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Small-business wages are outpacing national average

Australian small businesses are paying an extra 4.1 per cent in wages according to the latest Xero Small Business Index – the highest jump in wages since the index began more than five years ago.

Small-business wages are outpacing national average
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Wages rose to unprecedented levels in April to 4.1 per cent y/y a reflection of the tight labour market as small businesses struggle to retain staff and compete for new talent.

Construction recorded the largest wage rise at 5.1 per cent y/y, followed by manufacturing (4.6 per cent y/y) and hospitality (4.5 per cent y/y).

“While this is a record rise in small business wages, inflation is rising faster which is cutting the buying power of households. This means small businesses are facing the dual challenge of managing rising costs alongside falling purchasing power of their potential customers,” said Louise Southall, economist, Xero.

Joseph Lyons, managing director Australia and Asia, Xero, said the jump in wages was a positive sign in the health of the sector but it should also be a warning that small businesses are facing rising costs across the board as inflation continues to climb.

“Itʼs important for the incoming government and broader industry to consider how they can alleviate some of this growing financial burden,” he said.

The findings align with those of the Reserve Bank of Australia, which last month said wage growth is finally responding to a tight labour market and increasing job mobility.

However, Xero’s small-business wage growth figures outpace the official wage price index, which rose 2.4 per cent year-on-year in the March quarter.

Xero’s small-business data may “run ahead” of the wage price index for a number of reasons, Ms Southall said.

“I think our results are probably more in line with what the Reserve Bank has been hearing from their business liaisons rather than the Wage Price Index,” she said.

With labour still in short supply, the index revealed that job growth remained weak in April, falling 1.1 per cent y/y and with vacancy rates remaining stubbornly high small businesses are battling with the inability to find new staff. Western Australia saw the biggest impact with a decline of 2.6 per cent y/y potentially due to omicron case surging and disrupting workplaces.

“The decline in jobs in April is likely not an immediate reaction to weaker sales but rather is still reflecting ongoing challenges in finding staff. However, should sales continue to be so, we could see this start to affect the job market in a few months’ time,” said Ms Southall.

As households feel the pinch of rising inflation, sales slowed in April to 5.8 per cent y/y after 13 months of strong double-digit growth.

Industries that rely on discretionary spending were significantly impacted including arts and recreation (+2.4 per cent y/y), education and training (+3.4 per cent y/y), information media and telecommunications (+4.3 per cent y/y) industries all saw growth slower than the national average.

“With the broad-based increase in the cost of living, consumers are spending on more pressing bills that cannot be avoided. This can be seen in the sales results for April – particularly in sectors such as arts and recreation and retail. Industries that are not directly affected by discretionary consumer spend, such as professional services, saw a larger sales increase,” said Ms Southall.

Ms Southall said hiking wages to attract talent, while facing growing material costs and loan repayments, means the only way for many small businesses to compensate is by increasing their own prices.

“But this is a challenge,” she said.

“How much do they increase their prices? And how do they manage that when their own customers, or their potential customers are facing a cost-of-living crisis, and are probably less likely to be able to deal with the price increases?”

Xero data already suggests businesses focused on discretionary spending are already taking a hit. Sales growth grew 5.8 per cent year-on-year in April, Xero said, after a year of double-digit growth.

“Recreation in particular, subscriptions to your local theatre, it’s your gym membership, so things you might let fly if you’re looking to cut back on your budget,” she said.

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