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RBA governor Phil Lowe gave his regular update to parliament today.
His opening statement was a broadly upbeat overview of the economy with a note of caution about household budgets and the outlook for consumption. Nothing new there.
He did share some interesting signals that the RBA sees coming from the labour market relating to wages growth, which is at the heart of both the low inflation outlook and the household budget strain which the RBA sees as a bit of a risk to the economy.
We have discussed on previous occasions the reasons for the subdued wage increases. These include the continuing spare capacity in the economy after the unwinding of the mining investment boom; the heightened sense of competition due to globalisation and technological change; and changes in bargaining arrangements. These factors are still at work, although through our liaison program we hear reports of pockets where the labour market is tight and firms are finding it hard to find workers with the right skills. In some of these areas wages are now rising more quickly than previously, but many firms remain wary of adding to their cost base in the current environment.
This is a problem.
Some companies are having to pay people a bit more where there are “pockets” of skills shortages. But even though wages might be growing in these isolated areas, “many” businesses aren’t ready yet to come to get on and spend significantly more on staff.
There’s still plenty of available workers for most industries too chose from, meaning there’s no real need to lift wages by an significant degree.
Part of this stems from strong levels of population growth, along with a combination of better job market conditions and cost of living pressures, driving more people to enter the labour market.
It points to more of the same for workers: wages growth staying pathetically low at a time when household balance sheets are stretched.
If there’s to be near-term turnaround for wage growth to alleviate these concerns, it may require something different.
There’s increasing talk about some kind of policy intervention to boost household incomes. Commonwealth Bank chief economist Michael Blythe has raised the idea of linking planned company tax cuts to wage increases — at least suggesting it should be part of the debate. A poll this week found a significant majority of Australians would approve of a plan that forced businesses to pass on a certain proportion of their tax cuts as pay rises to staff.
The business establishment hates the idea. But the imperative for this would recede if businesses, working in an economy where growth is expected to return to 3 per cent, were to do a bit more of the heavy lifting themselves on wages growth.
If they don’t do something about wages growth themselves, there is an increasing likelihood that politicians might step in and do it for them. Which do they want it to be?
