On Friday the Reserve Bank executive appeared before the House economics committee, and wages growth was high on the agenda – especially the lack of growth. But while the governor of the bank did suggest hope for wages growth of at least 3%, the RBA’s own prediction released on Friday afternoon suggested that would not occur for some time.
One aspect that has been abundantly clear ever since the budget was handed down is that the government’s projections for wage growth are wildly optimistic. That optimism helps improve projection for tax revenue, but the Reserve Bank is not so concerned about pumping up the budget surplus numbers through inflated wage growth estimates.
The April budget predicted that wage growth through to June this year would be 2.5%, compared to the latest estimate by the RBA in last Friday’s statement on monetary policy of 2.3%:
Given the current seasonally adjusted annual wages growth is 2.3%, to get to 2.5% (even if rounded up) would require the June quarter to have the strongest quarterly growth for five years.
We will find that out on Wednesday when the ABS releases the latest wage price index figures, but it is the predictions for the next two years where the RBA and the government really diverge.
By this time next year the government predicts wages to be growing at a rate of 2.75%, while the RBA expects just 2.3%. By June 2021, the government predicts a jump to growth of 3.25%, while the RBA sees merely a rise to 2.4%.
At this point we should note that the past budgets have not been particularly successful at predicting wages growth:
The 2017-18 budget, for example, was predicting that by now we would be experiencing 3% annual wages growth.
But this difference in outlook aside, the RBA and the government also have quite different approaches to how to get wages growth improving.
At the basic level the Reserve Bank governor, Philip Lowe, noted that we should be aiming for around 3.5% annual wages growth. The reasoning is quite simple – we target an inflation growth of 2.5% and productivity annual growth of at least 1%. And as Lowe told the House economics committee on Friday, “2½ plus 1 equals 3½. I think that’s a reasonable medium-term aspiration.”
In essence Lowe is arguing that workers should get wage rises in line with inflation – to ensure real wages do not fall – and that any rise above inflation is determined by productivity growth.
This makes sense. Over the past three years productivity has grown on average each year by just 0.6% and with underlying inflation growing at 1.6% that gets up to 2.2% which is around the level of current wages growth:
But while at the moment it appears that the equation is working, over the past decade inflation and productivity combined has grown on average by 3.6% each year, compared with wage growth over that period growing by just 2.8% on average:
So it certainly appears that workers have not received the wages growth they were entitled.
Part of the reason Lowe suggests is that “we are in a situation now where wage norms have drifted down to two to 2½%” ie that “most people are accepting wage increases of two to 2½%”.
This has the impact of keeping wages down because of an almost structural change of acceptance. Whereas once real wage growth was the bare minimum, now it has become almost the bare maximum.
Lowe noted that one other issue is that of public sector wage growth, which has been stifled due to imposed limits – such as that of the federal Workplace Bargaining Policy 2018, which “allows for remuneration increases to be negotiated up to an average of 2.0% per annum”.
Given the lowest target level for inflation is 2%, this in effect is a policy that locks in real wage falls for the Australian public service.
A look at the wage growth of public sector workers in the ACT (the majority of whom work for the commonwealth) shows just how greatly this has stifled wage growth even below that of public sector workers elsewhere in the country:
Lowe noted that “the public sector wage norm I think is to some degree influencing private sector outcomes as well – because, after all, a third of the workforce work directly or indirectly for the public sector”.
But while this is an area of concern, what clearly is holding back wages at the moment is the lack of demand and growth in the economy.
At best the Reserve Bank now predicts us achieving GDP growth of above 3% by the end of 2021, and household consumption growth not to reach that previous average level at all in the next two years:
Such low levels of growth are unlikely to be enough to lower unemployment or underemployment and the RBA does not anticipate the unemployment rate falling below 4.9% before 2022.
In his hearing before the economics committee Lowe noted that would be above the 4.5% rate of “full employment” and that we would “need to get down to an unemployment rate of 4.5% to have wage growth consistent with the inflation target”.
This suggests we still have a very long wait till we see wage growth back above 3%, especially if the task is left to the bank alone.
• Greg Jericho writes on economics for Guardian Australia
