The Reserve Bank may have dropped its long-standing expectation that interest rates won’t rise until 2024 in yesterday’s November board meeting, but wages growth remains the main objective of monetary policy. If anything, yesterday’s statement, and the media conference by RBA governor Philip Lowe afterwards, strengthened the bank’s stance that significant wages growth was needed before rates would rise.
The board will not increase the cash rate until actual inflation is sustainably within the 2-3% target range. This will require the labour market to be tight enough to generate wages growth that is materially higher than it is currently. This is likely to take some time. The board is prepared to be patient, with the central forecast being for underlying inflation to be no higher than 2½% at the end of 2023 and for only a gradual increase in wages growth.
Lowe repeatedly mentioned wages growth. Particularly “wages growth at the end of 2023 is expected to be running at 3%. While this is higher than it is now, it is still below the average over the two decades to 2015.”
But isn’t inflation rising? Yes and no, Lowe explained: “Inflation, in underlying terms, remains low in Australia, at 2.1%. Inflation is, however, a little higher than it has been over recent years. This increase largely reflects higher oil prices in global markets, higher prices for residential construction and strained global supply chains.”
These are transient causes of higher inflation (residential construction costs are partly the result of the successful HomeBuilder program supporting that sector through the past 18 months). It is wages growth that will drive long-term increases in inflation, by permanently increasing producer costs and assisting higher inflationary expectations. And it’s wages growth that the RBA wants to see to push inflation up into its target band “sustainably”.
This has created an open divide between the bank and inflation hawks and bond markets, which jump at all inflation rises and think any reference to “temporary” inflation is an appalling abandonment of monetary discipline.
There’s another group in the mix, the commentariat at the likes of The Australian Financial Review. The AFR has been demanding rate hikes for years now. For most of that time, that was driven by an ideological fixation with “loose monetary policy”. Now it’s driven by something altogether baser — a deep-seated loathing of workers. The AFR wants higher interest rates in order to choke off strong gains in employment. The wages growth the RBA wants to see is anathema to the AFR and its business readers, who prefer higher unemployment and the real wage cuts that have characterised recent years in Australia.
The idea that unemployment might reach 4% and wages growth reach 3% or — horror of horrors — the 4% that workers enjoyed when Labor was in government fills them with terror.
Luckily for the AFR crowd, there’s little sign of that happening. While the RBA has upgraded its wages forecasts in its final statement of monetary policy for 2021 due on Friday, Lowe noted yesterday: “The starting points for inflation and wages growth are lower in Australia than in many other countries. In addition, our business liaison suggests that wage growth remains modest, although there are some hotspots. Wages growth is expected to pick up as the labour market tightens, but this pick-up is expected to be gradual.”
And: “There is also the question of the impact on labour supply of the opening of the international border.”
Lowe, having pointed out the role migration has played in wages suppression, would be acutely aware of the government’s determination to return to allowing hundreds of thousands of temporary workers into the economy to push wages down.
The falsity of the AFR/business lamentation about wages growth was elegantly demonstrated by figures released on Friday from the Australian Bureau of Statistics in its annual national accounts data for 2020-21. They showed that business costs in the five years to June 30 fell sharply, while GDP and output rose strongly. And since 2016-17, real unit labour costs — that is the cost of employing staff per unit of output — fell a combined 9.1%. Labour productivity rose 3.7% in the same period, including 2.9% in the year to June this year. Gross Value Added per hour worked in the market sector also rose 4.7% since 2016-17.
Australian businesses have enjoyed the best of times: a growing economy while productivity improved and real labour costs declined significantly. But they won’t ever admit that.
It’s possible that things will go better than the RBA forecasts, Lowe says. But it’s also possible that things will go worse.
“It is, of course, also possible that we experience yet another setback that throws the economy off course and delays progress towards our goals,” he said. “One source of such a shock would be a new strain of the virus or a decline in vaccine effectiveness.”
After the past 18 months, who would disagree?
The business lobby say they need a productivity increase before giving wage rises, while ignoring the fact that productivity increases over the last 10 or 20 years have gone unrewarded.
Don’t worry at the least sign of a wage rise there will be a flood of foreign workers
I have been saying that wage growth should have been around 5% per year min for a number number of years now for low to middle income workers and on government benefits it seems I was right but then again what would I know.
Nice to see Philip Lowe on the right side of the higher wages and higher employment versus higher inflation needing higher interest rates debate. (The AFR crowd have too much money and nowhere to park it…)
But the fact is we can free ourselves from the terrible NAIRU-dilemma (non-accelerating-inflation-rate-of-unemployment) of orthodox economics, and implement the Job Guarantee policy of MMT (Modern Monetary Theory), yet Lowe remains captured by the economic orthodoxy that shaped his thinking, and has reigned supreme in academia, for the last 4 decades.
As shown by this remark which Lowe made to a parliamentary committee (during the pandemic): “the RBA does not, and will not, directly finance governments. The bonds we own will have to be repaid in the same way as if they were owned by others“. (google: ross gittins: ‘funding the budget by printing money is closer than you think’, to learn more).
Interestingly there is an MMT-literate party standing at the next Federal election, offering a Job Guarantee policy, named ‘The New Liberals’, the name being a reference back to the Menzies ‘Liberal’ government which achieved continuous unemployment <2% (!) with fast economic growth, via continuous deficit spending in the years 1958-67, well before the privatization fetish of post-Thatcherism took hold in the 1980’s on.
I can’t help but think inflation will follow the path of a hockeystick. The bond market is completely artificial due to QE worldwide. Whatever Lowe says about not financing governments, doesn’t mean it isn’t so. Whether you buy bonds via via or direct. The consequence is that the usual bond buyers search for higher yields. Thus we have an artificial stock market. What happened to the good old price discovery?
It may help for the federal public service to receive increased wages at a reasonable rate.
And banks, a friend in lower middle management, like her colleagues, has not had a raise in salary in five years; her now retired and wealthy siblings were incredulous, but out of touch with reality. Meanwhile many of the latter and companies like banks are more than happy to apportion wage stagnation to ‘immigration’…… the lazy Oz dog whistle and cop out, unsupported by research.