Wages growth remains in the groove

The Labour Price Index (LPI) showed a rise of 1.0% in the price of labour in the December quarter, leaving the annual increase steady at a near optimal 3.6%.

The data confirm that wages growth remains at a not too hot, not too cold but just right level.  From an inflation perspective, wages growth is well contained, reflecting many things, not least the degree to which labour markets can react to changing circumstances.

The growth in labour prices fits well with the evidence of a softening in employment conditions, including the slight rise in the unemployment rate through 2011.  Recall that as recently a year ago (the year to December 2010), the LPI rose 3.9%.

But it is also worth looking at the wages data from a longer run perspective.

• The annual rise in labour prices has been below 4% since June 2009. 

• The long run increase in labour prices is 3.6%, exactly the level recorded through 2011.

It is also interesting to note that the only time annual growth in labour prices has been above 4% in the last 15 years or so was the period between June 2005 to March 2009 (with the odd quarter where it dipped to 3.9%).  This coincided with a low unemployment rate, but also it was when Workchoices was in place or then was unwinding. 

It is not clear what all of this means other than the current labour market regulations are delivering a low unemployment rate (around 5.25%) with moderate but sustained increases in nominal and real wages.