“Productivity Growth Picks Up” As Hours Worked Fall

Q3 productivity grew 0.8% q/q, the first quarterly rise since Q1 2022, but it is still down 2.1% y/y. This is good news for the RBA who has said that wage growth is still consistent with the inflation target if “productivity growth picks up”. The improvement though was predominantly driven by a 0.6% q/q drop in hours worked as the labour market eases rather than because of an improvement in efficiency, but it buys time for the latter to occur.

• Productivity is important for keeping a lid on unit labour cost (ULC) growth at a time of rising wages. The solid Q3 wage outcome due to government policy and the Fair Work Commission’s ruling on minimum wages plus the tight labour market meant that there was a strong rise in ULC of 2.2% q/q, less than Q3 2022, and 6.4% y/y, down from 6.9% in Q2.

Source: MNI - Market News/ABS

• If hours worked fall by the same amount as Q3 over the next two quarters and real GDP grows as the RBA expects, then its desired 1% productivity growth would be achieved by Q1 next year helped by very favourable base effects. If hours worked are flat instead, then it will be by mid-2024.
• If there are no further quarterly falls in hours worked ULC growth is likely to remain above 2% y/y using the RBA’s WPI assumptions. The scenario above where they fall further will result in them growing by less than 1% in H2 2024.

Source: MNI - Market News/ABS