Private sector wages have increased 6.3% over the past year, reaching a record $204 billion, according to new government figures. This sharp rise contrasts with the modest 1.1% growth in company profits, highlighting increasing pressure on business margins due to higher labour costs. The growing wage bill is being fuelled by more people in work and larger pay packets, while unemployment remains near historic lows at 4.3%.
The broader economic environment includes persistent inflation and signs that businesses may be struggling to sustain profits. The Reserve Bank aims to keep inflation between 2% and 3%, yet the latest annual consumer price growth is higher at 3.8% and the surge in wages could be a contributing factor. Slower-moving indicators like the wage price index, still at 3.4%, may not reflect the true pace at which employer costs are rising.
While overall profit growth is subdued, some sectors are seeing gains. Bolstered by strong consumer spending, accommodation and food services reported a 16% increase in profits. At the same time, businesses are cutting back on inventories, a move that often shows cautious optimism. Business investment is strong, particularly in areas such as data infrastructure, and is expected to drive the fastest growth in capital expenditure since 2012. However, job advertisements have fallen for five consecutive months, suggesting softening demand for labour.
The rise in employer wage bills supports the Reserve Bank’s assessment that the labour market remains tight, which reduces the likelihood of any immediate interest rate cuts. For the government, this trend complicates the delivery of cost-of-living relief, especially as it introduces new public-sector wage top-ups. Although real wages have improved over the past two years, the recent increase in inflation is slowing that progress.
