RBA governor Phil Lowe

Australia’s governing class is finally starting to have a conversation with itself about the wage stagnation it has inflicted on Australian workers, but it still doesn’t get it.

The government remains in denial about wage growth, with Pollyannaish budget forecasts that the RBA now appears to have no confidence in and, if pressed, an allusion to its trivial $10-a-week tax cuts (which are actually supposed to address bracket creep), not the years of poor wage outcomes most workers have endured. The Reserve Bank has been more forward on the issue, and yesterday governor Philip Lowe tackled the issue head-on with some comments that have gotten considerable attention.

His most important observation — made in a speech to many of the culprits in depriving workers of pay rises at the Australian Industry Group — related to the impact of wage stagnation on inflation, and thus on monetary policy. We’ve long assumed that the next move in interest rates was up — but the schedule keeps being pushed back. Yesterday, Lowe appeared to push it back yet again. “Any increase in interest rates,” he said, “still looks to be some time away.”

Indeed, if wages growth were to continue at around its current rate for an extended period, it is unlikely that the rate of inflation would average around the midpoint of the inflation target in the period ahead. Wages growth of 2% and reasonable labour productivity growth are unlikely to make for 2.5% inflation on a sustained basis.

Indeed, would further wage stagnation even lead to another rate cut? That would jolt the “lift rates for the sake of lifting rates” crowd.

Lowe also detailed how stagnation was affecting the economy. “[R]eal debt burdens stay higher for longer. Many people who borrowed expected their incomes to grow at something like the old rate rather than the current rate. With their expectations not being realised, the real value of the debt stays higher than they expected and this is likely to affect their spending decisions.”

The other indirect way it affects the economy is that “beyond these purely economic effects, the slow wages growth is diminishing our sense of shared prosperity. If this remains the case, it can make needed economic reforms more difficult.”

That stirred up the “economic reform” mob in the commentariat (and prompted a stupid claim that Lowe had “challenged voters” from the Financial Review). Economic reform is holy writ among that crowd; the perceived failure of successive governments to undertake Reform (industrial relations deregulation, spending cuts, company tax cuts, slashing red tape) is an heretical abandonment of faith. Anything that threatens the cause of Reform must be decried. 

But Lowe is being too optimistic. Courtesy of wage stagnation, years of corporations enjoying the upside of privatisations while consumers got the downside and unpunished corporate misconduct, voters regard economic reform as a code for screwing them over to the benefit of companies. Three per cent wage growth won’t fix that.

Lowe yesterday struggled with explaining why wages growth is so low despite a long period of strong jobs growth and employers reporting growing labour shortages, offering a laboriously convoluted explanation about how information technology uptake by leading firms was making slow-adopter firms screw down on labour costs more to try to compete. It seems that, whatever else, there’s a rule that Lowe and his colleagues must not mention the more obvious reason: that the industrial relations landscape and the decline of unions has made collective bargaining and industrial disputation more difficult for workers across Western countries, undermining their capacity to secure pay rises. 

In any event, Lowe confirmed any wages growth was a long way off, even though 3%-range growth was far more preferable than our current 2% level — though he didn’t mention the many private sector workers who are struggling on 1% growth and going backwards. Any recovery would be, to use the bank’s favourite word at the moment, “gradual”. Like, Lowe seemed to be saying, very gradual. Zeno’s Paradox gradual, perhaps. Which means the next rate rise is a long way off.

One more thing: for all those neoliberal heroes at the Business Council or in the commentariat who reckon industrial relations deregulation boosts productivity, Lowe had an interesting graph showing the impact of WorkChoices on labour productivity. Maybe we should be re-regulating workplaces.