome of 0.5 percent, which would see the annual rate tick up to 1.9 percent.

Private sector wages growth has been on a downward trend for the past four years. Wages growth was just 1.8 percent over the year to QIV, which was the lowest result in the history of the series. It is lower than would be expected given the level of the unemployment rate and the strong gains in commodity prices over the past year.

There are many explanations for low wages growth, including rising spare capacity in the labour market, heightened job security concerns, low inflation rates and declining commodity prices from the peak in 2011.