Low wage growth too much of good thing

07_Low wage growth too much of good thing

Garry Shilson-Josling, AAP Economist
(Australian Associated Press)

Don’t worry, wage-earners, the RBA’s got your back.

About time too, some might think.

After over four decades of playing with wage inflation, the RBA is now wondering whether it’s been too successful.

Wages rates grew just over two per cent in 2015, their slowest pace since the Australian Bureau of Statistics began compiling the index in 1997.

And with employment growth skewed towards lower-paid work, average weekly earnings rose even less – just 1.2 per cent for adults in full-time jobs.

That was the slowest since 1969 – way back when the figures only showed average male earnings.

That’s an indication of the success of the RBA’s campaign to grind down the expectations of wage and price rises that have fuelled inflation since the mid-1970s

Expectations matter.

They affect the price rises businesses factor into their plans, the pay rises workers ask for, and what their employers concede.

Managing expectations is the main aim of the two to three per cent inflation target the RBA announced 23 years ago.

It talks loud and long about inflation – rising consumer prices – but its real fear has been a breakout in wages growth.

So it watches the jobs market like a hawk, using higher interest rates to avoid conditions that might allow faster wages growth.

But the minutes of the RBA’s May 3 monetary policy meeting, released on Tuesday, suggest it may have achieved more success than it wanted.

Wages growth of two per cent or less is simply not compatible with inflation in the two to three per cent range over the long haul: it’s too slow.

The central bank said wages growth should pick up late in its two-year forecast period, in line with a forecast improvement in the jobs market.

“In addition, information from the Bank’s business liaison suggested that firms generally had been unwilling to make offers of wage growth below two per cent.”

But with private sector wage rates rising by exactly two per cent through 2015, perhaps many businesses are too busy playing hardball with their staff to liaise with the RBA.

In any case, the RBA does recognise that things could get even grimmer for wage-slaves.

“But if inflation was to be persistently lower than previously forecast, it was possible that, in time, this could be reflected in lower wage growth,” the RBA said.

That concern prompted the RBA to boost the economy with an interest rate cut earlier this month.

And it’s why – although it did not say as much – there’s a good chance the RBA will try to revive the unconscious mole with another interest rate cut if it looks as though wage and price rises are continuing to lose momentum.

March quarter wage price index data on Wednesday will be an important pointer, although the June quarter inflation figures on July 27 look more likely to be the key.

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